Hobiehawker
Well-known member
- Joined
- Dec 23, 2004
- Posts
- 154
An SWA friend of mine sent me this article that is from one of their unions analysts. I found it very interesting.
What on earth is going on in the airline business these days? Southwest finds itself as one of the few profitable companies in an industry facing record fuel prices and unprecedented losses. Nearly half of US airline capacity is flown by carriers in bankruptcy, and there is continuing speculation about mergers and consolidation. What are the likely impacts on Southwest from all of the upheaval in the business today and in the future?
My name is Dan Akins and I am a Transportation Economist and Financial Advisor with over twenty years of experience in airline consulting. SWAPA has hired me to assist your Negotiating Committee in preparing for the upcoming round of negotiations with Southwest Airlines.
As part of that effort I have been asked to provide an assessment of what is going on in the airline industry today, with special emphasis on the performance and competitive position of Southwest Airlines going forward. Foremost in this discussion are analyzing the reasons why Southwest has been able to prosper during this period of airline strife. It is also important for Southwest pilots to be aware of the likely competitive impacts of the changing landscape of labor and fuel costs, as well as how bankruptcies and mergers are likely to affect Southwest Airlines.
Today, there are several unprecedented forces bearing down on the airline industry that are affecting Southwest Airlines’ competitive position. Record fuel prices, which have resulted in increased competitor costs and fares, have resulted in bankruptcies and potential consolidation activity and are acting on several different levels to enhance Southwest’s competitive position. Unlike Southwest, ALL other carriers, including low cost carriers like Jet Blue, will face the full price of jet fuel over the next few years. Southwest absorbs a lesser impact of price increases as a result of its fuel hedging strategy. Increased unit costs and fares are causing the relative gap between Southwest and competitors to increase, as fuel prices force higher fares and carriers struggle to cover increased costs. This is no trivial matter, Jet A fuel on the Gulf Coast has risen to nearly $3 a gallon at the end of September 2005, which is more than twice as expensive as it was just two years ago.
Competitors fares have increased to cover rapidly inflating fuel costs and have caused Southwest’s unit costs (or CASM) and unit revenue (or RASM) to become relatively lower than the competition. For example, from 2000 through 2Q 2002 Southwest’s unit costs averaged 40 percent below the major airline average, while unit revenue averaged 16 percent below. Over the past 24 months the relative level of Southwest’s unit costs has averaged 47 percent below the Majors, while unit revenues were 28 percent below. These huge unit cost and unit revenue gaps keep increasing, as the second quarter 2005 results show Southwest unit costs 65 percent below the major airline average and unit revenue 48 percent below. These gaps make Southwest more attractive to customers as Southwest fares fall further and further below other carriers. The increased unit cost gap is also interesting to investors as Southwest’s costs fall further below the competition, where industry CASM is now at an all time high pushing above 12 cents. Although fare adjustments relate directly to customer price sensitivity, which must be carefully watched, the fare “headroom” provided by competitors increasing fares allows a chance for Southwest to potentially pocket as much as $2 billion annually if it were to restore it’s historical relative fare gap of 16 percent below the competition (rather than the 28 percent below performance of the second quarter 2005).
Additionally, many industry leaders and analysts are convinced that there is just too much domestic capacity for the industry to be profitable. The solution to the problem is seen, increasingly, through future consolidation aimed at reducing competition and pulling down marginal domestic capacity. Bankrupt carriers are also focusing on international expansion and domestic shrinkage. Both of these activities are likely to provide Southwest with new and potentially unforeseen near term growth opportunities as carriers reduce their domestic footprints. For example, bankrupt carrier Northwest is positioning itself to reduce or eliminate capacity at its Memphis hub, and Delta has announced similar plans for Cincinnati. In addition, the upside potential of the removal of the Wright Amendment, which seems now more likely than ever, has huge positive implications for Southwest as it will “free up” growth opportunities that are currently severely constrained in Dallas.
After 9/11 most carriers sought to recover by shrinking and cutting labor costs. Sadly much of the cost savings came as a result of painful labor concessions, the results of which have been completely eclipsed by fuel price increases. It is also important to remember that while debt restructuring in bankruptcy can make a carrier less costly, there is nothing a bankruptcy judge can do to alter a carrier’s fuel costs. Even though Southwest’s fuel hedges diminish over the next five years, it is important to remember that they are likely to save Southwest billions, while at the same time fuel prices force the rest of the industry to dramatically downsize or liquidate. Amazingly, even if one eliminates the labor and fuel expense from each airline’s total operating expense, Southwest’s “core costs” of 2.9 cents per ASM is the lowest among Legacy and LCC’s, which average around 6.0 cents of core costs per ASM. Therefore, the relative cost efficiency of Southwest’s factory to produce seat miles is unmatched in the industry and no amount of debt reduction or labor cost adjustment can take that advantage away. Southwest simply has a better, more efficient business model than all the others, indicating why Southwest’s market value (stock price times shares outstanding) is greater than all others in the industry combined.
Southwest pilots are an integral part of the success of Southwest Airlines as your productivity is unmatched in the industry. Southwest pilots fly an average of 766 block hours per year, the most of any domestic competitor. Southwest pilots also fly more passengers per capita than any other carrier by a wide margin, averaging over 19,300 per pilot in 2004, in an industry producing only 11,750 on average per pilot, according to DOT statistics. Southwest’s pilot costs per enplaned passenger are only $10 in an industry that averages $19 per enplanement. Put these factors together and it is clear that Southwest pilots are the most productive and among the most cost efficient in the industry.
Therefore, contrary to all the bad news you might read or hear about the current state of the airline industry, I believe that Southwest Airlines has a significantly enhanced competitive position in the marketplace which will allow it to grow and prosper while others fail and liquidate over the coming period. Continued growth and increased employee productivity are key to Southwest’s continued prosperity and, without them, Southwest’s costs will creep up and its competitive advantage will be threatened. However, plenty of new domestic expansion opportunities appear to be on the near horizon as others contract or liquidate and as the Wright Amendment gets pulled down. Like most industry analysts, I believe Southwest is extremely well positioned to exploit these opportunities though the myriad unique and favorable competitive advantages it possesses.
Dan Akins, Akins & Associates
Dan Akins has a Graduate Degree in Transport Economics from the London School of Economics and over twenty years experience as an air transport consultant starting as a Financial Analyst for ALPA. His clients include passenger and cargo airlines, airports, vendors, and labor.
What on earth is going on in the airline business these days? Southwest finds itself as one of the few profitable companies in an industry facing record fuel prices and unprecedented losses. Nearly half of US airline capacity is flown by carriers in bankruptcy, and there is continuing speculation about mergers and consolidation. What are the likely impacts on Southwest from all of the upheaval in the business today and in the future?
My name is Dan Akins and I am a Transportation Economist and Financial Advisor with over twenty years of experience in airline consulting. SWAPA has hired me to assist your Negotiating Committee in preparing for the upcoming round of negotiations with Southwest Airlines.
As part of that effort I have been asked to provide an assessment of what is going on in the airline industry today, with special emphasis on the performance and competitive position of Southwest Airlines going forward. Foremost in this discussion are analyzing the reasons why Southwest has been able to prosper during this period of airline strife. It is also important for Southwest pilots to be aware of the likely competitive impacts of the changing landscape of labor and fuel costs, as well as how bankruptcies and mergers are likely to affect Southwest Airlines.
Today, there are several unprecedented forces bearing down on the airline industry that are affecting Southwest Airlines’ competitive position. Record fuel prices, which have resulted in increased competitor costs and fares, have resulted in bankruptcies and potential consolidation activity and are acting on several different levels to enhance Southwest’s competitive position. Unlike Southwest, ALL other carriers, including low cost carriers like Jet Blue, will face the full price of jet fuel over the next few years. Southwest absorbs a lesser impact of price increases as a result of its fuel hedging strategy. Increased unit costs and fares are causing the relative gap between Southwest and competitors to increase, as fuel prices force higher fares and carriers struggle to cover increased costs. This is no trivial matter, Jet A fuel on the Gulf Coast has risen to nearly $3 a gallon at the end of September 2005, which is more than twice as expensive as it was just two years ago.
Competitors fares have increased to cover rapidly inflating fuel costs and have caused Southwest’s unit costs (or CASM) and unit revenue (or RASM) to become relatively lower than the competition. For example, from 2000 through 2Q 2002 Southwest’s unit costs averaged 40 percent below the major airline average, while unit revenue averaged 16 percent below. Over the past 24 months the relative level of Southwest’s unit costs has averaged 47 percent below the Majors, while unit revenues were 28 percent below. These huge unit cost and unit revenue gaps keep increasing, as the second quarter 2005 results show Southwest unit costs 65 percent below the major airline average and unit revenue 48 percent below. These gaps make Southwest more attractive to customers as Southwest fares fall further and further below other carriers. The increased unit cost gap is also interesting to investors as Southwest’s costs fall further below the competition, where industry CASM is now at an all time high pushing above 12 cents. Although fare adjustments relate directly to customer price sensitivity, which must be carefully watched, the fare “headroom” provided by competitors increasing fares allows a chance for Southwest to potentially pocket as much as $2 billion annually if it were to restore it’s historical relative fare gap of 16 percent below the competition (rather than the 28 percent below performance of the second quarter 2005).
Additionally, many industry leaders and analysts are convinced that there is just too much domestic capacity for the industry to be profitable. The solution to the problem is seen, increasingly, through future consolidation aimed at reducing competition and pulling down marginal domestic capacity. Bankrupt carriers are also focusing on international expansion and domestic shrinkage. Both of these activities are likely to provide Southwest with new and potentially unforeseen near term growth opportunities as carriers reduce their domestic footprints. For example, bankrupt carrier Northwest is positioning itself to reduce or eliminate capacity at its Memphis hub, and Delta has announced similar plans for Cincinnati. In addition, the upside potential of the removal of the Wright Amendment, which seems now more likely than ever, has huge positive implications for Southwest as it will “free up” growth opportunities that are currently severely constrained in Dallas.
After 9/11 most carriers sought to recover by shrinking and cutting labor costs. Sadly much of the cost savings came as a result of painful labor concessions, the results of which have been completely eclipsed by fuel price increases. It is also important to remember that while debt restructuring in bankruptcy can make a carrier less costly, there is nothing a bankruptcy judge can do to alter a carrier’s fuel costs. Even though Southwest’s fuel hedges diminish over the next five years, it is important to remember that they are likely to save Southwest billions, while at the same time fuel prices force the rest of the industry to dramatically downsize or liquidate. Amazingly, even if one eliminates the labor and fuel expense from each airline’s total operating expense, Southwest’s “core costs” of 2.9 cents per ASM is the lowest among Legacy and LCC’s, which average around 6.0 cents of core costs per ASM. Therefore, the relative cost efficiency of Southwest’s factory to produce seat miles is unmatched in the industry and no amount of debt reduction or labor cost adjustment can take that advantage away. Southwest simply has a better, more efficient business model than all the others, indicating why Southwest’s market value (stock price times shares outstanding) is greater than all others in the industry combined.
Southwest pilots are an integral part of the success of Southwest Airlines as your productivity is unmatched in the industry. Southwest pilots fly an average of 766 block hours per year, the most of any domestic competitor. Southwest pilots also fly more passengers per capita than any other carrier by a wide margin, averaging over 19,300 per pilot in 2004, in an industry producing only 11,750 on average per pilot, according to DOT statistics. Southwest’s pilot costs per enplaned passenger are only $10 in an industry that averages $19 per enplanement. Put these factors together and it is clear that Southwest pilots are the most productive and among the most cost efficient in the industry.
Therefore, contrary to all the bad news you might read or hear about the current state of the airline industry, I believe that Southwest Airlines has a significantly enhanced competitive position in the marketplace which will allow it to grow and prosper while others fail and liquidate over the coming period. Continued growth and increased employee productivity are key to Southwest’s continued prosperity and, without them, Southwest’s costs will creep up and its competitive advantage will be threatened. However, plenty of new domestic expansion opportunities appear to be on the near horizon as others contract or liquidate and as the Wright Amendment gets pulled down. Like most industry analysts, I believe Southwest is extremely well positioned to exploit these opportunities though the myriad unique and favorable competitive advantages it possesses.
Dan Akins, Akins & Associates
Dan Akins has a Graduate Degree in Transport Economics from the London School of Economics and over twenty years experience as an air transport consultant starting as a Financial Analyst for ALPA. His clients include passenger and cargo airlines, airports, vendors, and labor.