Forbes on LCC's

GogglesPisano

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Costs Lift Off At Low-Cost Airlines Mark Tatge, 10.24.05, 12:00 PM ET CHICAGO - Low-cost airlines are now facing the same cost pressures that have driven bigger, established legacy carriers into bankruptcy--boosting wages, building costly hubs and buying expensive new fleets. Workout specialists here for the Turnaround Management Association's annual convention said the honeymoon is over for Southwest (nyse: LUV - news - people ), AirTran (nyse: AAI - news - people ), JetBlue Airways (nasdaq: JBLU - news - people ). The warnings came just on the heels of JetBlue announcing a third quarter pre-tax loss of $3.6 million, mostly due to higher fuel costs. The carrier warned it might report a fourth-quarter and full-year loss. Even Southwest is facing headwinds. So far, fuel hedges have insulated Southwest from rising fuel prices. The airline currently has a 25% cost advantage over other carriers, mostly due to hedges that begin expiring next year. But Southwest's operating costs are rising, driven by fatter paychecks and an aggressive expansion into new cities, said Timothy R. Coleman, senior managing director for the Blackstone Group in New York. Coleman, a consultant to the Delta Airlines bankruptcy, said as older, more established carriers retire planes, it removes available seats from the market. Those seats are quickly being replaced by new upstarts leasing shiny new Airbus' or Boeing (nyse: BA - news - people ) jetliners. JetBlue, for example, has firm orders for 106 new Airbus A320s and 101 Embraer E190s. In the past, low-cost carriers grew rapidly by flying point-to-point, siphoning off traffic from the majors. Some leased or bought used jets and paid employees peanuts. Those days are over. The low-cost carriers are now well capitalized and are expanding aggressively. One area is of concern is the pressure to build hubs, similar to those that Delta (nyse: DAL - news - people ), American (nyse: AMR - news - people ) and United (otc: UALAQ.OB - news - people ) operate. Hubs have been both an industry boon and bane. They gained favor in the mid-1980s as deregulation took hold. Hubs were seen as a way to increase incremental revenue by funneling traffic from smaller, less profitable cities into a large central location. Carriers figured hubs would reap additional revenue and profits. But costs ballooned. The majors are now struggling with how to downsize their hubs, fly more point-to-point routes, and eliminate costs without losing market share. As Southwest has run out of room to grow, it has started to build hub operations, one of its biggest being at Chicago's Midway Airport. Other low-cost carriers are bumping into the same challenges as they get larger. "We are watching a slow convergence between the different airlines," said Todd R. Snyder, managing director of Rothschild Inc. of New York, a consultant to United Airlines Chapter 11 bankruptcy reorganization. What economic model will emerge a winner is literally up in the air. David S. Kurtz, managing director of Lazard Freres & Co., in Chicago, an adviser to the federal Air Transportation Stabilization Board, said the capital markets loved bankrupt US Airways' merger with low-cost America West Airlines (nyse: AWA - news - people ), because it embraced both operating models. Blackstone Group's Coleman said the "airline business is the most structurally flawed business model in the world." Yet, General Electric (nyse: GE - news - people ) Commercial Aviation Services, American Express (nyse: AXP - news - people ), JPMorgan Chase (nyse: JPM - news - people ) and other lenders are pouring capital into an industry that is losing billions. "The big question: is this a good long-time play? I don't think any of these players are thinking that way, " Coleman said. Most investors are betting on the inevitable consolidation, Snyder said. United, expected to emerge from Chapter 11 next year, is figuring it will drive the industry consolidation. But others disagree, saying United's reorganization plan is flawed. They say United is erroneously assuming crude oil will drop to $52 per barrel. Plus, the airline is betting it can recapture premium fare-paying business travelers, a segment that started deserting United six years ago because of bad service. Investors should watch for mergers. "How this will happen, when it will happen, and who will match up with whom is something that is on everybody's mind," said Lazard's Kurtz. "It's what is driving investment in this industry." Want to track news by this author or about this industry? Forbes Attache makes it easy. Click here. 1 of 1
 

Alcatraz

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Interesting Article, but...

While fuel and labor costs at Southwest may continue to increase, this article ignores the fact that Southwest has a low debt load (and, therefore interest cost) compared to nearly everyone else. I think several other LCCs are pretty strong, too.

Of course, bankruptcies could change the picture...
 

Dangerkitty

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Alcatraz said:
While fuel and labor costs at Southwest may continue to increase, this article ignores the fact that Southwest has a low debt load (and, therefore interest cost) compared to nearly everyone else. I think several other LCCs are pretty strong, too.

Of course, bankruptcies could change the picture...
I read in the Motley Fool that Jetblue now has a debt load that is just as bad as most of the other Legacies. This coming from a Fool Author who usually kisses Jetblues behind anytime he could. I can't seem to find the article however.
 

Clyde

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Was Forbes drinking a Bud Lite during the interview? :D
 

B6Driver

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Dangerkitty,
"I read in the Motley Fool that Jetblue now has a debt load that is just as bad as most of the other Legacies. This coming from a Fool Author who usually kisses Jetblues behind anytime he could. I can't seem to find the article however."

Are they close to amount of debt that AA has, now that is a huge amount.
JB is adding to their debt as they grow at their current rate. Soon to be 22 new hires every two weeks and all this costs money.
 

Dangerkitty

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B6Driver said:
Are they close to amount of debt that AA has, now that is a huge amount.JB is adding to their debt as they grow at their current rate. Soon to be 22 new hires every two weeks and all this costs money.
From the article it stated that JB actually had a debt load worse than AA's when you compare the size of the carriers. Again, I take everything that I read on the Motely Fool with a huge grain of salt. However, I do find it interesting that the same author who has been singing JB's praises for years is now stating concern over JB's debt load.

I will look again and see if I can find the article.
 

G4G5

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Here it is, I typically take the Fool with grain of salt too.

JetBlue's New Look
By W.D. Crotty
October 11, 2005

I have been anxiously awaiting JetBlue's (Nasdaq: JBLU) announcement of where it plans to fly its new 100-seat airplanes -- all the more so given the fact that these planes mark a departure from a business plan Southwest Airlines (NYSE: LUV) has used successfully for years: Keep life simple by flying a single type of aircraft. But from now on, JetBlue will now be flying two types of airplanes.

Today, Motley Fool Stock Advisor recommendation JetBlue announced the first routes it's going to fly using fellow Stock Advisor pick Embraer-Empresa Brasilier (NYSE: ERJ) aircraft. The focus won't be on only second-tier cities where high ticket prices reign. The company will also be adding 10 flights a day between Boston and New York. Introductory promotional fares will be $25 each way.

JetBlue is trying something legacy airlines have not been willing to do -- put the corporate bread-and-butter logo on non-Boeing (NYSE: BA) or Airbus aircraft. And although I'm not sure it bears relation to the aforementioned, we know where most of the legacy airlines have ended up.

JetBlue is trying to match capacity to demand. Flying smaller planes during non-peak times or to second-tier markets, of course, makes sense. JetBlue is betting it will make cents, too. As promised, JetBlue did pick second-tier cities for new routes. The business centers of Austin, Texas, and Richmond, Va., will be getting a combined total of seven round-trip flights every day.

To the extent that JetBlue's foray represents an endeavor into markets with adequate demand, use of the smaller Embraer planes make excellent sense. The idea is simple -- they'll find themselves better able to operate their planes at capacity from a cost standpoint, enabling higher revenue per seat and better marginal coverage of costs.

The question everyone is looking to answer is this: Will JetBlue customers see the new planes, with their leather seats, 100 channels of XM (Nasdaq: XMSR) satellite radio, and 36 channels of DirecTV (NYSE: DTV), in the same way they view the larger Airbus A320 the company currently flies? If so, this will be a breakthrough in airline transportation.

The 100-seat planes have to be a success. While JetBlue will take delivery of 16 A320's in 2006, the company is also currently taking delivery of the Embraer aircraft at the rate of one every 20 days (or 18 in a year). JetBlue, with debt to equity at a jaw-dropping 252%, has little wiggle room to attract customers with the new planes.

This was an interesting read:
http://www.newyorkmetro.com/nymetro/news/bizfinance/biz/features/14720/index.html
 
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