jetflier
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- Dec 22, 2003
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Well the airline watchers are now revising their projections on the "great debate" of LCC VS Legacy....
'Legacy' Airlines May Outfly Discount Rivals – Wall Street Journal
By MELANIE TROTTMAN and SUSAN CAREY
October 30, 2006; Page C1
As the airline industry finally starts to gain altitude, investors in the still-risky sector should be especially wary of the carriers that specialize in cheap seats. They're flying into head winds.
Not only are discount carriers increasingly competing against each other, but they are up against some reinvigorated adversaries: big, older airlines. These so-called legacy carriers now have the best of both worlds -- some of the lower costs that discounters enjoy and the premium overseas traffic that they don't.
All that is raising questions about the discounter model: low fares and rapid, mostly domestic growth.
Last week, discounter darling JetBlue Airways swung to a third-quarter net loss from a modest year-earlier profit and said it will further slow its growth rate by reducing the size of its planned fleet. The parent of low-cost carrier AirTran Airways likewise swung to a quarterly loss and is postponing aircraft deliveries. Meanwhile, Frontier Airlines reported a sharply lower profit for its fiscal second quarter, which ended Sept. 30.
Even the typically unflappable Southwest Airlines is having a bumpy ride. It turned in a respectable third-quarter profit two weeks ago but fell short of expectations.
Shares of most of these discounters fell after the release of their results. Southwest's stagnant stock fell 3% the day it reported. On Friday, Frontier fell 3.7%, and AirTran Holdings Inc. was down 6.4% after reporting results the day before. JetBlue's stock rose after its quarterly report, though its closing price of $12.25 Friday remained far below its 52-week high of $16.85.
The legacy airlines have been restraining their growth as the discounters rapidly add seats, and the bigger companies' stocks largely have improved due to increasing profits or sharply narrowed losses. The day before Southwest's shares fell 3%, the stock of American Airline's parent, AMR, rose 7.5% on news of a year-over-year return to profit.
Michael Boyd of the Boyd Group Inc., an aviation consulting and forecasting firm in Evergreen, Colo., has for some time been predicting that discounters would run into challenges. "They're running out of places to fly," says Mr. Boyd, who owns no airline stocks. If there is a downturn in the economy and demand softens, he adds, "One or two may not survive."
The bigger airlines, by contrast, are in better shape than they've been in years, thanks to aggressive cost-cutting and streamlining -- changes inspired by their discount rivals. If demand turns down, these carriers have older aircraft they can take out of service, and the ability to shed feeder flights operated by regional affiliates. The discounters have newer planes, which are too costly to simply retire.
The discounters need to grow rapidly to keep costs down, spreading overhead over more capacity. They are constantly looking for new places to fly. AirTran is adding winter flights from Detroit and White Plains, N.Y., to three Florida cities. JetBlue started flights to more than a dozen new destinations this year.
"Discounters are realizing an inconvenient truth: Slower growth may in fact improve profitability," said JP Morgan analyst Jamie Baker.
Consider AMR and JetBlue. AMR shrank third-quarter capacity on nonregional routes by 2.4% from a year earlier and returned to a profit as it filled more of its seats. JetBlue, which increased its third-quarter capacity by 19%, swung to a small loss as it filled fewer seats.
A few years back, many industry watchers assumed discounters would dominate simply because of lower costs. And though their costs remain lower, many discounters underestimated the power of the legacy carriers' size and reach, which allow them to serve more major markets that draw higher fares, Mr. Baker said.
The struggle between the two business models is by no means over, said Dan Kasper, a managing director and airline specialist at LECG LLC in Cambridge, Mass. "The low-cost carriers have been pummeling the legacy airlines for five years. Well, now the legacies are rallying," he said. Mr. Kasper doesn't own any airline stocks.
To be sure, all the airlines were hurt in the third quarter by still-high fuel prices and the government ban on bringing liquids on planes in carry-on baggage. But discounters were hurt disproportionately by the now-relaxed ban because they tend to operate short-haul flights on which passengers prefer to carry rather than check luggage.
CreditSuisse analyst Daniel McKenzie, who has AirTran at a "buy" rating, trimmed his fourth-quarter earnings estimate for the airline. CreditSuisse expects to receive or seek investment-banking compensation from the airline.
J.P. Morgan's Mr. Baker raised his JetBlue rating to "neutral" from the equivalent of a "sell" and raised his 2007 profit forecast but not with a lot of enthusiasm. "As turnarounds go, United appeals more," he said in a report, referring to prospects for the UAL Corp. unit. J.P. Morgan has an investment-banking relationship with JetBlue. Mr. Baker doesn't personally own any airline stocks.
Southwest, the most mature and consistently profitable of the discounters, reported disappointing third-quarter profit that was flat with a year earlier excluding a big charge in the latest period. Southwest still plans to meet its 15% earnings growth target for this year and has been more aggressive about raising fares to cover high fuel prices. But the Dallas-based airline's fuel hedges, which largely have protected it from high prices, are eroding, narrowing its favorable cost gap with competitors.
Meanwhile, AirTran, which ordered more than 100 new jetliners in 2003 and has been growing by 20% to 25% a year, now thinks its capacity is growing too fast with fuel prices this high. Last month, the airline said it planned to defer deliveries of some aircraft. In announcing its third-quarter loss, AirTran said it may slow fleet growth more. By trimming growth to 10% in 2008, AirTran would reduce its exposure to new markets, which tend to start slowly and not make money immediately.
"There is some value to size," said Stan Gadek, AirTran's chief financial officer. "It will improve our revenues if we can get there in a responsible way."
'Legacy' Airlines May Outfly Discount Rivals – Wall Street Journal
By MELANIE TROTTMAN and SUSAN CAREY
October 30, 2006; Page C1
As the airline industry finally starts to gain altitude, investors in the still-risky sector should be especially wary of the carriers that specialize in cheap seats. They're flying into head winds.
Not only are discount carriers increasingly competing against each other, but they are up against some reinvigorated adversaries: big, older airlines. These so-called legacy carriers now have the best of both worlds -- some of the lower costs that discounters enjoy and the premium overseas traffic that they don't.
All that is raising questions about the discounter model: low fares and rapid, mostly domestic growth.
Last week, discounter darling JetBlue Airways swung to a third-quarter net loss from a modest year-earlier profit and said it will further slow its growth rate by reducing the size of its planned fleet. The parent of low-cost carrier AirTran Airways likewise swung to a quarterly loss and is postponing aircraft deliveries. Meanwhile, Frontier Airlines reported a sharply lower profit for its fiscal second quarter, which ended Sept. 30.
Even the typically unflappable Southwest Airlines is having a bumpy ride. It turned in a respectable third-quarter profit two weeks ago but fell short of expectations.
Shares of most of these discounters fell after the release of their results. Southwest's stagnant stock fell 3% the day it reported. On Friday, Frontier fell 3.7%, and AirTran Holdings Inc. was down 6.4% after reporting results the day before. JetBlue's stock rose after its quarterly report, though its closing price of $12.25 Friday remained far below its 52-week high of $16.85.
The legacy airlines have been restraining their growth as the discounters rapidly add seats, and the bigger companies' stocks largely have improved due to increasing profits or sharply narrowed losses. The day before Southwest's shares fell 3%, the stock of American Airline's parent, AMR, rose 7.5% on news of a year-over-year return to profit.
Michael Boyd of the Boyd Group Inc., an aviation consulting and forecasting firm in Evergreen, Colo., has for some time been predicting that discounters would run into challenges. "They're running out of places to fly," says Mr. Boyd, who owns no airline stocks. If there is a downturn in the economy and demand softens, he adds, "One or two may not survive."
The bigger airlines, by contrast, are in better shape than they've been in years, thanks to aggressive cost-cutting and streamlining -- changes inspired by their discount rivals. If demand turns down, these carriers have older aircraft they can take out of service, and the ability to shed feeder flights operated by regional affiliates. The discounters have newer planes, which are too costly to simply retire.
The discounters need to grow rapidly to keep costs down, spreading overhead over more capacity. They are constantly looking for new places to fly. AirTran is adding winter flights from Detroit and White Plains, N.Y., to three Florida cities. JetBlue started flights to more than a dozen new destinations this year.
"Discounters are realizing an inconvenient truth: Slower growth may in fact improve profitability," said JP Morgan analyst Jamie Baker.
Consider AMR and JetBlue. AMR shrank third-quarter capacity on nonregional routes by 2.4% from a year earlier and returned to a profit as it filled more of its seats. JetBlue, which increased its third-quarter capacity by 19%, swung to a small loss as it filled fewer seats.
A few years back, many industry watchers assumed discounters would dominate simply because of lower costs. And though their costs remain lower, many discounters underestimated the power of the legacy carriers' size and reach, which allow them to serve more major markets that draw higher fares, Mr. Baker said.
The struggle between the two business models is by no means over, said Dan Kasper, a managing director and airline specialist at LECG LLC in Cambridge, Mass. "The low-cost carriers have been pummeling the legacy airlines for five years. Well, now the legacies are rallying," he said. Mr. Kasper doesn't own any airline stocks.
To be sure, all the airlines were hurt in the third quarter by still-high fuel prices and the government ban on bringing liquids on planes in carry-on baggage. But discounters were hurt disproportionately by the now-relaxed ban because they tend to operate short-haul flights on which passengers prefer to carry rather than check luggage.
CreditSuisse analyst Daniel McKenzie, who has AirTran at a "buy" rating, trimmed his fourth-quarter earnings estimate for the airline. CreditSuisse expects to receive or seek investment-banking compensation from the airline.
J.P. Morgan's Mr. Baker raised his JetBlue rating to "neutral" from the equivalent of a "sell" and raised his 2007 profit forecast but not with a lot of enthusiasm. "As turnarounds go, United appeals more," he said in a report, referring to prospects for the UAL Corp. unit. J.P. Morgan has an investment-banking relationship with JetBlue. Mr. Baker doesn't personally own any airline stocks.
Southwest, the most mature and consistently profitable of the discounters, reported disappointing third-quarter profit that was flat with a year earlier excluding a big charge in the latest period. Southwest still plans to meet its 15% earnings growth target for this year and has been more aggressive about raising fares to cover high fuel prices. But the Dallas-based airline's fuel hedges, which largely have protected it from high prices, are eroding, narrowing its favorable cost gap with competitors.
Meanwhile, AirTran, which ordered more than 100 new jetliners in 2003 and has been growing by 20% to 25% a year, now thinks its capacity is growing too fast with fuel prices this high. Last month, the airline said it planned to defer deliveries of some aircraft. In announcing its third-quarter loss, AirTran said it may slow fleet growth more. By trimming growth to 10% in 2008, AirTran would reduce its exposure to new markets, which tend to start slowly and not make money immediately.
"There is some value to size," said Stan Gadek, AirTran's chief financial officer. "It will improve our revenues if we can get there in a responsible way."
