AirTran upgraded

[RIDETHELIGHTING]

http://biz.yahoo.com/ap/080125/apfn_airlines_sector_snap.html?.v=1


Among the sector's biggest gainers was AirTran Holdings Inc., which jumped more than 3 percent after JPMorgan analyst Jamie Baker raised his rating on the stock to "Overweight" from "Neutral."

"With an industry-leading cost structure, AirTran is expected to remain profitable at current fuel prices even when coupled with a weak economy -- after all, it survived the entirety of this decade's downturn without a single annual loss," Baker wrote in a client note.
We need to keep our eye on the ball.:beer:

 

[CitationLover]

http://biz.yahoo.com/ap/080125/apfn_airlines_sector_snap.html?.v=1


Among the sector's biggest gainers was AirTran Holdings Inc., which jumped more than 3 percent after JPMorgan analyst Jamie Baker raised his rating on the stock to "Overweight" from "Neutral."

"With an industry-leading cost structure, AirTran is expected to remain profitable at current fuel prices even when coupled with a weak economy -- after all, it survived the entirety of this decade's downturn without a single annual loss," Baker wrote in a client note.
We need to keep our eye on the ball.:beer:

The only way to maintain this is the rapid growth model. Air Tran needs the growth or its cost structure will increase. What are the rumblings regarding TA#3? Has the new leadership talked to mgmt yet?

 

[Secret Squirrel]

I have never understood this theory. The only way to remain profitable is with rapid growth formula? What the hell kind of reasoning is that? It is very expensive and takes years to make profits when starting new routes. So what you are saying is that by taking on huge start up costs and trying to compete in new markets makes us profitable. But if we were to just stop taking aircraft and expanding we would all of a sudden loose money? Silly.

 

[CitationLover]

I have never understood this theory. The only way to remain profitable is with rapid growth formula? What the hell kind of reasoning is that? It is very expensive and takes years to make profits when starting new routes. So what you are saying is that by taking on huge start up costs and trying to compete in new markets makes us profitable. But if we were to just stop taking aircraft and expanding we would all of a sudden loose money? Silly.

You're missing the point. The highlighted part was regarding the "industry leading cost structure". If Air Tran were to stop taking deliveries then all of its labor costs shift simply one column on the pay scale (ie costs go way up) while their revenue remains constant. So if profit is defined simplistically as Revenue - Cost and cost goes up, profits must come down.

Growth allows business to spread the costs out more (it ain't simply in the airline business, but every business). You have cheaper (on average) seniority rates for pilots, fa's, mechanics, etc. As growth increases thus economies of scale develop and further cheapens the costs of introducing new routes. Air Tran introduces a lot of new routes and I am sure has a process the follow (they don't wing it as you make it sound). Air Tran's "new routes" are really about a new O feeding their existing D's.

Thus when the deliveries start to slow down, reality will set in and costs will go up.

 

[maxblast72]

The growing part helps us keep our non-fuel CASM down as we continue to hire new people at lower wages providing an average lower cost per employee. Having 90% of our FO's on year 3 pay or less, 1/2 of our CA's on year 4-7 pay, and over 70% of our FA's on year 5 or less definitely helps us keep our non-fuel CASM down compared to other more senior airlines. I also believe we have very few people in upper management when compared to other airlines (not counting our 30+ inflight supervisors).

However, on the RASM side of the equation, by us not taking airplanes is Q4 2007 allowed some of our new markets of the last couple years to mature. I think that is why you see our load factor up about 5% year over year (which combined with better ticket prices is supposed to be a positive 6-8% RASM for the quarter). Also, no new cities recently has cut down on the startup costs and route development cost that you talk about.

I guess we will see how well we did on Tuesday. Do you think we schedule our earnings release to be on the same day as Jetblue or do you think they schedule the same day as us to one up us?

 

[maxblast72]

Thus when the deliveries start to slow down, reality will set in and costs will go up.

It is a little more complicated than that. We slowed down our growth over the last 2 years and still decreased our non-fuel CASM as we have increased our average stage length (I believe up to 20% of our ASM are now in the Trans-con markets). You can still grow ASM's while taking a smaller number of airplanes. Obviously a larger number of ASM helps bring down the CASM as some costs are fixed.

 

[RIDETHELIGHTING]

I think we our going to loose 2 million in the 4th.

 

[CitationLover]

It is a little more complicated than that. We slowed down our growth over the last 2 years and still decreased our non-fuel CASM as we have increased our average stage length (I believe up to 20% of our ASM are now in the Trans-con markets). You can still grow ASM's while taking a smaller number of airplanes.

absolutely, you will see it at MEH this summer with 0 new deliveries, but 12.5% capacity growth. our unit costs will go down, but this is a contract year and I am sure a "fudge" will occur. but even though our CASM will decrease, our costs still increase because wages and benefits increase. the industry can play it's unit cost/revenue argument all it wants, but it still comes down to the sum of the parts.

just remember now that the denominator is higher it must REMAIN in that position. your argument is proving that growth is needed to increase the average stage length. no more new 737's no more increases in average stage length.

 

[gt1900]

Ride.... Thats what the website was saying as of 1/16/08... Looks like a $2 million loss for Q4. -9 Million for Q1 in 08.. But we beat the 07 Q1 estimate by about 10 million this year. Originally I believe the were forecasting a $7 million loss but we ended up making 3 million. So who knows, but Id bet a loss of 2 million is pretty close... Still a gain of $56 million for the year...

This upgrade goes hand in hand with what JL and BF have said in the past. They said that one of the best things for AAI would be high fuel costs since AAI could handle it with there low CASM costs. It would force airlines to fold or into consolidation which would benefit us in the future by reducing capacity..

 

[Secret Squirrel]

We do not operate in a vacuum. Every year every other carrier's costs increase also. We have industry leading cost structure not just because of our pilot pay rates. Pilot costs compared between companies make very little difference in CASM. Look at Southwest. They have some of the highest costs when you consider labor. Their third year FO rates are higher than most companies FO rates top out at, same for Captain. And some of it is their fuel hedges but not all of it. Economies of scale (or growth as you stated) happens when you utilize your aircraft better, not just adding aircraft. People get so tied up into pay rates but at a certain point it makes very little difference in costs.

I believe we have a industry leading costs structure because the company runs lean, 1/3 the numbers of managers and vice presidents of other companies. Our management bought new aircraft (lower MX costs) at a time when most companies were getting rid of aircraft and canceling orders so our aircraft /engine costs are much lower than many. A contract that allows a much better (for the company) utilization of crews. Reduced training costs by only having two aircraft and a single pay rate which reduces the training events of people going between aircraft. Negotiating cheaper leases at airports as legacy carriers bailed out.

Growth is very expensive for an airline. Start up costs are HUGE when going into new markets. Competition is HUGE when you start competing with established carriers for market share. How come Frontier and Jetblue are slowing their expansion if expansion will lower their costs?

 

[CitationLover]

I believe we have a industry leading costs structure because the company runs lean, 1/3 the numbers of managers and vice presidents of other companies. Our management bought new aircraft (lower MX costs) at a time when most companies were getting rid of aircraft and canceling orders so our aircraft /engine costs are much lower than many. A contract that allows a much better (for the company) utilization of crews. Reduced training costs by only having two aircraft and a single pay rate which reduces the training events of people going between aircraft. Negotiating cheaper leases at airports as legacy carriers bailed out.

It ain't managers otherwise AA would be leading the pack in CASM and their in the lower half compared to the other majors. AMR has managers for managers for managers with tons of overhead compared to the other legacies.

Look at who has the low CASM and shocker it's newer airlines with lower average seniority costs. SWA is an anomaly due to it's very high aircraft utilization rate which really drives the denominator up. besides SWA has been fueled with rapid growth further allowing its costs to remain lower.

Other carriers costs do go up, but with higher growth than most everyone else AAI's can REMAIN lower, that is the point. they need the growth to spread the costs out, otherwise theirs will rise FASTER than others, due to AAI being smaller. The trannies hammer MEH on this point in being small, but you're saying you're immune to this?

Frontier and Jetblue as slowing down because they cannot maintain the growth in the current market. You need capital to continue growth. Jetblue needed emergency capital from Lufthansa to maintain it's growth, Frontier doesn't have that. It also doesn't help in Frontiers case to spend millions on Lynx all of last year and it hadn't flown a mile yet. AAI's growth is tieing into existing markets and expanding there (for example MKE/IND). They are not starting out in a brand new city and exploding from there, rather putting the toe in the water and seeing if they like it. This growth is cheaper than what you describe. Their growth stops and unit costs will rise.

If pay rates mean as little as you think, why is your company continuously lowballing you in its offers. It is desperately scared of costs increasing and them not being able to maintain the growth needed to average out those increases. Sure pilot costs on their own isn't that much, but if pilots get money then FA's, mechanics, etc. all want their piece. If the costs rise beyond what they can maintain they have no choice but to stop growing (as you said that costs money but instead their spending the money on a higher cost structure) a la Jetblue and Frontier.

 

[Secret Squirrel]

Sure it costs money for increases in contracts, and management plays the victim as soon as you start talking about increases in contracts, but work rules will hurt much more than a pay increase. Our union president said that if we got everything we were asking for it would increase our CASM by less than 5 cents. That is not going loose us our industry leading costs.

We were told it takes 3 years after entering a market to make money. Sure we increase flying out of existing cities, but we also are opening many new cities, and every time we go to our three main cities we are fighting with Delta into Atlanta and Orlando, plus SW out of Orlando FLL, and BWI, and MEH out of Milwaukee. And those are just the Direct competitors.

You said Jet Blue and Frontier are slowing down growth because they can not afford to continue to expand. You keep saying expansion makes your costs go down? Frontier and Jet Blue both have very young (longevity wise) pilot groups, new aircraft, and everything else we have that should have their costs as low as ours, and Southwest should be up there with American. What is the difference between them and us? Why aren't their costs as low as ours?

You only spread out your fixed costs by increasing the number of airplanes. Every other cost increases by growth. More employees, more gas, more mX, more gates, more cities, more everything. What fixed costs are spread out? Our training center and Corporate offices. You have seen the training center, I hear our corporate offices are not much bigger or more opulent.

The only cost that I agree with you is a more Jr. Pilot group. But I don't think the effect of that is as huge as you believe. Have you looked at the contracts of other carriers? Our captain rates are higher than everybody but SW (I will agree our FO rates are much lower than most). And in the grand scheme of things if United pilots cost $60 more and hour because of their longevity what kind of effect is that on CASM. A penny?

 

[Max Powers]

I have never understood this theory. The only way to remain profitable is with rapid growth formula? What the hell kind of reasoning is that? It is very expensive and takes years to make profits when starting new routes. So what you are saying is that by taking on huge start up costs and trying to compete in new markets makes us profitable. But if we were to just stop taking aircraft and expanding we would all of a sudden loose money? Silly.

That is why you are a pilot and not a business man.....

 

[Max Powers]

We do not operate in a vacuum. Every year every other carrier's costs increase also. We have industry leading cost structure not just because of our pilot pay rates. Pilot costs compared between companies make very little difference in CASM. Look at Southwest. They have some of the highest costs when you consider labor. Their third year FO rates are higher than most companies FO rates top out at, same for Captain. And some of it is their fuel hedges but not all of it. Economies of scale (or growth as you stated) happens when you utilize your aircraft better, not just adding aircraft. People get so tied up into pay rates but at a certain point it makes very little difference in costs.

I believe we have a industry leading costs structure because the company runs lean, 1/3 the numbers of managers and vice presidents of other companies. Our management bought new aircraft (lower MX costs) at a time when most companies were getting rid of aircraft and canceling orders so our aircraft /engine costs are much lower than many. A contract that allows a much better (for the company) utilization of crews. Reduced training costs by only having two aircraft and a single pay rate which reduces the training events of people going between aircraft. Negotiating cheaper leases at airports as legacy carriers bailed out.

Growth is very expensive for an airline. Start up costs are HUGE when going into new markets. Competition is HUGE when you start competing with established carriers for market share. How come Frontier and Jetblue are slowing their expansion if expansion will lower their costs?

It's all about balance, too much growth and you lose too little and you lose.

 

[CitationLover]

Sure it costs money for increases in contracts, and management plays the victim as soon as you start talking about increases in contracts, but work rules will hurt much more than a pay increase. Our union president said that if we got everything we were asking for it would increase our CASM by less than 5 cents. That is not going loose us our industry leading costs.

i think work rules are implied in the "higher" wages part. it isn't simply rates as you say.

We were told it takes 3 years after entering a market to make money. Sure we increase flying out of existing cities, but we also are opening many new cities, and every time we go to our three main cities we are fighting with Delta into Atlanta and Orlando, plus SW out of Orlando FLL, and BWI, and MEH out of Milwaukee. And those are just the Direct competitors.

As you mention later, the costs have to be spread out, thus those airplanes to fuel the growth have to go somewhere. This is why marketing drives any airline. Everything flows from them. New markets are targeted based on the lack of competition, unused capacity, and competing on weaker routes where a competitive advantages may occur (like competing against RJ's).

You said Jet Blue and Frontier are slowing down growth because they can not afford to continue to expand. You keep saying expansion makes your costs go down? Frontier and Jet Blue both have very young (longevity wise) pilot groups, new aircraft, and everything else we have that should have their costs as low as ours, and Southwest should be up there with American. What is the difference between them and us? Why aren't their costs as low as ours?

Their costs are in line with yours.
http://www.wikinvest.com/stock/US_Airways_Group_(LCC)
What is the commonality regarding Frontier, JetBlue, and AAI? They're relatively young airlines that have grown quite a bit in recent years. This growth maintains the lower seniority for wages, benefits, etc.

SWA is not up with American because it has grown leaps and bounds since 9/11 while AA has been quite stagnant, shrinking actually, with AMR's growth coming in uneconomical 50/44/35 seat embraers. They are apples and oranges. SWA is a relatively young company with a single fleet type, no international or extraneous related businesses (sabre, skychef, etc in the history of AMR), has the highest work and fleet utilization rates in the industry (which keeps the denominator much higher than a similar company). SWA is also unique in its cash happy (debt unfriendly) culture versus pretty much any other airline. Their fuel hedges have allowed them to utilize their cash reserves to earn much better internal rates of return over any other airline.

You only spread out your fixed costs by increasing the number of airplanes. Every other cost increases by growth. More employees, more gas, more mX, more gates, more cities, more everything. What fixed costs are spread out? Our training center and Corporate offices. You have seen the training center, I hear our corporate offices are not much bigger or more opulent.

Of course the fixed costs are spread out, but you fail to list the other half of the equation: revenue. More growth = more revenue. If revenue can outpace costs in growth, you will make money: it's that simple. AAI, give them credit, has done a great job in managing this with their explosive growth. If they stop taking 737 deliveries you do not think their cost growth will outpace someone who is growing?

The only cost that I agree with you is a more Jr. Pilot group. But I don't think the effect of that is as huge as you believe. Have you looked at the contracts of other carriers? Our captain rates are higher than everybody but SW (I will agree our FO rates are much lower than most). And in the grand scheme of things if United pilots cost $60 more and hour because of their longevity what kind of effect is that on CASM. A penny?

FO's are 47% of your pilots, they IMPACT the bottom line period. Others also contribute mightily. FA's, mechanics, baggage handlers, equipment expenditures, overhead, etc. Margins are razor thin in the airline industry. A penny here and there can mean the difference between a profit or a loss.

Do you really believe if deliveries were to stop tomorrow, AAI will maintain its current cost structure?

 

[CitationLover]

It's all about balance, too much growth and you lose too little and you lose.

how true. another reason revenue and yield management play an important part in the grand scheme of things. pricing algorithms have a lot to detail. an airline that successfully manages this well, can easily maintain rapid growth, while others who don't can't sustain it. it has come a long way from crandall's super saver program.

 

[j41driver]

What are the rumblings regarding TA#3? Has the new leadership talked to mgmt yet?

Sorry...thought you worked here. No new talks yet...just basically getting BOD and Committees up to speed.

 

[CitationLover]

Sorry...thought you worked here.

almost, in august of last year.

 

[Secret Squirrel]

Do you really believe that if AAI stopped taking deliveries tomorrow our costs would all of a sudden become unprofitable?

 

[CitationLover]

Do you really believe that if AAI stopped taking deliveries tomorrow our costs would all of a sudden become unprofitable?

Yes .