Tag Archives: airline profits

PlaneBusiness Banter Now Posted!

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Good evening everyone! This week’s huge mega-earnings issue of PlaneBusiness Banter is now posted. This week we take an in-depth look at the recent earnings results and the earnings calls from Delta Air Lines, US Airways, Alaska Air Group, JetBlue, and United Continental Holdings.

But there’s more.

Republic Holdings announced last week that Frontier Airlines was getting a new executive team and — that the airline was going to become an ULCC.

You know what that is don’t you?

Ultra low cost carrier. Think Spirit. Or Ryanair.

Not sure what all the animals are going to think about this. Not quite sure what we think about it yet — as details are slim. But it appears that either Frontier will be rebranded and operated as a ULCC. Or it looks like it will be rebranded and then sold as a ULCC.

Heading up the new operation is none other than Dave Siegel. Yes, the same Dave Siegel who headed up the old US Airways during the Dark Period. Joining him is the former head of planning and pricing at Allegiant — Robert Ashcroft as SVP Finance. Daniel Shurz, meanwhile, was promoted to SVP Commercial.

Tomorrow employees and union leaders will finally hear from American Airlines — as the airline is slated to roll out its proposed labor contract modifications per section 1113 of the U.S. bankruptcy code. Meanwhile we’ll be interested to more hear details of the airline’s proposed restructuring plan.

It’s going to be one difficult day for American employees.

Meanwhile the head of the Pension Benefit Guaranty Benefit Corp., the government agency that would be forced to take over the administration of employee pensions if the airline walks away from them continued his very public criticism of the airline Tuesday.

The PBGC also placed liens against assets of American on Tuesday. The agency said that it filed over 70 liens for a total of $91.7 million, on behalf of the four pension plans the airline currently has. This comes after American only paid $6.5 million of the roughly $100 million that was due earlier in the month. The airline said that it had to conserve its cash.

We’ll find out more tomorrow on where the pension issue is headed. But one thing’s for sure — this PBGC is not the same as the one United Airlines rolled over when it went through its bankruptcy. Josh Gotbaum, the director of the PBGC, is not going to go down without a fight.

But the big story this week in PlaneBusiness Banter is earnings — lots and lots and lots of earnings. This week’s issue clocks in at over 150 pages as we take an in-depth look at the five airlines that reported in last week. Which airline do we think reported the strongest earnings for the fourth quarter? Delta Air Lines. And I tell subscribers why.

Also, those reports last Friday about how Delta was now possibly looking at a deal for US Airways? We give you our take on those reports and why they shouldn’t surprise anyone. Who is going to do what to whom and why? We’ll break down a number of the possible scenarios.

All this and a whole lot more. Now. In this week’s PlaneBusiness Banter.

PlaneBusiness Banter Now Posted!

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This week’s mega-earnings issue of PlaneBusiness Banter is now posted. Subscribers can access this week’s issue here.

What is on the agenda this week? First, we have in-depth reviews of the earnings calls from AirTran, Allegiant, and WestJet.

But that is just the start.

Our first column from this year’s Phoenix Sky Harbor International Airline Symposium discusses a presentation that was made at this year’s event by Adrian Slywotzky, economist, author, and partner with Oliver Wyman – the consulting firm that works with the airport to put on the Symposium.

The subject of his presentation? The airline industry is not the only “no-profit” industry out there. And yes, there are competitors in other “no-profit” industries who have figured out ways to improve profitability. Are there lessons here for the airlines? Yes.

Our second column this week is our first take from the recent US Airways Media Day. Coming just a day after the airline’s earnings call and just a couple of days after the airline said it wasn’t talking to the powers-that-be in Chicago anymore — the airline still managed to give us some information we’d never seen before.

All that plus the manic moves on Wall Street last week, the NMB’s news from today, the DOT’s decision on the proposed slot swap, American’s decision to hold its annual meeting away from the madding crowds, and more. In this week’s issue of PlaneBusiness Banter.

Virgin America: Now It’s Not Just Us Questioning the Airline’s Financial Viability

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Monday the Bureau of Transportation Statistics of the DOT issued the latest Form 41 data for the industry. The information covered the fourth quarter 2008 numbers.

Needless to say, for airline geek types, the release of Form 41 data is like a huge box of goodies, all wrapped up with a nice big bow. The only problem is — you have to take the time to get in the box and carefully unwrap all the nuggets.

This morning analyst Gary Chase with Barclays issued a research note on Virgin America’s financial situation — a note that was clearly based on Gary and fellow analyst Dave Fintzen’s careful unwrapping of the Virgin America nuggets.

But wait — Gary doesn’t even cover Virgin America. The airline is not publicly traded.

Oh, but he does cover airlines that are currently affected by the airline’s presence. Most notably JetBlue and Alaska Air Group. Of all the major airlines Virgin overlaps about 25% of JetBlue’s capacity, while it overlaps about 17% of Alaska’s.

In his note this morning, Gary noted that while Virgin has been in the news a good deal lately because of questions concerning its ownership structure — “we cannot know the details of the company’s ownership structure.” But Gary and company can, and did, analyze the airline’s operating performance for the fourth quarter as reported to the DOT.

The verdict?

“The airline is now beyond the point in its development where JBLU turned profitable; Virgin America’s results would show losses in late 2008 even at sub-$1.00 fuel prices.

DOT filings point to substantial losses that go well beyond high fuel prices.  We estimate that to break even in 2009 (similar to the rest of the industry on an un-hedged basis), the airline would need to drive significant improvement in revenue or cost performance, or both.  For example, one path to break-even would be to achieve a roughly 20% higher unit passenger revenue (in an environment where industry RASM is declining by nearly 10%) and reduce non-fuel costs by almost 10% while fuel prices remain at the $1.49 level.”

He continued, “Virgin America’s premium strategy, including its First Class and Main Cabin Select products, does not appear to be generating a meaningful revenue premium.  Rather, unit revenue performance lags JBLU and the industry at-large.  Virgin America’s unit revenue performance has shown relative improvement as the airline spools-up, but still lags a typical new JBLU markets despite having a first class option and fewer seats on an equivalent aircraft (which should translate into both higher RASM and CASM).  While Virgin America has found some relative success in short-haul West Coast markets, revenue performance in Transcon and longer-haul West Coast (i.e. Seattle) lags the industry by a wide margin.”

In addition, Gary said, “The premium strategy likely contributes to the airline’s relative cost problem, with non-fuel unit costs that are 40% higher than JBLU today and ~30% higher than JBLU at the same point in its life cycle.  Unit cost tends to improve dramatically during the first year of an airline’s operations, but Virgin America is now beyond the point where JBLU’s cost structure stabilized.  The cost structure remains significantly higher than JBLU, not to mention other low-fare airlines.”   

In typical carefully worded “analyst-speak” he concludes: “We believe the Virgin situation represents a potential opportunity for the industry generally, but for JBLU and ALK in particular.  Even if the press surrounding the ownership structure proves inaccurate, operating losses could also prompt a move away from its Transcon and long-haul West Coast routes, where performance has been the weakest.”

So how bad were the numbers themselves?

Virgin America’s recent DOT filings show the airline posted significant losses through its first year of operations. In total, the airline posted a 2008 pre-tax loss of ~$207mm on revenue of ~$370mm, for a pre-tax margin of negative 56%. While margins did improve, DOT reports show 4Q08 pre-tax margin was a negative 29% with a pre-tax loss of $32 million.

Now, is there anyone out there who still wonders why it was that Virgin America fought for so long to keep from reporting its results to the DOT?

I didn’t think so.

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Airlines: Don’t Look Now, But Oil Prices Are on the March

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In the midst of all the giddy sentiment that is starting to take hold in the industry concerning the “stabilization” in demand decline — a fact that April RASM estimates issued by some airlines have fueled this week — a new ugly problem is starting to make itself known. That ugly problem? Higher fuel prices.

As they say, if it’s not one thing, it’s another in this industry.

The big question concerning the recent relatively calm period of lower oil prices was this one — how fast would they start to ratchet up when the economy began to shows signs of recovery?

We, unfortunately, are starting to see that apparently the answer to that question is — pretty fast.

If you have not looked at the oil futures market lately, here is the bad news. As I post this (at about 1:30 PM CDT), the price of a barrel of crude is now sitting at 58.55, up almost $2 bucks for the day. Just two weeks ago, the price of crude closed at 50.80. Last Friday, it closed at 53.20.

Today’s price is the highest price that crude has posted since November.

What is fueling the push?

A combination of some encouraging signs on the economic front, U.S. equity markets that seem to believe the worst is over (whether it is or not) and a weaker U.S. dollar.

As most of you know, a declining US dollar makes dollar-priced oil cheaper for foreign buyers and tends to encourage demand, leading to higher prices.

Yes, it is indeed a vicious circle.

And one damn frustrating one if you are an airline. Do you hedge or not? At what price levels? With what hedging instruments?

Remember that many airlines were still paying the price (and dearly) in the first quarter for making the wrong move on oil futures last year.

What makes this rapid rise in the price of oil potentially more troubling for the industry than the record-breaking rise last summer is that it is rearing its ugly head at a time when the level of demand, i.e., revenue, has fallen through the floor.

What Did This Quarter’s Earnings Tell Us?

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It’s Friday. Do you know how well YOUR favorite airline did for the first quarter of 2009?

As of today, all the major airlines have reported earnings.

So what have we learned? A couple of things.

One, Allegiant Air continues to blow away everybody else on the block. The travel company, which happens to include an airline that happens to fly only MD-80s that also happens to make money hand over fist had a spectacular first quarter. As I mentioned earlier this week, a 31.3% operating margin was posted by the airline.

You just don’t see margins like that in this industry.

I told you guys not to believe that anti-Allegiant rant that CNBC’s Jim Cramer spewed out not too long ago. Cramer, by lumping ALGT with Las Vegas “casino stocks,” proved that his research is lacking.

We also learned this week that AirTran had a great first quarter. No, the results were not as stratospheric as those of Allegiant, but they were pretty damn good. Nice fat profit, and nice big declines in costs. Excellent job.

We also learned that while we may have hit a point where declines in demand have more or less leveled out — nobody, and I mean, NOBODY, (well, except for Allegiant) is ready to call what is going to happen in May and June.

Preliminary bookings are down — but will they recover, as more and more passengers continue to book tickets closer in? Then again, at the heart of the demand decline here in the U.S. is the declining number of premium passengers. That is only going to improve when the economy improves.

What I might have concerns about if I were an airline other than Allegiant is just how much of that previous business travel my airline had before does return. Even if the economy picks up.

You don’t have to look very far to see what is happening in companies both big and small these days. Companies are cutting back on travel and are using video conferencing more and more. Heck, today anyone with a laptop can connect via video to a small one-on-one meeting or to a meeting with many more participants. There is no question that the quality and ease, not to mention the low to no-cost of such efforts — has changed dramatically just in the last couple of years.

So yes, I am concerned that going forward — if a company gets used to using video conferencing as a result of the current belt-tightening — is that same company going to be anxious to start spending money on sending their employees to far-flung regions of the country? Much less the rest of the world? Just because they now have a little extra money to spend?

I’m not so sure.

And, if this is the case — which airlines stand the best chance of inheriting the earth? Or at least the bulk of the shorter-term profit kitty? Those airlines that cater to the leisure traveler and have the low fares and low cost structure to make money doing so.

Which is one of the reasons why Morgan Stanley analyst Bill Greene recently advised airline stock investors to move out of U.S. legacy carriers and into low cost, low fare airlines such as Allegiant, AirTran and JetBlue. US Airways kind of sneaks in there as well, as it has the lower fares and the lower cost structure and a bigger domestic market than that of American, United, Delta, or Continental.