SuperFLUF
lazy Mc Donald's pilot
- Joined
- Jul 9, 2003
- Posts
- 639
The latest common sense musings from Boyd: www.aviationplanning.com
Say what you will, but the guy usually right on the mark and years ahead.[font=Tahoma, Verdan, Lucida]Okay, Panic Is Now Acceptable Behavior...[/font][font=Tahoma, Verdan, Lucida]
Jet Fuel Heads For $2+ Per Gallon[/font]
[font=Tahoma, Verdan, Lucida]That scraping sound, Captain Smith, really is an iceberg.[/font]
[font=Tahoma, Verdan, Lucida]Watch in the next few weeks for the Peanut Gallery of academics to be crowing about how "legacy" carriers and their "outdated" operational models deserve not only bankruptcy, but also to go completely out of business.[/font]
[font=Tahoma, Verdan, Lucida]As usual, these irrelevant book-dwellers are flat wrong.[/font]
[font=Tahoma, Verdan, Lucida]To be sure, there could be a couple of major airline Chapter 11 filings in the not too distant future. But it won't be due to "outdated" models, or labor unions, or the hub-and-spoke system.[/font]
[font=Tahoma, Verdan, Lucida]It will be due to the projected outcome of the race to get costs down fast enough to meet $2+ per-gallon jet fuel before the cash runs out. Then toss in the new bankruptcy laws coming into effect this October, which are geared toward forcing airlines to liquidate if they can't [/font]http://www.aviationplanning.com/images/815a.JPG[font=Tahoma, Verdan, Lucida]re-structure quickly. The result is a higher probability of some carriers having no choice but to dive into the Chapter 11 cesspool in order to buy some time, and conserve some cash while they re-structure operations to deal with fuel costs that are more than double those of two years ago.[/font]
[font=Tahoma, Verdan, Lucida]It's The Fuel, Stupid. Not The Model. Make no mistake, legacy carriers are not hopeless dinosaurs, despite the "accepted thinking" in some circles. These airlines can adjust to $2+ fuel, but the price jump has been so rapid that re-structuring probably can't be made at some airlines before their cash runs out.[/font]
[font=Tahoma, Verdan, Lucida]So don't get lead down the path by the media gadflies, and intellectual bantam-weight academics who will claim that the operating models of legacy carriers are the reason for the industry's latest crisis. Nevertheless, watch for the following tell-tale signs of total airline industry ignorance that are bound to pop up over the next few weeks:[/font]
- [font=Tahoma, Verdan, Lucida]"Southwest Makes Money. That Proves The Legacy Carriers Are Obsolete." It's amazing that some media "airline experts" continue to use Southwest as the single paragon of airline virtue, often referring to WN's "low" pay levels and - at least in the editorial section of the Wall Street Journal - how the carrier's non-union status is a shining example of what an airline needs to be in order to compete. [/font]
[font=Tahoma, Verdan, Lucida]To be sure, Southwest is a great airline. But it, too, has the same fundamental problems faced by carriers such as Northwest and Delta - the latter of which, unlike Southwest, really is essentially non-union, except for pilots and dispatchers.[/font]
[font=Tahoma, Verdan, Lucida]The fact is that on a fully-adjusted "normalized" basis, Southwest is losing money. True, its fuel hedges are allowing it to report legitimate profits, but these are essentially the result of a well-managed bet that somebody else lost. Fuel hedges are like a no-interest, no-payback loan. Great. But they will expire in the next 18-24 months - and that will expose Southwest's Achilles heel - high labor costs - to the hard light of competitive reality.[/font]
- [font=Tahoma, Verdan, Lucida]"If A Legacy Carrier Goes Glub-Glub. LCCs Will Jump In To Replace It." A common mantra, this is a comment that identifies the maker as one whose brain is solidly installed in a place where the sun don't shine. [/font]
[font=Tahoma, Verdan, Lucida]As many communities found on a small scale after US Airways closed its PIT hub - there isn't a replacement for much of the service lost. That's because the LCC model is a cherry-picking, high-density traffic model. It'shttp://www.aviationplanning.com/images/815d.JPG a model that doesn't typically accommodate the economics to support the types of equipment that can access traffic at either Bangor or Beijing. Nor do they have any economic incentive to invest tens of millions in establishing new multi-level hub operations. [/font]
[font=Tahoma, Verdan, Lucida]So, if Delta accommodates the fervent desires of some in academia, and goes out of business, don't hold yourf breath for an LCC to toss several hundred flights into CVG or SLC.[/font]
[font=Tahoma, Verdan, Lucida]So, if Delta accommodates the fervent desires of some in academia, and goes out of business, don't hold yourf breath for an LCC to toss several hundred flights into CVG or SLC.[/font]
- [font=Tahoma, Verdan, Lucida]"The Regional Carriers Are Profitable. They've Got A Better Model." Another statement that's in total conflict with reality. Some folks read about the traffic growth and the profits at "regional airlines" and conclude that these entities have their act together. The fact is that "regional airlines" are neither regional, nor are they airlines. They are merely vendors of lift, and their customers are legacy carriers. If the legacy goes down, the "regional airline" goes with it. http://www.aviationplanning.com/images/815c.JPG[/font]
[font=Tahoma, Verdan, Lucida]And, no, a carrier like ExpressJet, or Chautauqua, or Pinnacle can't just break away and operate as a stand-alone carrier. Establishing the necessary infrastructure - reservations, ticketing, marketing - would be very expensive. Establishing brand loyalty would be tough. Furthermore, "regional" jets are economic dogs in most stand-alone, non-feed market situations. It's a situation that's getting worse with higher fuel prices and increasingly inept FAA management of the ATC system.[/font]
[font=Tahoma, Verdan, Lucida]By the way, it's already been tried. It's called Independence Air.[/font]
[font=Tahoma, Verdan, Lucida]Now For Some Realities[/font]
[font=Tahoma, Verdan, Lucida]Legacies: They're The Future. Not LCCs. Heresy! No, worse, apostasy! The usual suspects in the aviation media will cringe at such a statement. [/font]
[font=Tahoma, Verdan, Lucida]But what most folks are missing is that a P & L statement involves two sides of the ledger. The cost part is what everybody seems to be focusing on. But the revenue part is http://www.aviationplanning.com/images/815b.JPGthe one that's more important. While Southwest can do a great job in high density markets, its fleet of 737s are useless in relatively small markets like Saltillo or Muskegon or Montgomery or Shreveport. And they're not very good in accessing traffic at Shanghai or Taipei or Osaka, either. Tumble to it: it's markets like these where the real future revenue growth will be found.[/font]
[font=Tahoma, Verdan, Lucida]Northwest, on the other hand, can access the revenues at places such as these and cross-flow them throughout their system. So can American and United and Continental. [/font]
[font=Tahoma, Verdan, Lucida]The only problem is that the rapid and near-vertical trajectory of fuel costs threatens to suck the cash out of such airlines before they can adjust. The only refuge may be Chapter 11. That raises the logical question: then what? Are there cost reductions these carriers can still gain to offset fuel prices?[/font]
[font=Tahoma, Verdan, Lucida]You betcha. Just a couple examples....[/font]
[font=Tahoma, Verdana, Lucida](c) 2005, The Boyd Group/ASRC, Inc. All Rights Reserved[/font]
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