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.