Strategies and tactics: July 2008 Archives

So what? The DoT's new proposals on new slot rules for New York's LaGuardia, JFK, and Newark constitute a big docket, but one filing caught our eye as cutting through the Gordian knot. Howard Kass, the US Airways guys in Washington made his filing and, unlike most of the other many commenters, said he wouldn't go through the reasons why this idea of taking landing slots away from airlines and then selling them back was a not a good one. Instead, he said "we simply ask the DoT and the FAA to step back, look round and observe the current state of the airline industry."

Such a guy. JetBlue's chief executive officer, Dave Barger, took a voluntary 50% cut in 2008 base pay for the rest of the year. The reduction, in effect through Dec. 31, puts Barger's salary at an annual rate of $250,000, the airline said in a Securities and Exchange Commission filing. Barger, 50, took the step "in recognition of the challenges faced by the company and its employees in the current industry environment," JetBlue said. Barger (above, left), who took over from JetBlue founder Dave Neeleman (above, right)in May 2007, had a base salary last year of $200,000 that was part of a total package of just over $514,000. The airline has entered rocky territory since Barger took office, losing $7 million in the last quarter alone. Fuel has risen by more than 80% since Barger took over.

It will be different. Indeed, it's the fire next time. No, not the end of the world, quite, but if US majors go back into bankruptcy in this crisis, they may not come out. That is the view of Phil Baggaley, a leading analyst with Standard & Poor's, which downgraded the debt of AMR, the parent of American, UAL, parent of United, and NWAC, parent of Northwest. On Friday afternoon, Baggaley held a teleconference to explain his thinking and had some every interesting thoughts. "Really, there is less left to fix in the case of some of these airlines that have gone through bankruptcy or even that have not," Phil said. The easy fixes - unsecured debt, pension fixes, and the like - are gone. The really big change is in the industry's fleet: "In a perverse way, the strength of the aircraft market runs against, in some ways, the ability to reorganize. If you have an airline going into bankruptcy and it has a fleet of mostly new aircraft, if there's a very strong aircraft market, creditors may be more inclined to say, 'Hand over the keys. We'll just take them back, no matter what happens to you'," he says.

Even the angels are having pains. Name two airlines that make money: that's right, Southwest and Allegiant. And Allegiant is really a sort of travel company rather than an airline. So Southwest comes along and puts out another stellar quarter, its 69th profitable earning period. Net earnings of $321 million in the quarter, pumped up by a few special items. Without them, a net of $121 million. Wow, Sort of. Listen to the earnings call and you'll hear chief executive Gary Kelly tell the tale of the hedges: without Southwest's famous fuel hedges, the Dallas-based discount king would have lost $134 million in the second quarter. As Kelly said, "Nobody at Southwest Airlines intends to lose money, but I can't guarantee that won't be the case."

We're not sure what a synergy is (we hear they don't make very nice house pets) but they got a lot of them down there in Atlanta. That's the word from Delta, which has refined its estimates of how much it will save from its Northwest merger and how much it will cost. During Delta's second-quarter call the other day, Delta President and CFO Ed Bastian said that the two carriers had refined their estimates and come up with $2 billion a year after 2012. "We expect total synergies of in 2009 of roughly $500 million, increasing about $500 million a year until you get to the full run rate in 2012," he said. And the pilots at Delta get a 3.5% equity stake and those at Northwest get a 2.38% stake in the new Delta, he said. The new joint contract that has been agreed upon will include pay increases of roughly 4% a year through 2012.

You can not smash the omelet after it's been scrambled. Or, a cut is like a thing of beauty: it's forever. That the clear statement of American's top guys, chief executive Gerard Arpey and chief financial officer Tom Horton. Asked what they would do with their announced cutbacks if fuel prices came down, Arpey said, "The capacity reductions we are making are permanent. We are not bringing these planes back." Any new aircraft would be used to replace the existing fleet, not to add new capacity, he said. In other words, as American's CFO Horton says, "These cuts are permanent." American is also moving the retirement date for its A300-600 fleet up by several years and will have all of the very big and quite old 'Buses out of its fleet by the end of next year.

So much for private ownership as the answer. For a long time, critics said that airlines would suffer as long as they had short-term perspectives imposed upon them by short-term owners - mainly investors, pension funds, widows, orphans and the like. If they didn't have to meets the public every 90 days and tell it their most intimate secrets, airlines could engage in longer-term planning, blahblahblah. You know the rap.

Well, maybe the example of Midwest Airlines disproves the thesis. Much praised and much liked by the flying public, the Milwaukee-based carrier went private at the beginning of the year when private equity in the form of The Texas Pacific Group (TPG) and former Midwest rival Northwest Airlines bought out the carrier. Now though Midwest is going through the writhing maneuvers that we have learned are the sure signs of disaster.

No surprises? ExpressJet has finally pulled the plug on its independent branded service, a venture (or adventure) in point-to-point flying it began just over a year ago, when its former parent Continental Airlines pulled the plug on some of its flying as Continental Express. XJet said its 39 Embraers used in the operation will go back to their lessors by next June, while the flying will end in September. Its service, which it sold through such marketing slogans as "get over stopovers/stopovers are so last week," was a boon to some airports that had not had very much non-stop service, on such routes as Oklahoma City to Sacramento or Boise to San Diego.

Cui bono? The English, at least the old-fashioned sangfroid Oxbridge types love to ask that. It means (loosely) "To whose benefit?" or, "Who Wins?" That's the question to ask in the very big news that Southwest Airlines has signed its first big international deal, a code-share with Canada's WestJet. They're both fine airlines, even though WestJet is slightly more of a hybrid than Southwest.

But if you look at a route map, you have to wonder what's in it for Dallas-based Southwest. Yes, some Southwest flyers will want to go to Canada in the summer, but to our aged eyes it would seem that the prime beneficiary is WestJet, based out there on the prairies of Alberta.

They shouldn't have been surprised and they weren't. The flight attendants at American Airlines have been bracing for word that there would be some layoffs or furloughs after the carrier announced a reduction in flights and in the fleet for later this year. When word come of a looming 900 layoffs, the Association of Professional Flight Attendants was ready, sort of, and Frank Bastien, its national communications coordinator, said that he was very glad indeed that company had decide on a "Voluntary Bridge to Retirement" program. When the RIF starts sometime in this quarter, flight attendants who are 50 years or older and who have at least 15 years of seniority will be offered a one-time severance payment of $15,000 if they give up recall rights. They do get some medical and free flying rights.