Boyd Prognosticates

[Big Slick]

[FONT=Tahoma, Verdan, Lucida]Just When Airlines Thought It Was Safe To Get Back Into The Black...[/FONT]
[FONT=Tahoma, Verdan, Lucida]$75 Oil - A Whole New Dimension[/FONT]
[FONT=Tahoma, Verdan, Lucida]Hot Flash Summary: [/FONT][FONT=Tahoma, Verdan, Lucida]It's fairly certain that if oil stays above $70 - or goes even higher - the airline industry will need to again fundamentally change. [/FONT]

[FONT=Tahoma, Verdan, Lucida]Here's another strategic trend forecast from The Boyd Group, one that the aviation cognoscenti will sneer at today, and next year will be preaching like an evangelist who just discovered a gospel tent: The airlines best postured to weather this oil price storm are legacy carriers. The ones that will be hurt worst and first will be low-cost carriers. Some key points:[/FONT]

• [FONT=Tahoma, Verdan, Lucida]Legacies have reduced their operating costs, so they aren't wildly at variance with LCCs any longer. [/FONT]
• [FONT=Tahoma, Verdan, Lucida]Higher fuel costs will lead to higher fares. Higher fares will hit discretionary, price-driven passenger segments first. Passengers who in the past were created by low fares to Orlando will think twice with higher ticket prices and $3-per-gallon gas for the SUV.[/FONT]
• [FONT=Tahoma, Verdan, Lucida]Legacies will continue to have access to the strong growth traffic at places such as Shreveport, Taipei, Montgomery, Tupelo, and Kaoshiung. (Tupelo? Yup. Traffic's up almost double in two years. Maybe it's the consultant they hired.) LCCs don't have the fleets or the route systems to access these flows. [/FONT]
• [FONT=Tahoma, Verdan, Lucida]Most importantly, legacies are not as vulnerable to traffic down-turns as are LCCs. That's because several legacies have significant fleets they can quickly park, and have limited aircraft on order, unlike most LCCs. In fact, the new-airliner orderbook may well be the Achilles Heel of the LCC segment in the next 18 months.[/FONT]

[FONT=Tahoma, Verdan, Lucida]First Qtr 2006 - It's Revenue Front & Center.[/FONT][FONT=Tahoma, Verdan, Lucida] Let's start with the good news. Legacy carriers have made the turn.[/FONT]

[FONT=Tahoma, Verdan, Lucida]Sorry to disappoint some of the lightweights in the financial world, or some of those college professors who purport to know the airline industry, yet couldn't recognize a flight coupon from a speeding ticket. The facts are now clear: it's the LCCs that have the problem, while re-structured legacies have the revenue advantage. [/FONT]

• [FONT=Tahoma, Verdan, Lucida]Fact: American and Continental both reported operating profits - which, for all those ivory tower academics out there, means they made money running an airline, and did so paying essentially retail for fuel.[/FONT]
• [FONT=Tahoma, Verdan, Lucida]Fact: The low-cost phenomenon, as it is structured today, is running out of steam. Fact: without the fuel hedges (which, again, was a brilliant bet) Southwest would have reported not only net losses, but probably operating losses as well. The conclusion is inescapable that the future is in the revenue stream - and that's where the traditional low-cost model is running into problems. [/FONT]

[FONT=Tahoma, Verdan, Lucida]Rather, it's where low-cost carriers are running into each other. And that's fixin' to get worse, with the capacity increases coming on line at Southwest, jetBlue, and AirTran. [/FONT]
[FONT=Tahoma, Verdan, Lucida]Morphs To Come: Southwest. [/FONT][FONT=Tahoma, Verdan, Lucida]Southwest - take this to the bank - is fully aware of the situation, and is without doubt in the process of revising its traditional set - yes, set - of business models. The easy-meat markets are gone, so they have to now concentrate more heavily on taking share from other carriers, like at Denver and IAD, as opposed to relying on fare stimulation. [/FONT]
[FONT=Tahoma, Verdan, Lucida]They surely know that their traditional product - such as the "fall of Saigon" boarding process - might have been fun for the DAL-Lubbock crowd, but it's less and less competitive when compared to what Frontier, AirTran, jetBlue, United, and the rest of the industry are offering. They also know that their labor costs need to be addressed. Some exciting labor negotiations may be in the cards.[/FONT]
[FONT=Tahoma, Verdan, Lucida]Regarding Southwest, it's in it for the long-haul, and it's not going to be a static target for other carriers to shoot at. So plan on film at 11. Or, more correctly, film around the end of the year - there will be changes, and watch Wall Street go into a hissy-fit.[/FONT]

Continued Below:

 

[Big Slick]

[FONT=Tahoma, Verdan, Lucida]Now, the bad news... None of the above might make any difference.[/FONT]
[FONT=Tahoma, Verdan, Lucida]If You Can't Afford Go-Juice, Park The Plane.[/FONT][FONT=Tahoma, Verdan, Lucida] Regardless of the shifts in the financial models of LCC v legacy, it's all a moot point if oil prices keep climbing. At $60 a barrel, the legacies have the costs and the revenues to carve out at least a break-even performance, while it's an open question if the traditional 100-150 seat legacy model has enough growth potential to support the new capacity they're adding, at least at current price points.[/FONT]
[FONT=Tahoma, Verdan, Lucida]But at $75 a barrel, all bets are off - for everybody. If oil stays at that level - or goes higher - it changes the fundamentals of even this newly-restructured airline industry. Tumble to it: if oil keeps going up, more major changes in the air transportation system are inevitable. [/FONT]
[FONT=Tahoma, Verdan, Lucida]See F-16 Run. See Oil Run, Too.[/FONT][FONT=Tahoma, Verdan, Lucida] A lot of the price of oil is based on emotion - one missile attack on Iran's atomic-weapons facilities, and the market could head toward panic city. We could see the price of jet fuel to go toward $2.50 or even $2.75 per gallon. Depending on how fast this run-up occurs, it could send airline strategic planning back to the drawing board.[/FONT]
[FONT=Tahoma, Verdan, Lucida]Doing a cursory glance at the globe, things are not going in the right direction. One African oil producer is threatening to cut off supplies if the World Bank doesn't allow its loans to be used for essentially the personal use of the country's president. There's our buddy Hugo down there in Venezuela, wiping out democracy, rigging elections with the approval of Jimmy Carter (senility is always fun), and who's contemplating selling oil mostly to China. Topping this off we have a wacko running Iran, one who's an open and enthusiastic proponent of reviving Hitler's "final solution." [/FONT]
[FONT=Tahoma, Verdan, Lucida]Some Outcomes...[/FONT]

[FONT=Tahoma, Verdan, Lucida]If oil stays at $75, or goes higher, we can expect some very fast moves by the airline industry:[/FONT]

• [FONT=Tahoma, Verdan, Lucida]Fares: No More Testing The Waters.[/FONT][FONT=Tahoma, Verdan, Lucida] Whether it's via a $20 fuel surcharge, an across-the-board fare hike, a juggling of fare buckets, or a combination of the above, air fares will be jacked up materially.[/FONT]
• [FONT=Tahoma, Verdan, Lucida]Traffic: Strong Economy Or Not, It'll Head Down.[/FONT][FONT=Tahoma, Verdan, Lucida] Keep in mind that as airlines find it imperative to raise fares, gasoline prices will go up, too. That means less disposable income to take the kids on a vacation to see grandma. Less in the travel budget at businesses. So, demand will drop - albeit unevenly by region and by market - and carriers will find it necessary to slash capacity. That's hard to do when you've got a bunch of new airplanes on hard order. Easier to do when you have a static fleet, and the ability to park some birds in the sun.[/FONT]
• [FONT=Tahoma, Verdan, Lucida]Fleets: Call Your Realtor At Coolidge, AZ.[/FONT][FONT=Tahoma, Verdan, Lucida] Desert space will be at a premium for airplane parking, as carriers cut back capacity. Carriers in the best shape, at least fleet-wise: Northwest, with a flock of DC-9s that can be easily parked and have little or no debt service. American: a large fleet of MD-80s that can be parked, aircraft rental costs notwithstanding. Delta: it has plenty of excess RJ lift that can come out, and, possibly, dumped under Chapter 11. Airlines in more difficult shape: those that a) have lots of new airplanes on order, and b) are focused on a plan that's predicated on domestic traffic growth to carry the day. Draw your own conclusions regarding who's who.[/FONT]
• [FONT=Tahoma, Verdan, Lucida]Labor: Already Pretty Much Bled Dry.[/FONT][FONT=Tahoma, Verdan, Lucida] Unlike in the past, labor cuts are not going to be in the cards, except possibly at Southwest, and - as if it matters - at some "incremental lift re-sellers," a.k.a, small jet providers, a.k.a. regional airlines. This latter segment will be hit very hard, as the ability to generate sufficient revenues with high-cost 50-seaters will be even more dicey.[/FONT]
• [FONT=Tahoma, Verdan, Lucida]Rural Air Service: The Bar Is Going Up. [/FONT][FONT=Tahoma, Verdan, Lucida]The costs to access the incremental revenues at smaller airports are going to go up astronomically. That means that the ability of some communities to continue to support air service will be torpedoed. [/FONT]

[FONT=Tahoma, Verdan, Lucida]Re-focus: Revenue Streams.[/FONT][FONT=Tahoma, Verdan, Lucida] The mainstream analytical crowd is just now starting to notice this, sort of like a Realtor who walks into the room that has the stove, sink, and dishwasher, and announces to the client, "This is the kitchen..." Logically, the airlines most vulnerable to $75 - $80 oil are those with the most vulnerable revenue streams - and it's not rocket science to see which ones are at the top of the hit parade. Discretionary passengers will be the first to go. Less affected will be core business travel, particularly intra-regional traffic, and international traffic. Figure it out.[/FONT]
[FONT=Tahoma, Verdan, Lucida]For the airline industry, long-term $75 oil will be the quiet equivalent of another 9/11 attack. [/FONT]

 

[GogglesPisano]

A lot of what he writes makes sense. I just wish he didn't write at the fifth-grade level. Some of his hyperboles make me cringe.

 

[lowecur]

He didn't mention them, but Jetblue is who he is mainly referring to. Frontier and Spirit will also face close scrutiny in the coming months. AirTran will bear watching, but their route network should allow them some latitude for stable revenue.

Analysts are predicting a loss anywhere between $26-45M for the quarter for B6. Look for guidance at tomorrows CC from Neeleman on 320 sales or deferrals. My guess is he will advise that a limited number of 320s are being sold this quarter, but look for deferrals and more sales at the 2nd Q CC. Hopefully they can get enough 190s on line in the next year to help the bottom line.

imp:

 

[FlyBoeingJets]

[FONT=Tahoma, Verdan, Lucida]Morphs To Come: Southwest. [/FONT][FONT=Tahoma, Verdan, Lucida]Southwest - take this to the bank - is fully aware of the situation, and is without doubt in the process of revising its traditional set - yes, set - of business models. The easy-meat markets are gone, so they have to now concentrate more heavily on taking share from other carriers, like at Denver and IAD, as opposed to relying on fare stimulation. [/FONT]
[FONT=Tahoma, Verdan, Lucida]They surely know that their traditional product - such as the "fall of Saigon" boarding process - might have been fun for the DAL-Lubbock crowd, but it's less and less competitive when compared to what Frontier, AirTran, jetBlue, United, and the rest of the industry are offering. They also know that their labor costs need to be addressed. Some exciting labor negotiations may be in the cards.[/FONT]
[FONT=Tahoma, Verdan, Lucida]Regarding Southwest, it's in it for the long-haul, and it's not going to be a static target for other carriers to shoot at. So plan on film at 11. Or, more correctly, film around the end of the year - there will be changes, and watch Wall Street go into a hissy-fit.[/FONT]

[FONT=Tahoma, Verdan, Lucida]Fleets: Call Your Realtor At Coolidge, AZ.[FONT=Tahoma, Verdan, Lucida] Desert space will be at a premium for airplane parking, as carriers cut back capacity. Carriers in the best shape, at least fleet-wise: Northwest, with a flock of DC-9s that can be easily parked and have little or no debt service. American: a large fleet of MD-80s that can be parked, aircraft rental costs notwithstanding. Delta: it has plenty of excess RJ lift that can come out, and, possibly, dumped under Chapter 11. Airlines in more difficult shape: those that a) have lots of new airplanes on order, and b) are focused on a plan that's predicated on domestic traffic growth to carry the day. Draw your own conclusions regarding who's who.[/FONT]

Most importantly, legacies are not as vulnerable to traffic down-turns as are LCCs. That's because several legacies have significant fleets they can quickly park, and have limited aircraft on order, unlike most LCCs. In fact, the new-airliner orderbook may well be the Achilles Heel of the LCC segment in the next 18 months.


Rural Air Service: The Bar Is Going Up. [FONT=Tahoma, Verdan, Lucida]The costs to access the incremental revenues at smaller airports are going to go up astronomically. That means that the ability of some communities to continue to support air service will be torpedoed[/FONT]

[/FONT]

I like this article more than most of Boyd's work. I like how he took a couple of stands without hedging. He is right about SWA morphing. SWA has been morphing since 2001 and is not really the same airline now. Looks like Boyd and I expect the morph to continue.

But he hedges a coupel bets nicely...

The first is his turn around on SWA (which I like, of course). Make up your mind. Are they changing to fit the marketplace or are they in trouble for having new airplanes on order? I don't think Boyd has decided and has now adopted a wait and see. He was previously negative.

Boyd states the LCC's and others who have new airplanes coming are "in trouble". Can't agree with that one. Boyd mentions the "possibility" of parking DC-9s, RJ's and MD-80's. Are the carriers with new ones on order in trouble? How about an airline that can replace older planes with new, more efficient ones. Alaska comes to mind. I think you're missing the boat on this one. No mention of the legacies parking airplanes eventually buying EMB's or ordering new?? At least you take a stand on this one. But it will be a short victory until they do start ordering new. Then you will praise them for buying new fuel efficient planes.

If I understand Boyd correctly, Legacy good--LCC bad. SWA maybe o.k. I got it.

Boyd says strong traffic growth for Montgomery and Tupelo (Doubling 10 passengers still results in a small number) and also predicts the parking of RJ's. Which is it? Strong regional demand or blood shed for the RJ's?

I do agree with Boyd that soon the year of the legacy is coming. Most analysts I've read have said 2007. Looks like Boyd is falling in line with everyone else.

So why would WallStreet throw a "hissy fit" over his articles??

Oh..I get it...Plagiarism. Same conclusion, but with Boyd's own special brand of humor and bragging about being right all the time.

 

[FlyBoeingJets]

He didn't mention them, but Jetblue is who he is mainly referring to. Frontier and Spirit will also face close scrutiny in the coming months. AirTran will bear watching

imp:

I too think this article was all about JetBlue. In that case it makes a little more sense. Why didn't he just come out and say it. It didn't seem to fit a few of the other players in the biz.

If Boyd lived in New York I would have understood. Maybe that is his intended audience. They don't seem to recognize airlines that don't fly into their neighborhood.

So is he predicting good or bad for USAir?? Hard to tell. I think he could claim a victory either way since they fly international and have airplanes on order.

 

[inline]

"Hugo Chavez rigging elections with the approval of Jimmy Carter." How true. Carter's an embarrassment and a willing enabler to third world American hating kooks.

 

[Einstein]

"Hugo Chavez rigging elections with the approval of Jimmy Carter." How true. Carter's an embarrassment and a willing enabler to third world American hating kooks.

It just makes me sick that my dues money to ALPA goes to back the party this clown came out of. Give me anyone except a dingbat democrat trying to save the world.

 

[lowecur]

I too think this article was all about JetBlue. In that case it makes a little more sense. Why didn't he just come out and say it. It didn't seem to fit a few of the other players in the biz. Boyd is a consultant for Embraer. Now you know why no mention of Jetblue.

If Boyd lived in New York I would have understood. Maybe that is his intended audience. They don't seem to recognize airlines that don't fly into their neighborhood.

So is he predicting good or bad for USAir?? Hard to tell. I think he could claim a victory either way since they fly international and have airplanes on order.

I think he is vascillating back and forth with USAir. USAir pretty much rides the SWA wave. Everytime they raise fares, it incrementally gives a boost to USAir because of the large route overlap. Doug Parkers biggest challenge is melding the two cultures. His tirade on Neeleman is a classic leadership example of building one loyal culture by focusing adversarial thoughts toward the competition in lieu of within.

imp:

 

[Frank Lorenzo]

[FONT=Tahoma, Verdan, Lucida] Airlines in more difficult shape: those that a) have lots of new airplanes on order, and b) are focused on a plan that's predicated on domestic traffic growth to carry the day. Draw your own conclusions regarding who's who.[/FONT]

Should say "draw your own conclusions regarding who's BLUE."

People Express 2.

ICEBERG RIGHT AHEAD!

Glug glug glug glug glug......