US airlines are starting to run out of tools to stem their losses as fuel continues its increase
Consider the pure statistics, the numbers posted by the US carriers for their first quarter. These look like very big bad numbers. Strip out the one-time charges and the specials, especially from Northwest and Delta, and they still are. The US industry is in one of its worst periods ever, facing a crisis that is at least as threatening as 9/11 was. Record oil prices and teetering demand are combining to reshape the industry. In April, five US carriers went into bankruptcy and only one is still flying. Eos, ATA Airlines, Aloha and Skybus all shut down, while Frontier Airlines, which went into Chapter 11 reorganisation, is still flying.
"You just can't underestimate how the spike in fuel prices is fundamentally changing our industry," says Delta Air Lines head Richard Anderson.
Airlines have resorted to every possible means in their tool boxes, from mergers to capacity cuts to new shares to asset sales. These may not be enough, say analysts, but the options are limited. They cannot just go back to bankruptcy court, for that could be the last trip into Chapter 11 and may end in Chapter 7, as liquidation is called. And, as Northwest Airlines chief executive Doug Steenland says, they cannot go back to their employees, who already took significant wage cuts while the carrier was under Chapter 11 between November 2005 and May 2007.
Delta and Northwest have sought to merge to bulk up against the storms. But even merging may not be enough. United lost so much money in the first quarter - over half a billion dollars - that its stock values plunged and it could not do a proposed merger with Continental. United is now discussing a possible merger with US Airways (see page 15).
Some carriers have issued new shares in an effort to ease the capital crunch. AirTran Airways, a relatively well-positioned low-cost carrier, issued new shares and debt worth about $152 million. Meanwhile, United parent UAL was able to gain a one-year extension on debt covenants valued at $1.5 billion the revisions alter the amount of cash United must have on hand.
At Continental, plans for an early end to a lock-up on the sale of its remaining stake in Panama's Copa could help it raise as much as $100 million. The restrictions on the sale end in late June.
Meanwhile, Phoenix-based Mesa Air Group has been slammed by a court judgement in Hawaii, where its new go! unit lost $20 million in its first 16 months, and by the loss of flying for Delta by its Freedom Air unit that could cost it as much as $20 million a month. It is now looking to sell more stock - enough to double the company's market capitalisation. The $37.8 million increase would pay off notes due in June. Without that, however, debt rating agencies such as Standard & Poor's have doubts about its ongoing viability.
The fare increases that the airlines have imposed so far this year are accompanied by fuel surcharges. Rick Seaney, chief executive of Web-based FareCompare in Dallas, says there were 23 attempts last year, a figure that is most likely to be surpassed by year-end. Leisure fares are back up to 2006 levels while business fares are up by about 30% from when a new policy from Delta brought about structural change and some steep decreases. And ancillary charges are becoming the way to boost revenues.
"There is no investment case for a business that is seeing its annual costs rise at about $1 million per hour," says UBS analyst Kevin Crissey. "That is what AMR has faced in fuel costs so far this year." Capacity cuts and consolidation may not be enough to offset this impact, he adds.
Still, the carriers are cutting. Jamie Baker of JP Morgan says that within a year, some 20% fewer seats may be on offer. That is roughly the equivalent of shutting down American Airlines.
American is cutting about 5% of the capacity at its Dallas/Fort Worth hub and ending all service to Oakland, while JetBlue Airways has cancelled a new city before even beginning it, axing its planned Los Angeles flights from New York JFK and Boston Logan. Those routes could not be profitable, with fuel costing about $15,000 to fill an Airbus A320, up from $9,600 a year ago.
Some of the American cuts are minimal, such as DFW to Boston Logan falling from 10 daily flights to nine, or Denver from 12 to 11, or San Francisco from nine to eight, but others are significant. American is also trimming its schedules at Austin, Texas and Raleigh/Durham, North Carolina. It is ending three routes to Austin. At Raleigh/Durham, once an American hub, its daily services to New York LaGuardia and St Louis will be downgraded to regional jets rather than 140-seat Boeing MD-80s. Also at Raleigh/Durham, AirTran is ending its daily service to Orlando, which it only launched in early February.
Austin and Raleigh make an interesting set of case studies: they are both booming hi-tech centres, with young and affluent populations, but they are both cities where Southwest is a major player and where JetBlue also plays.
At American, the second-quarter began with a well-publicised series of MD-80 groundings by the FAA for re-inspection, a chain of events that will cost it as much as $100 million. But more significantly, the airline's handling of the crisis alienated many flyers. Mike Redbord of compete.com says passengers were not only stranded but angered by the airline's poor communications. Almost half of the travellers compete.com polled said they were less likely to fly American again.
While domestic US capacity is down about 3% this year, Daniel McKenzie of Credit Suisse says capacity cuts have been twice that in markets where network carriers compete with Southwest. The low-cost carrier has twice moved to bulk up its Denver schedules in recent months, making targets not just of foundering Frontier, but also of United, the dominant carrier there.
Southwest is slowing the retirements of its older aircraft and adding three routes from Denver as of August: Sacramento, Fort Lauderdale and New Orleans. The first two are United cities, while New Orleans had been a Frontier market. It is also adding flights to Portland in Oregon, and Indianapolis, a United and a Frontier city.
US Airways has cut its Las Vegas service dramatically, axing capacity there by about 20% over the last year as Southwest ramped up. Michael Derchin, who covers airlines for finance house FTN Midwest, says: "Southwest is perfectly positioned competitively with the network airlines in full retreat." He cites its "unique abilities to generate strong revenue growth in a weak economy and protect earnings against rapidly rising fuel prices".
But Southwest does have challenges, which include closing the gap on its revenues. To do this, it has modified its fare structure to breach a self-imposed cap, and in addition to its so-called Business Select - fares that cost some $10 to $30 more each way - it has increased the number of fare types, nearly doubling them to 15 buckets. So far this year, Southwest has pushed through at least two general fare increases, one in the $2 to $6 each way range and the other in the $3 to $10 range. This contrasts with the 2002/04 period, when it boosted fares eight times, usually by $1 to $4. Between 2005 and 2007 it hiked fares 16 times, in some cases by as much as $10 each way.
Southwest has also stayed above the ancillary fray, refusing to charge for a second checked bag or a seat preference. It will not charge for on-board food, fairly limited though it is, but, according to chief Gary Kelly, it may charge for on-board internet or other in-flight entertainment. Still, Southwest appears to remain the consumer's preferred choice even in an age of rising fares and unpalatable options.
For the latest on Southwest, Frontier and other US carriers go to Dave Field's blog at flightglobal.com/leftfield