DAL labor costs are "are still uncompetitive."

[Spooky 2]

SWA vs Delta

Yesterday. SAT to SLC on Delta $655.00 (non-stop) on a RJ700. SAT to SLC on SWA $336.00, with a quick aircrat change in LAS on a B737-700. SWA answers the phone when you call to boot. Simply a no brainer. Delta is simply out by SWA in every discipline other than the SWA boarding process which is 3rd world IMO.

 

[instructordude]

More paycuts might be in the happening.

 

[FlyBoeingJets]

Yesterday. SAT to SLC on Delta $655.00 (non-stop) on a RJ700. SAT to SLC on SWA $336.00, with a quick aircrat change in LAS on a B737-700. SWA answers the phone when you call to boot. Simply a no brainer. Delta is simply out by SWA in every discipline other than the SWA boarding process which is 3rd world IMO.

Check the loads on these flights and get back to us. Is Delta filling the RJ? The cost per ticket yet unsold is only part of the equation.

I'm betting some on the Delta SAT to SLC are thru pax from somewhere else.

 

[General Lee]

More paycuts might be in the happening.

Thanks for that wonderful insight.....Wow.


Bye Bye--General Lee

 

[General Lee]

Yesterday. SAT to SLC on Delta $655.00 (non-stop) on a RJ700. SAT to SLC on SWA $336.00, with a quick aircrat change in LAS on a B737-700. SWA answers the phone when you call to boot. Simply a no brainer. Delta is simply out by SWA in every discipline other than the SWA boarding process which is 3rd world IMO.

And, the Southwest connections to Anchorage? How did they get there from SAT? Get the picture? Most of our pax connect through our hubs to places SW doesn't fly to, like Montana and Alaska. We are full most of the time.


Bye Bye--General Lee

 

[General Lee]

Another thing Bastian may be saying here is a partial warning not to react like the USAir pilots, who now after a few profitable quarters, want a change in their rates. Usually that is taken care of by a contract. From what I am hearing from people on Virginia AVE, he was most likely talking about Comair's costs. This statement was before the weekend agreement.

OR, it could be this:

The International Association of Machinists says it will launch a campaign Monday to organize about 6,000 fleet-service workers at Delta Air Lines


Bye Bye--General Lee

 

[Spooky 2]

No question about General the Delta flights are full and especially north of SLC. Once upon a time SWA only flew to a couple of destinations. Look at them now wait a few years to see where they go next. Still no reason for such a poorly run and user unfriendly reservation system.

 

[FlyBoeingJets]

The Worst Has Yet to Come for Regional Airlines

Why investors should avoid regional carriers.

by Brian Nelson |

For the safe and efficient transfer of passengers, regional airlines receive a guaranteed revenue stream with a contractual profit margin and are reimbursed for many flying costs such as fuel, landing fees, and insurance. Regional carriers are only indirectly exposed to the variations in ticket prices, passenger loads and fuel prices that trouble legacy carriers. With deals like this, it's not surprising that regional airlines have been consistently profitable through the course of the commercial airline cycle. But should investors be taking notice?

Most Morningstar followers know that we think a firm's intrinsic value is best determined by projecting and discounting its free cash flows. When looking at the regional airline group, we focus on the sustainability of a carrier's free cash flow over the long haul. To begin this approach, let's first take a look at the reasons behind the proliferation of regional flying in the United States.

Why So Many Regional Airlines?
The slowdown in air travel demand after 9/11 forced legacy carriers (like UAUA), for example) to downsize their fleets to match the reduced demand on many routes. Often, this required the replacement of larger mainline aircraft with smaller regional jets. This was a simple solution for slackening demand, except that mainline pilots at legacy carriers refused to fly these smaller planes in an attempt to protect their salaries. Pilots of smaller aircraft generally earn less than those who operate larger mainline planes. Legacy airlines, therefore, opted to outsource these short-haul flights to regional carriers.

But to protect their mainline jobs, pilots' unions negotiated scope clauses, or stipulations in union contracts that restrict the size and number of smaller jets that can be outsourced to regional carriers. As long as legacy carriers abided by these rules, they were allowed to allocate short-haul capacity to regional carriers, thereby matching capacity with demand and increasing route flexibility. As more and more routes were downsized, the market for regional flying took off, with regional passengers surging to more than 151 million in 2005 from just more than 80 million in 2001. Regional carrier growth has been impressive, and regional carrier profitability has been even more so, despite the massive losses by their network partners in recent years.

[FONT=Trebuchet MS, Arial, Helvetica][SIZE=-2]Regional Carriers [/SIZE][/FONT][FONT=Trebuchet MS, Arial, Helvetica][SIZE=-2]Legacy Carriers[/SIZE][/FONT]


[FONT=Trebuchet MS, Arial, Helvetica][SIZE=-2]1998 [/SIZE][/FONT][FONT=Trebuchet MS, Arial, Helvetica][SIZE=-2]17.0 %[/SIZE][/FONT][FONT=Trebuchet MS, Arial, Helvetica][SIZE=-2]8.5%[/SIZE][/FONT]

[FONT=Trebuchet MS, Arial, Helvetica][SIZE=-2]1999 [/SIZE][/FONT][FONT=Trebuchet MS, Arial, Helvetica][SIZE=-2]17.0 %[/SIZE][/FONT][FONT=Trebuchet MS, Arial, Helvetica][SIZE=-2]7.1%[/SIZE][/FONT]

[FONT=Trebuchet MS, Arial, Helvetica][SIZE=-2]2000 [/SIZE][/FONT][FONT=Trebuchet MS, Arial, Helvetica][SIZE=-2]16.0 %[/SIZE][/FONT][FONT=Trebuchet MS, Arial, Helvetica][SIZE=-2]5.0%[/SIZE][/FONT]

[FONT=Trebuchet MS, Arial, Helvetica][SIZE=-2]2001 [/SIZE][/FONT][FONT=Trebuchet MS, Arial, Helvetica][SIZE=-2]4.0% [/SIZE][/FONT][FONT=Trebuchet MS, Arial, Helvetica][SIZE=-2]-12.6%[/SIZE][/FONT]

[FONT=Trebuchet MS, Arial, Helvetica][SIZE=-2]2002 7[/SIZE][/FONT][FONT=Trebuchet MS, Arial, Helvetica][SIZE=-2].0%[/SIZE][/FONT][FONT=Trebuchet MS, Arial, Helvetica][SIZE=-2]- 13.4%[/SIZE][/FONT]

[FONT=Trebuchet MS, Arial, Helvetica][SIZE=-2]2003[/SIZE][/FONT][FONT=Trebuchet MS, Arial, Helvetica][SIZE=-2]11.6%[/SIZE][/FONT][FONT=Trebuchet MS, Arial, Helvetica][SIZE=-2]-4.1%[/SIZE][/FONT]

[FONT=Trebuchet MS, Arial, Helvetica][SIZE=-2]2004[/SIZE][/FONT][FONT=Trebuchet MS, Arial, Helvetica][SIZE=-2]10.6%[/SIZE][/FONT][FONT=Trebuchet MS, Arial, Helvetica][SIZE=-2]-6.7%[/SIZE][/FONT]

[FONT=Trebuchet MS, Arial, Helvetica][SIZE=-2]2005[/SIZE][/FONT][FONT=Trebuchet MS, Arial, Helvetica][SIZE=-2]9.2%[/SIZE][/FONT][FONT=Trebuchet MS, Arial, Helvetica][SIZE=-2]-4.4%[/SIZE][/FONT][FONT=Trebuchet MS, Arial, Helvetica][SIZE=-2]Source: Regional Airline Association, Morningstar data[/SIZE][/FONT]

In our view, this imbalance is unsustainable over the long haul: Either legacy carriers will return to enduring profitability, or regional carriers will share more in legacy carriers' pain. The recent upswing in air travel demand has legacy carriers now turning profits alongside their regional brethren, but the next economic downturn, the timing of which is uncertain, will likely push mainline carriers back into the red, much like it has done in previous cycles. Also, legacy carriers, by necessity, must strive for leaner operations, as unit costs remain significantly greater than those of their low-cost rivals
With these factors in mind, we recognize that the recent profitability of legacy carriers is largely a function of the current upswing in air travel demand and not that legacy carriers have transformed into sustainable profit-making entities (check out this article, "Why We're So Bearish On Legacy Airlines"). Global shocks and the general economic cycle coupled with legacy carriers' high financial and operating leverage make enduring profitability nearly impossible to achieve. As a result, we think that to resolve this profit imbalance, margins will continue to shrink for regional carriers.

Weakening Economics, Fierce Competition, and Limited Supplier Power
To no surprise, pressure on contractual operating margins for regional flying has already taken hold, both in and out of the bankruptcy courts. CAL) recently achieved more than $100 million in annual cost savings by choosing Chautauqua to replace capacity previously operated by ExpressJet.
Though majors use regionals, in some cases, as a finance arm to expand their fleet, we contend that the primary value of regional services to the legacy carrier depends on regional carriers' labor cost advantage. Most regional carriers are younger than their network partners and often are not unionized, which translates into lower salaries and benefits for their workers. We believe that, as length-of-haul-adjusted labor costs for legacy carriers converge with those of regional airlines, the value of outsourcing regional flying deteriorates.

[FONT=Trebuchet MS, Arial, Helvetica][SIZE=-2]Regional Carriers [/SIZE][/FONT][FONT=Trebuchet MS, Arial, Helvetica][SIZE=-2]Legacy Carriers [/SIZE][/FONT][FONT=Trebuchet MS, Arial, Helvetica][SIZE=-2]Difference[/SIZE][/FONT]


[FONT=Trebuchet MS, Arial, Helvetica][SIZE=-2]2001 [/SIZE][/FONT][FONT=Trebuchet MS, Arial, Helvetica][SIZE=-2]2.46 [/SIZE][/FONT][FONT=Trebuchet MS, Arial, Helvetica][SIZE=-2]4.60 [/SIZE][/FONT][FONT=Trebuchet MS, Arial, Helvetica][SIZE=-2]2.14[/SIZE][/FONT].
[FONT=Trebuchet MS, Arial, Helvetica][SIZE=-2]2002 [/SIZE][/FONT][FONT=Trebuchet MS, Arial, Helvetica][SIZE=-2]2.70 [/SIZE][/FONT][FONT=Trebuchet MS, Arial, Helvetica][SIZE=-2]4.89 [/SIZE][/FONT][FONT=Trebuchet MS, Arial, Helvetica][SIZE=-2]2.19[/SIZE][/FONT]
[FONT=Trebuchet MS, Arial, Helvetica][SIZE=-2]2003 [/SIZE][/FONT][FONT=Trebuchet MS, Arial, Helvetica][SIZE=-2]2.54 [/SIZE][/FONT][FONT=Trebuchet MS, Arial, Helvetica][SIZE=-2]4.60 [/SIZE][/FONT][FONT=Trebuchet MS, Arial, Helvetica][SIZE=-2]2.06[/SIZE][/FONT]
[FONT=Trebuchet MS, Arial, Helvetica][SIZE=-2]2004 [/SIZE][/FONT][FONT=Trebuchet MS, Arial, Helvetica][SIZE=-2]2.38 [/SIZE][/FONT][FONT=Trebuchet MS, Arial, Helvetica][SIZE=-2]4.23 [/SIZE][/FONT][FONT=Trebuchet MS, Arial, Helvetica][SIZE=-2]1.85[/SIZE][/FONT]
2005 [FONT=Trebuchet MS, Arial, Helvetica][SIZE=-2]2.21 [/SIZE][/FONT][FONT=Trebuchet MS, Arial, Helvetica][SIZE=-2]3.73 [/SIZE][/FONT][FONT=Trebuchet MS, Arial, Helvetica][SIZE=-2]1.52[/SIZE][/FONT]
[FONT=Trebuchet MS, Arial, Helvetica][SIZE=-2]First half of 2006 [/SIZE][/FONT][FONT=Trebuchet MS, Arial, Helvetica][SIZE=-2]2.10 [/SIZE][/FONT][FONT=Trebuchet MS, Arial, Helvetica][SIZE=-2]3.30 [/SIZE][/FONT][FONT=Trebuchet MS, Arial, Helvetica][SIZE=-2]1.20[/SIZE][/FONT]

[FONT=Trebuchet MS, Arial, Helvetica][SIZE=-2]*Length of haul adjusted, 1,000-mile trip[/SIZE][/FONT][FONT=Trebuchet MS, Arial, Helvetica][SIZE=-2]Source: SEC filings, Morningstar data[/SIZE][/FONT]

 

[FlyBoeingJets]

(continuation of article)



Though the difference between legacy and regional labor costs is still sizable, the gap has closed substantially. We expect this labor disparity to shrink even further as a result of recent structural changes in the airline industry. For starters, the growing overlap in aircraft sizes operated by mainline and regional pilots suggests that pay scales could potentially converge, especially if scope clauses continue to be relaxed. One example is US Airways (NYSE:LCC - News), which, after emerging from bankruptcy, chose its own mainline pilots to fly its regional Embraer 190 jets, rather than hiring Republic (NASDAQ:RJET - News) to provide the service. In addition, with fewer spots available for mainline pilots as domestic flying continues to be outsourced to feeder airlines, regional pilots are gaining tenure, putting upward pressure on wage rates within the regional ranks. We expect these conditions to lessen the attraction of regional flying services over time.
What's more, over 80 regional carriers in the United States will ensure that market rates will match the value of regional flying, as there are only a handful of large domestic network operators from which to seek business. To make matters worse, most requests for proposals for regional flying are based on number of aircraft, not on the amount of capacity to be flown or passengers to be carried. Therefore, the trend toward larger regional aircraft (70 to 90 seats), which can provide incremental capacity with fewer planes, will likely slow the growth of domestic regional jets in service, despite continued outsourcing by the majors. We expect this deceleration to heighten competition as regional carriers become increasingly aggressive in their attempts to secure new business or retain existing capacity.
But perhaps most ominous is that network carriers possess substantial bargaining power during contract negotiations. Most feeders are ill-equipped to break ties with their larger affiliates due to the higher unit costs associated with flying smaller jets on shorter routes. One has to look no further than the Independence Air liquidation to ascertain the possible fate of regional carriers that attempt to go at it alone. Also, flying rates on most contracts are reset annually, providing legacy carriers with frequent opportunities to adjust terms to match the market or demand further concessions. In the worst cases, network airlines can cancel agreements with one year's notice to replace existing capacity with a lower-cost provider.
Declining Profitability Is Inevitable
So, what does all this mean? For one thing, we expect operating margins to continue to fall for the regional group. For example, our long-term operating margin assumptions for Mesa Air (NASDAQ:MESA - News) and ExpressJet are significantly lower than their 2005 levels. Additionally, we think SkyWest and Republic will experience reduced profitability in coming years, as legacy carriers continue to seek out the lowest-cost regional service provider. Our long-term margin forecasts would be even lower for these regional carriers if we excluded the positive impact from declining fuel costs, which are direct pass-through expenses.
To see the related chart, click here:

http://news.morningstar.com/article/article.asp?id=175416
What's more, due to the fragility of regional carrier contracts and the "musical chairs" the industry has experienced in recent years, we have little confidence in the sustainability of a regional carrier's future free cash-flow streams. Though we expect the number of code-share feeders to decline as carriers with bloated cost structures fail or team up with better operators, we do not think this change will be enough to stifle cutthroat competition among the regional clique. As investors may have gathered by now, we think regional airlines represent poor long-term investment opportunities.

 

[FlyBoeingJets]

Why We're So Bearish on Legacy Airlines

Is there never a good time to buy these perennial value-destroyers?

by Chris Lozier | 03-10-06 | 06:00 AM |

We wouldn't recommend buying and holding a legacy airline stock now nor at any point in the airline industry cycle. There--we said it. I feel better already.

Kidding aside, it should be no secret by now that we do not consider any airlines other than the very best low-cost carriers--to be wise buy-and-hold investments. If we did, legacy airlines would not all have moat ratings of "none," and "speculative" risk ratings, and we would not model regional airlines (which partner with the legacies) as having steadily declining margins. That said, when Morningstar's fair value estimates are 20%-50% of Wall Street's target prices for an entire industry subsegment, we like to offer the occasional reminder of why.


Two Things We're Not Saying

We are not predicting the demise of the hub-and-spoke airline model, the operational foundation of the legacy carriers. Many of the markets served by such carriers are simply too thin to be economically attractive to low-cost carriers that fly point-to-point, no matter how low their operating costs.
What's more, the air transportation system is very much a public utility in its import to states around the world. If the (mostly) free market for air travel can't correct itself, you can be sure that governments will step in as they have done many times in the past (witness the recent involvement of the Air Transportation Safety Board and the Pension Benefit Guarantee Corporation since 2001). Other changes like liquidations and consolidation might also benefit the majors to a limited degree. Ultimately, we expect most of the legacy airlines to be flying planes in 2020, though the structure, composition, and regulation of the industry may look quite different.
Neither are we suggesting that money cannot be made by buying and selling airline stocks. These securities are extremely volatile, with betas (a measure of a stock's relative volatility) in the 2-3 range, implying frequent and sizable mispricings regardless of intrinsic value. One week spent observing the airlines will illuminate this crazy reality. In fact, if one could develop a way to consistently predict the short-term movements in these stocks, that investor could make a killing. Good luck doing that. We've had little success here, and even Warren Buffett was befuddled when he tried. The short-term game of speculating on the largely random movements of airline stocks is often illogical and maddening on top of running counter to Morningstar's investment philosophy.


A Fundamentally Troubled Industry

So what should investors make of our markedly low fair value estimates? Here is where we get to the crux of the matter. One of our most basic beliefs about the airline business is that it's becoming increasingly commodified with each day. We acknowledge that there will always be some people willing to pay more money for certain amenities, whether they be http://im.morningstar.com/im/premIcon.gif XM Radioto be wise buy-and-hold investments. If we did, legacy airlines would not all have moat ratings of "none," and "speculative" risk ratings, and we would not model regional airlines (which partner with the legacies) as having steadily declining margins. That said, when Morningstar's fair value estimates are 20%-50% of Wall Street's target prices for an entire industry subsegment, we like to offer the occasional reminder of why.

Two Things We're Not Saying

We are not predicting the demise of the hub-and-spoke airline model, the operational foundation of the legacy carriers. Many of the markets served by such carriers are simply too thin to be economically attractive to low-cost carriers that fly point-to-point, no matter how low their operating costs.
What's more, the air transportation system is very much a public utility in its import to states around the world. If the (mostly) free market for air travel can't correct itself, you can be sure that governments will step in as they have done many times in the past (witness the recent involvement of the Air Transportation Safety Board and the Pension Benefit Guarantee Corporation since 2001). Other changes like liquidations and consolidation might also benefit the majors to a limited degree. Ultimately, we expect most of the legacy airlines to be flying planes in 2020, though the structure, composition, and regulation of the industry may look quite different.

Neither are we suggesting that money cannot be made by buying and selling airline stocks. These securities are extremely volatile, with betas (a measure of a stock's relative volatility) in the 2-3 range, implying frequent and sizable mispricings regardless of intrinsic value. One week spent observing the airlines will illuminate this crazy reality. In fact, if one could develop a way to consistently predict the short-term movements in these stocks, that investor could make a killing. Good luck doing that. We've had little success here, and even Warren Buffett was befuddled when he tried. The short-term game of speculating on the largely random movements of airline stocks is often illogical and maddening on top of running counter to Morningstar's investment philosophy.

A Fundamentally Troubled Industry

So what should investors make of our markedly low fair value estimates? Here is where we get to the crux of the matter. One of our most basic beliefs about the airline business is that it's becoming increasingly commodified with each day.

But as access to air travel continues to proliferate, even more customers who base their purchase decisions predominantly on price will enter the market. This phenomenon has contributed to the steady decline in real yields (passenger revenue per revenue passenger mile on a constant dollar basis) over many decades.



[SIZE=-2][COLOR=#0]1950 [/COLOR][/SIZE][SIZE=-2][COLOR=#0]15.04[/COLOR][/SIZE]
[SIZE=-2][COLOR=#0]1955 [/COLOR][/SIZE][SIZE=-2][COLOR=#0]13.04[/COLOR][/SIZE]
[SIZE=-2][COLOR=#0]1960 [/COLOR][/SIZE][SIZE=-2][COLOR=#0]13.41[/COLOR][/SIZE]
[SIZE=-2][COLOR=#0]1965 1[/COLOR][/SIZE][SIZE=-2][COLOR=#0]2.54[/COLOR][/SIZE]
[SIZE=-2][COLOR=#0]1970[/COLOR][/SIZE] [SIZE=-2][COLOR=#0]10.08[/COLOR][/SIZE]
[SIZE=-2][COLOR=#0]1975 [/COLOR][/SIZE][SIZE=-2][COLOR=#0]9.32[/COLOR][/SIZE]
[SIZE=-2][COLOR=#0]1980 [/COLOR][/SIZE][SIZE=-2][COLOR=#0]9.09[/COLOR][/SIZE]
[SIZE=-2][COLOR=#0]1985 7.40[/COLOR][/SIZE]
[SIZE=-2][COLOR=#0]1990 [/COLOR][/SIZE][SIZE=-2][COLOR=#0]6.70[/COLOR][/SIZE]
[SIZE=-2][COLOR=#0]1995 [/COLOR][/SIZE][SIZE=-2][COLOR=#0]5.78[/COLOR][/SIZE]
[SIZE=-2][COLOR=#0]2000 [/COLOR][/SIZE][SIZE=-2][COLOR=#0]5.52[/COLOR][/SIZE]
[SIZE=-2][COLOR=#0]2004 [/COLOR][/SIZE][SIZE=-2][COLOR=#0]4.16[/COLOR][/SIZE]

[FONT=Trebuchet MS, Arial, Helvetica][SIZE=-2]Source: ATA [/SIZE][/FONT]