Monthly Archives: July 2009

Tidbits from Southwest Airlines Call Concerning Frontier Deal

The press conference with Southwest Airlines just ended.

Handling the call for the airline was Ron Ricks, Executive VP of Corporate Services and Corporate Secretary and Bob Jordan, Executive VP, Strategy and Planning.

The airline says their idea at this point at time is to initially operate Frontier Airlines as a separate entity until a certain point in time. But the eventual goal, they say, is to merge Frontier into Southwest in a “reasonable” amount of time.

The binding bid is due into the bankruptcy court no later than Aug. 10.

Quote of the conference: “When United flies certain banks out of there [Denver] it’s like a solar eclipse there are so many flights.”

That was Ron Ricks talking about why he did not think there was going to be a problem with any “competition” issues involving the deal, were it to go through.

The next ten days the airline will be working on their due diligence, in regard to a final bid. This preliminary bid allows them access to Frontier Airline’s information.

Comments about the possible length of a transition period? As long as two years, but nothing is set at this point.

Mary Schlangenstein from Bloomberg asked on the call if the airline was ready for a “fight” with Republic over Frontier. Ron Ricks was pretty straight up that “Southwest’s bid is going to be superior in every respect.”

He left no question that the airline intends to fight as hard as it can, that it feels it can provide a better offer than Republic, and that it intends to win.

Overlap of markets between the two airlines now — about 27.

For those with enquiring minds, there are about 12 markets or so that Frontier flies into that Southwest does not, including a number of markets in Mexico.

Dan Reed with USA Today asked if the airline was going to sell the Frontier Lynx operation. Ron said the airline is going to use the due diligence period to determine more about Lynx and other aspects of the Frontier operation. No decision has been made as of yet. This is something that will be determined in the next ten days.

Eric Torbensen from the Dallas Morning News asked if one of the reasons behind the deal was not to more or less remove a competitor that could come out of bankruptcy leaner and more competitive.

Ron said no. This was about growth, a “jumpstart” as he put it.

“This was an opportunity to get back in a growth mode,” Ron said. “This was an opportunity that presented itself. We are just trying to react to the timelines set up by the bankruptcy court.”

“If you look at Denver prior to our entry, I think there is a lot of evidence that we are the ones that brought low fares to Denver,” said Bob Jordan.

The question was asked, “How much capacity can you add with this deal?” Bob responded that it would be roughly about 10% — over time.

A question was asked as to whether their bid is being encouraged by those at Frontier and creditors of the airline. Bob Jordan said that the bankruptcy attorneys “verified through the process that our offer would be welcome.”

Ron made the point that there are “dozens and dozens of non-stop monopoly markets out of Denver today that we feel would benefit from competition.”

David Jonas from Promedia brought up the point that CEO Gary Kelly said in the earnings call just last week when asked about Denver, and whether the airline would be interested in assets there, that he said, “The right fit had not been found yet” or words to that effect.

So, as David said, had something happened between then and now?

[David, we know that nothing happened between then and now…]

As expected, Bob said he didn’t remember the remark, and Ron didn’t want to go any further with it. But the comment was made that well, Gary probably did not want to say anything because of confidentiality issues.

I think it would be safe to say that Gary just didn’t want to talk about it.

The question was asked if the airline had bank financing for the deal. The answer was yes.

“A pocket of opportunity in a sea of pain,” is how Ron Ricks typified the deal, when asked if the move to get bigger, given the current economic situation, and given Gary Kelly’s comments just last week in the airline’s earnings call, was not contradictory.

Lisa Stark from ABC asked if there was anything that might keep them from making a final binding bid. Ron said that because they already know a lot about Frontier — they doubted it. But in the next ten days, the work is going to be intense as the airline reviews contracts, etc., as part of the due diligence process.

Bob said, “We’re in this to win.”

What Southwest Airlines Is Telling Their Employees About the Deal For Frontier Airlines

One of our PlaneBusiness Banter subscribers just passed along this information to us. It was communicated to employees via a Southwest Airlines’ Today@SWA email.

The airline has a press conference scheduled for 2 p.m. CT to talk about the airline’s bid.

Southwest Submits Nonbinding Proposal to Acquire Frontier Airlines

On Thursday, July 30, Southwest Airlines submitted a nonbinding proposal to acquire Frontier Airlines in accordance with the bidding procedures in the bankruptcy court.  We view this as an exciting opportunity for the Employees and Customers of both Southwest and Frontier. It represents an opportunity for Southwest to grow our Denver Customers; grow our revenues; and grow our profits. We must caution, however, that this is merely a preliminary step in the bidding process.

We must submit a binding proposal by August 10.  If there is more than one qualified investor, and at this time Republic Airways has also submitted a bid, an auction will be held beginning August 11.  Frontier will determine, in consultation with the unsecured creditors committee, which bid to accept and present to the bankruptcy court for approval.   

Although our plans may vary as we work our way through this process, we wanted to share with you our present plan as we envision it.  Frontier would continue to operate independently and separately for a period of time with its Airbus aircraft and personnel.  We do not intend to integrate the Airbus into our Boeing 737 fleet. As we are able to retire Airbus aircraft, we will add Boeing 737 aircraft. Over time, Frontier employees would be hired into Southwest as needed to support our fleet growth and expanded operations.  There are many details to be worked through, but we are confident that the effort will be worthwhile. We are also confident that our bid, if successful, will boost low-fare competition and benefit consumers in Denver and other cities our expanded network will serve.

Even if our bid is accepted and approved by the bankruptcy court, our closing on this transaction will be subject to several contingencies. These will include the negotiation of acceptable labor agreements dealing with the interim period of separate operation and seniority; and the appropriate regulatory review.  Absent the negotiation of these labor agreements, we will not go forward with this transaction.  However, we are confident that the benefits of such a transaction for Employees of both Southwest and Frontier will become self-evident and that we will be able to obtain such agreements.

Food Fight: Southwest Airlines Going After Frontier Airlines in Bankruptcy Court


Just never know what the day’s news is going to bring. Especially in this environment.

Today, news of a fight for Frontier Airlines.

Southwest Airlines announced today that it has filed a bid of $113.6 million for Frontier Airlines. Republic Holdings, as most of you are aware, has already submitted a bid of $108.8 million. That proposal has already been approved by the U.S. Bankruptcy Court for the Southern District of New York.

However — just because the bankruptcy court approved that offer — Frontier still had the right to seek a higher bid. And apparently that is what it did. Actually I don’t think Frontier solicited anything. I’m pretty sure Southwest is the one who made the call.

Under terms of the Frontier bankruptcy auction, bidders can submit offers until Aug. 3 and a final proposal has to be submited by Aug. 10.

The auction is scheduled for Aug. 11.

Is it just me, or are memories of the fight over ATA creeping into your consciousness as well?

Well, we certainly now have something more to talk about than earnings.

Good Morning Earthlings: US Airways Looking to Remove E-190s, Southwest Airlines Continues to Do the Revenue Two-Step; Liquidity Is THE Story For the Quarter


Holly here. Reporting from the airline earnings bunker where I have been toiling since last week.

This week’s PlaneBusiness Banter will be posted later today. It’s one of those monster issues. Next week’s issue will be just as packed, as we finish up from the group that reported last week. Just way too many earnings reports compressed in too short a period of time last week. Whew.

Having said that, it was an interesting group of calls last week. Just a couple of tidbits from what we heard.

One, US Airways, which has flirted with the idea of grounding its Embraer 190 fleet in the past — in an effort to cut capacity further at the airline — sounds like it is now looking at the possibility in a much more serious way. Because of the airline’s contract with its pilots — the airline is constrained in terms of how much flying it can remove. But it could remove the 25 Embraer 190 fleet in one fell swoop — thus cutting their capacity by 2.5%. It’s really the only option the airline has left if it wants to cut capacity further and in listening to the airline’s call last week, it sounds like the airline is very close to pulling the trigger on the move.

Two, I’m getting pretty tired of hearing the folks at Southwest Airlines keep talking about all these revenue initiatives they are going to do in the …future. Third quarter, fourth quarter. First quarter 2010. Who knows.

I am assuming the reason the airline keeps talking about all these things we are going to see — someday — is because the airline does not have the technological backbone in place to do them ..NOW.

Meanwhile the airline still does not charge for passenger bags. And revenues generated from their Business Select program continue to be under original forecast.

I think there is way too much money being left on the table here.

Three, the whole question of liquidity and who has it and who doesn’t permeated the calls last week.

Jamie Baker and Mark Streeter, analysts at JP Morgan Chase found themselves right in the middle of the fray after they published a note on where they saw United, American Airlines, and US Airways in the “Dance of the Cash Constrained.”

Hoping to clear up any confusion they had caused with their note, they issued another note later in the week in which they wrote:

Did We Not Make Ourselves Clear? – We are surprised by the volume of incoming calls from people who believe that our view is that LCC [US Airways] somehow disappears.

As noted earlier this week, “assuming LCC or UAUA die off, as we believe some do, is a mistake, in our opinion.” What we do take issue with is US Airways’ ability to raise incremental capital should industry fundamentals deteriorate further or even remain stuck here in neutral. There has been very little dialogue, as near as we can tell, as to the potential that 2010 demand may prove as bad as 2009’s. Alternatively, bump up your RASM and fuel by similar amounts and one’s industry models probably won’t show any meaningful improvement. It is against this backdrop that we continue to believe that borrowing power (as well as the need for incremental borrowing) at AMR & UAUA significantly exceeds that of LCC. Put another way, AMR needs to borrow a lot of money, and we think it has plenty of ways to do so. United needs to borrow less, and we think it also has a few bullets left to fire in the capital-raising gun. However, our view on LCC is that while its near-term needs are arguably low, its capital-raising options appear largely nonexistent if demand trends simply bump along from here or in fact worsen. We therefore believe that some form of Washington-mandated combination might potentially occur. Nothing this earnings season changed our view in this regard, nor our opinion that risk/reward in LCC shares remains weak assuming most scenarios short of quick recovery (though LCC’s peer-leading 54% decline since May 6th obviously tempers our negativity).

I’d suggest you tread very softly when discussing liquidity with US Airways‘ CEO Doug Parker however. Doug went on another one of his “liquidity rants” in the airline’s call last week. Deja vu all over again. It was just last year at about the same time that analysts were saying US Airways didn’t have enough cash to get through the winter. Then they pulled off that slick $1 billion financing deal out of nowhere.

As someone observed about this industry — don’t underestimate the ability of an airline to find cash.

No matter how bad the business environment.

AirTran and Allegiant Post Profits: Delta Air Lines Posts Loss; UAL and American Put on S&P Notice


Another day, another round of airline earnings reports — and yet another notice from Standard & Poor’s that another airline is now on credit watch, with further rating downgrades a distinct possibility.

Allegiant Travel Company posted results late Tuesday while AirTran came flying in today. The one thing both airlines have in common? They both posted nice profits for the quarter.

Take these guys out and buy them a beer. They certainly deserve it.

Allegiant posted a profit of $23.8 million, up 801% from a year ago. The airline flies only MD-80s. I would have expected nothing less, considering the drop in the price of fuel.

But there is much more to the Allegiant story as those of you who hang out around here know. And in regard to their overall business model — which relies heavily on ancillary revenue — this quarter really didn’t disappoint as the airline saw its ancillary revenues per ASM increase 17%.

AirTran, which is currently running kind of a hybrid operation in terms of ancillary revenues and more demand based scheduling that has been so advantageous to Allegiant versus the more traditional legacy carrier business model turned in another good quarter today as well.

The airline posted a profit of $78.4 million or $0.56. This was a huge turnaround from last year, when the airline posted a loss of $14.8 million or $0.14.

Excluding unrealized derivative gains associated with the airline’s hedging activities, the airline posted a profit of $46.6 million or $0.34.

Interestingly, even here though, unlike at Allegiant, revenues were down. At Allegiant the airline saw operating revenues up 12.5%. on a 30.3% growth in ASMs no less.

AirTran posted a 12.9% drop in revenues. However, the airline also posted a whopping 27.3% drop in operating expenses. There is where the profit came from. ASMs here were down 7.6% for the quarter.

All said and done — a good quarter for both airlines. Especially considering the rest of the carnage we’ve seen reported from almost everybody else.

One late note that hit the wires after the close today. Standard and Poor’s said this afternoon that it had put UAL Corp., the parent of United Airlines on credit watch for a possible further downgrade.

The company’s S&P rating is already buried in the “junk” status, sitting at a “B -.”

S&P also warned that AMR, parent of American AIrlines is also now on the bad list as well, as it was also placed on the list for a potential downgrade. American currently is also rated “B -.”

We’ll look at the Delta Air Lines loss in another post.

Southwest Airlines, United Airlines and Continental Airlines Report Earnings


On the first of a three-day onslaught of earnings that can only be described as “earnings hell,” Southwest, Continental, and United Airlines all reported their second quarter numbers today.

The short and sweet?

While Southwest Airlines reported a profit for the first time in three quarters, the airline’s guidance for the third quarter was not very rosy. So much so that the airline said it could not guarantee a profit for the third quarter. The airline posted a profit of $54 million or $0.07 for the quarter. This represented a 51% decline in profits over last year’s $121 million.

Operating income at the airline declined by 40%, to only $123 million.

Based on weak travel demand and fuel price volatility, we cannot predict a profitable third quarter,” said Gary Kelly, Southwest chairman, president and CEO.

United Airlines also posted a “profit” — but don’t let those headlines fool you. The airline only posted a “profit” as a result of one-time items and fuel hedge gains. Repeat after me: The airline did not post a real honest-to-God profit.

Excluding all the accounting handiwork, the airline lost $323 million or $2.23 for the quarter. This was, however, better than what the analyst consensus had been for the airline. Analysts had forecast the airline would post a loss of $2.61.

As for Continental, the airline posted a loss of $213 million, or $1.72 a share. Excluding special items, the airline posted a loss of $169 million or $1.36.

Continental posted a $154 million operating loss, which was 116% worse than the second quarter of 2008.

Those are the basics folks. Not exactly the kind of news that makes you want to jump up and down. Much less buy airline stocks. Because as we all know — if the airlines can’t make money in the second quarter — we don’t even want to see what’s coming next in the third and fourth quarters.

Someone noted to me in an email this morning,

“Holly, just looking over the Continental numbers. You know I was thinking about what you wrote this week in PlaneBusiness Banter concerning why Larry [Kellner] would choose to leave the airline right now, and the strength of the management team at Continental. I think the reason Larry has decided to leave this industry is obvious when you look at these results and realize that this airline clearly has one of the best management teams around. But even as good as they are — the airline is STILL not profitable. I can see Larry’s point.

Larry, get out of this industry, go make some money and have a good time doing it.”

I’m afraid our PBB subscriber speaks the ugly truth.

PlaneBusiness Banter Now Posted

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This week’s issue of PlaneBusiness Banter is now posted.

It was a busy week for the Things With Wings last week.

First, American Airlines reported its second quarter earnings results. The airline lost a lot of money. $390 million to be exact. $319 million excluding special items. However, you’d never have known it if you listened to the airline’s earnings call — which seemed focused on one thing — liquidity. Oh, and capacity reductions. That’s fine, but there are other aspects of an airline’s operations I’d like to hear about.

Then we had the blockbuster news concerning Continental’s Chairman and CEO, Larry Kellner. As I write in this week’s PBB, even though the management backbench strength at Continental Airlines is strong, and the airline should be able to carry on just fine as Larry goes to seek his fortune in the equity investment game — it’s quite discouraging to see one of the industry’s best and brightest leave.

Following up on our piece in last week’s issue about United’s bone-headed (or would that be heavy-handed) attempts to get travel agencies to take on more financial risk — or rather some travel agencies — the airline said late last week that it is going to give agencies 60 days to implement the business operation changes it seeks.

This whole thing still reeks. Nothing the airline says rings true.

Southwest Airlines had its own place in the spotlight last week, or would that be the sunlight, as the airline had a 737-300 aircraft develop a hole in the roof while enroute from Nashville to BWI. Not what the airline wants or needs — especially considering the issues the airline has had with the FAA concerning fuselage checks in the past. Preliminary NTSB report says there was no evidence of previous corrosion at the site.

That was not the only bad news Southwest had last week. The airline was also notified that its debt rating with Moody’s is under review, signaling a potential downgrade.

The Senate produced its version of an FAA Reauthorization bill last week. How did it differ from the House version? It differed on quite a few items. We talk more about that in this week’s issue.

Those misguided folks at the US Airways Pilot Association, the pilot union that was created in an attempt to circumvent the original ALPA seniority award that was handed down after US Airways and America West combined forces — had their head handed to them on a plate by U.S. District Judge Neil Wake last week. Wake issued his final injunctive order on the case brought against USAPA by the former America West pilots. Yes, we talk about this too.

Oh, and speaking of USAPA, we also give them, and our readers, a handy step-by-step instruction of how you correctly determine just how much an airline executive makes, using SEC documentation. Apparently the folks at USAPA have a problem figuring these things out.

British Airways raids its guaranteed employee pension benefit larder, Air Canada gets all of its employees “on board” with its 21-month contract extension program, and 215 Delta pilots sign up for the airline’s sweetened “early-out” package. Somehow I think the guys in suits over in Atlanta had hoped that number had been higher.

All this and more in this week’s issue of PlaneBusiness Banter.

If you are a subscriber, you can access this week’s issue here. If not, you can learn how you can become a subscriber by clicking here.

Shocker: Larry Kellner to Leave Continental At End of Year


Frankly, there is usually very little that shocks me about this industry. Surprises me, yes. Piques my curiosity, yes. But shocks me — no.

But I got caught out in left field on this one.

This afternoon Continental CEO Larry Kellner announced in a letter to employees, and in a press release, that he was leaving the company, effective the end of the year.

But wait, he’s just not leaving as CEO. He’s leaving his position as Chairman of the Board of the airline as well.


Kellner is leaving the airline to head up a new private investment firm, Emerald Creek Group, LLC.

The airline announced that Jeff Smisek, President and COO of Continental, will succeed Larry as CEO and Chairman of the Board.

How about that?

Another good one bites the dust.

JP Morgan’s Streeter Talks About Breaking Covenants, Not Guitars


Had to chuckle this morning when I read the JP Morgan Equity/Debt review of American Airlines’ earnings release.

As most of you know, Jamie Baker is the equity analyst for JP Morgan, but Mark Streeter handles the debt side.

Mark’s snarky side came out today in his headline as he wrote in the note,

Some Airlines Bust Guitars, Some Also Bust Covenants – We have been worried for some time that airlines (AMR, LCC & UAUA, more so than others) could violate bank debt covenants later this year or early next year if industry conditions don’t suddenly improve. AMR likely shared this concern as the company last month sought and received fixed charge coverage relief from banks. Specifically, the AMR bank debt fixed charge coverage ratio for the June 2009 quarter was waived. Going forward, the ratio remains at 0.95x for the September 2009 quarter (no change) but stays at that levels through year-end (i.e. lower threshold) with reduced step-ups through September 2010 as well. While our more bearish-than-consensus revenue forecast continues to show AMR tight (if not busting) covenants during 2H09 (along with others), additional bank relief remains achievable, in our view.”

As for the all-so-important liquidity question, the duo commented,

AMR’s Liquidity Pantry Is Still Fairly Well Stocked – Unlike the pantry at USAirways, which we consider bare, and the pantry at United, which is stocked with canned goods long past their expiration date (i.e. older aircraft and parts that are very tough to finance), AMR boasts of $3.7 billion in unencumbered asset provisions, real liquidity flexibility, in our opinion (with the untapped AAdvantage forward mileage sale the most obvious component). Now, not all of the contributing assets to this estimate are readily-financeable (such as AMR’s ownership of Eagle) but at least $2-$2.5 billion represents real liquidity flexibility in our opinion. Furthermore, $500 million of additional assets will become unencumbered later this year (including some not-too-old-to-refinance aircraft falling out of maturing EETCs). The bottom line is that USAirways and United are at or past V1 in their burn-the-furniture liquidity takeoff rolls, in our view, while AMR is just now nudging its throttles forward, with still-adequate runway remaining. Boiled down, we remain of the view that Chapter 11 can be averted at AMR.”

Southwest Airlines Emergency Landing: It’s a Bird, It’s a Plane…No, It’s a Hole …. in a Plane


See the picture. See the sunshine. Uh-oh.

This morning, details are slowly coming out concerning Southwest Airlines‘ flight 2294 that was forced to make an emergency landing in Charleston, West Virginia last night.

According to reports, a one by one foot hole developed in the roof of the Boeing 737-300 developed while the flight was in progress between Nashville and Baltimore/Washington International. After looking at video of the aircraft it appears that the hole in the fuselage developed directly in front of where the tail section is attached to the top of the aircraft.

The photo above was taken by a passenger on the aircraft, using his Blackberry.

According to a post by Southwest’s Paula Berg posted on the airline’s website Monday night,

“The aircraft cabin depressurized approximately 30 minutes into the flight, activating the passengers’ onboard oxygen masks throughout the cabin. Medical personnel in Charleston assessed passengers and no injuries are reported. Southwest Airlines is sending its maintenance personnel to Charleston to assess the aircraft, and the airline will work with the NTSB to determine the cause of the depressurization. According to initial crew reports, the depressurization appears to be related to a small-sized hole located approximately mid-cabin, near the top of the aircraft.”

The airline apparently began an emergency inspection of all of its 737-300s last night. Not much more information this morning on just which aircraft were inspected or if that inspection process is continuing this morning.

No more information is known about what happened at this time, but I think it would be safe to assume that the incident is going to restart the conversation concerning the airline’s previous issues with the FAA — most of which concerned inspection for cracks on the airline’s older aircraft.

The NTSB has already been on the scene, as they used a cherry picker to inspect the hole from the top of the aircraft.