Boyd: "Okay, Panic Is Now Acceptable Behavior..."

[SuperFLUF]

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in the next few weeks for the Peanut Gallery of academics to be crowing about how "legacy" carriers and their "outdated" operational models deserve not only bankruptcy, but also to go completely out of business.[/font]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 But it won't be due to "outdated" models, or labor unions, or the hub-and-spoke system.[/font]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]


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• [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]

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• [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]
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[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]​

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[font=Tahoma, Verdan, Lucida]By the way, it's already been tried. It's called Independence Air.[/font]​

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[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]​

 

[SuperFLUF]

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• [font=Tahoma, Verdan, Lucida]Rotate This Stuff To The Scrap Yard. Like, take a gander at just one example. There is nothing in the economy cabin of this 737 that has even a vague relationship with anything to do with a "chef." http://www.aviationplanning.com/images/catering.jpg[/font]
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[font=Tahoma, Verdan, Lucida]This picture represents a cost of maybe $100 just for the truck to show up. Do it for a couple hundred flights a day and the bill starts to represent a real hit.. [/font]
[font=Tahoma, Verdan, Lucida]"But," the traditionalists will protest, "it's necessary to balance the galley equipment and get catering supplies on board..." [/font]
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[font=Tahoma, Verdan, Lucida]Try to join the 21st century. That may have been true five years ago, but not now. You don't necessarily need to hire a vendor with an expensive scissors truck to load bags of pretzels, ice, a liquor kit, a new PSK, and some soda pop into an airplane. [/font]​

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[font=Tahoma, Verdan, Lucida]Furthermore, most traditional airliner galleys are equipment throwbacks to the 1950s. Having an outside caterer move it, push it around, take it to the kitchen (where increasingly nothing is cooked) and re-stocking it, gets real expensive, even when the "food" is a for-sale product. A lot of that equipment - carriers, carts, et al - should be balanced out to the junk yard.[/font]​

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• [font=Tahoma, Verdan, Lucida]You Get Your Boarding Pass Before Security. So, Why The Gate Army? Ten years ago, departure gates at most airlines were multi-function stations. Tickets could be written and boarding passes issued. That took manpower. Today, all those functions are completed before the customer goes through the TSA's sorry excuse for screening. But take a look at the gate staffing at many carriers - still three - and sometimes more - employees are often posted there to "process" passengers. Give it some thought.[/font]
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• [font=Tahoma, Verdan, Lucida]Fuel Is A Tool To Be Used. Instead of focus on "fuel conservation," the objective should be efficient fuel utilization. [/font]
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[font=Tahoma, Verdan, Lucida]Arriving at a hub airport 15 minutes early duehttp://www.aviationplanning.com/images/815e.JPG to tail winds sounds great - if the gate is open and the plane doesn't need to sit and wait, burning fuel. On the other hand, arriving 10 minutes late, with the objective not to burn more fuel to get in on time, is a false economy if it contributes to misconnecting passengers and their luggage. [/font]

[font=Tahoma, Verdan, Lucida]Point: it's not how much fuel an airline uses, its how it uses it. If the only focus is to use less, then the airline has a big time problem.[/font]
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• [font=Tahoma, Verdan, Lucida]Managing Revenue Flows, Not Arrivals & Departures. How departures and arrivals are sequenced into and out of airport gates can make a difference in maximizing efficiency. If the single goal is to "be on schedule," then the airline is operating inefficiently. Yup. Inefficiently. A printed schedule is a piece of paper. But in the real world, that schedule plan is affected by a range of issues. Not only weather and ATC, but day-to-day and minute-to-minute considerations of revenue flows, aircraft positioning, and facilities availability. [/font]
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• [font=Tahoma, Verdan, Lucida]Air Traffic Control. The airline industry today is incurring somewhere in the neighborhood of $8 billion in excess costs annually because the leadership at the FAA has been totally incompetent in managing upgrades to the ATC system. Back in 1994, when our study on Free Flight prompted Congressional hearings, the total estimate of ATC-caused excess costs to the airline industry was $5 billion. Since then jet fuel has gone up over 300% and the ATC system has deteriorated further. [/font]http://www.aviationplanning.com/images/815atc.JPG
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[font=Tahoma, Verdan, Lucida]If the airline industry stopped kissing up to patronage hacks like Marion Blakey and started to demand results and accountability, this situation could change. As it is today, airlines participate in "collaborative committees" with the FAA to work on ATC issues. These degenerate into mutual admiration societies where the airline participants generally forget who's paying them, and nothing gets done. [/font]​

[font=Tahoma, Verdan, Lucida][/font]​

[font=Tahoma, Verdan, Lucida]The point is this: all carriers do have options to address the higher costs of jet fuel. Whether they're forced to do so inside of Chapter 11 or not remains to be seen. [/font]​

[font=Tahoma, Verdan, Lucida]That much said, the fundamental realities remain. Multi-level hub-and-spoke legacy carriers have greater revenue-generating capacity than do carriers operating under the Southwest-style LCC model. In the final analysis, legacies can get their costs down. [/font]

[font=Tahoma, Verdan, Lucida]Then the determinant of long-term growth will be revenue-generating capacity. That's where the LCC model is limited and vulnerable.[/font]

(c) 2005, The Boyd Group/ASRC, Inc. All Rights Reserved
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[ASH]

An excellent read, thanks.

 

[Peanut gallery]

Unfortunately

The consumer and cash flow do not agree with any of these fantasies.

The spiraling cost of labor associated with the hub and spoke system along with the inefficiencies of delays system wide will chase away the consumer almost as fast as the profit potential.

The addition of RJ's at such an alarming rate further chase away the consumer to LCC's operating larger aircraft that now have the "seat". Who thought Southwest would actually have the better seat and comfort level when this all first started. The marketing or lack thereof I should say is paramont in any analysis of the industry. Current market strategy is woefully inadequate for actual revenue generation that is above cost. And unfortunately in the case of UAL the one I am most familiar with since I work there is actually driving away the preferential customer that is willing to pay more.

 

[WillowRunVortex]

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[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]


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I think "well-managed" is the truest part of this hypothesis. When SWA's fuel deals run out in 24 months, they will raise faires by $3 and still kick everyones a$$. Sounds like this thing was written by a legacy driver that is about to lose his job.

 

[Peanut gallery]

there you go

Unfortuate but true, the course of events set in motion during the summer of fun in 2000 that is still playing out regardless of what we would really like to see.

"To fight the inevitable rather than accept reality is truely the mark of a desperate man"

Somebody said that, I wonder who that might be.

 

[canyonblue]

24 months? Current hedges run until 2009 albeit much less comfort.

2005 @ 85% @ $26

2006 @ 65% @ $32

2007 @ 45% @ $31

2008 @ 30% @ $33

2009 @ 25% @ $35

Still not bad, even for 25% of our fuel costs.

 

[canyonblue]

they will raise faires by $3 and still kick everyones a$$.

Southwest, American raise select fares

FORT WORTH (AP) — Southwest Airlines has joined the parade of carriers that are raising fares, and American Airlines on Tuesday increased surcharges on fares to and from most international destinations.

Both carriers said they needed to increase fares to help cover the rising cost of jet fuel.

The moves came on the heels of several carriers, including American, boosting fares on domestic travel late last week.

On Tuesday, Fort Worth-based American announced it was immediately adding a $20 per round trip surcharge on most international flights and those to and from Puerto Rico and the U.S. Virgin Islands.

That came a day after Southwest raised fares by $2 to $4 each way, depending on the distance of the flight. The Dallas-based airline didn't change its cap of $299 per ticket.

Company spokesman Ed Stewart said the increase was "modest and reasonable in light of what's happening with fuel costs."

The price of a gallon of jet fuel has jumped about 60% from a year ago to more than $1.70 in New York and the Gulf Coast and $2 in Los Angeles, tracking the rise in crude oil prices, according to government statistics.

 

[atafan]

Don't think SWA isn't thinking globally.

SWA isn't just playing with ATA because they want a few gates and feed from a handful of cities. Expect International moves from SWA first by utilizing ATA feed and if it feels good watch out.

SWA is where it is because they have the some of the sharpest, thinking outside the box managers in the business.

 

[73-Driver]

SWA is where it is because they have the some of the sharpest, thinking outside the box managers in the business.

Amen Brother!