Let the Bleeding Begin

[storminpilot]

http://biz.yahoo.com/rb/040320/airlines_seats_1.html

Reuters
Airlines Add Seats, Fare Wars Cloud Skies
Saturday March 20, 7:41 am ET
By Jui Chakravorty


NEW YORK (Reuters) - As the travel industry sputters its way out of a 3-year downturn, U.S. airlines are adding enough seats to approach pre-Sept. 11 levels. But analysts see a dark cloud as carriers slash fares to win market share, leading revenue to trail demand.

Analysts expect low-cost carriers to expand capacity by more than 10 percent this year, and regional carriers by 24 percent. Even the larger carriers are doing the same, even as many continue to lose millions of dollars a day.

The nine major airlines - American Airlines (NYSE:AMR - News), Continental Airlines (NYSE:CAL - News), Delta Air Lines (NYSEAL - News), Northwest Airlines (NasdaqNM:NWAC - News), United Airlines (OTC BB:UALAQ.OB - News), and US Airways (NasdaqNM:UAIR - News), Alaska Airlines (NYSE:ALK - News), America West (NYSE:AWA - News) and Southwest Air (NYSE:LUV - News) -- are expected to increase capacity by 5.8 percent this year, according to Deutsche Bank analyst Susan Donofrio. That is up from her previous forecast of 2.3 percent.

Larger airlines shrank capacity after the Sept. 11, 2001 attacks, as the Severe Acute Respiratory Syndrome epidemic and the Iraq war took their toll on the economy. Vacationers tightened their budgets and corporations curbed their travel spending. Low-cost carriers, on the other hand, grew aggressively.

As the economy has started to rebound, particularly in the past few months, larger carriers have begun adding capacity in a bid to take on low-cost rivals.

Total U.S. airline capacity, measured in available seat miles, has fallen progressively over the past three years -- to 891 billion in 2003 from 966 billion in 2000. But it is estimated to climb back to 964 billion in 2004, Buttrick said. "By early 2005, capacity will have returned to pre-9/11 levels."

Big airlines use cheaper ways to add capacity, such as using existing planes for more flights, according to several analysts.

"By contrast, low-cost carriers (already) tend to have higher aircraft utilization, so they typically have to buy new planes to expand capacity," said UBS analyst Sam Buttrick said.

But analysts remain divided on which type of carrier will hurt the most. "The larger airlines should look at getting prices up before adding capacity," said Blaylock & Partners analyst Ray Neidl.

"The problem is on the revenue side," he said. "Low-cost carriers have the cost structure to justify growth -- they are setting prices at levels where they can still produce a profit."

Neidl cited leisure routes such as Boston to Florida as an example, "where JetBlue (NasdaqNM:JBLU - News) is setting prices which American Airlines will not be able to sustain."

But even as the comeback of leisure travelers is keeping holiday sales relatively strong, year-round corporate travel remains well below pre-Sept. 11 levels. "Business travelers have refused to pay fares that cost 10 times the lowest leisure fare," said Donofrio.

Increased competition on transcontinental U.S. routes and for certain destinations has also been pushing prices down. Analysts expect total industry revenue in 2004 to trail 2000 levels by about 6 percent to 8 percent.

Costs, on the other hand, have been on the way up due to rising jet fuel prices. Buttrick lowered his 2004 industry earnings forecast to a loss of $2.3 billion, from his prior estimate of a loss of $500 million.

"Less revenue, higher costs, is clearly not a winning formula for success," he wrote in a research note.

 

[badog]

the squeeze

Sounds like the majors are getting sick of the lccs' $hit. Time to flex a little muscle, ( very little left ) and squeeze the lccs'. For the majors to increase capacity, they need to pull equipment outta the desert. For the lccs' to do it they need to buy, all the cash spent will decrease profit. Maybe things are getting better to the piont the majors can finally compete with the lccs or just increase asms' to cut share. Any way you slice it it means more jobs for us.
It's a crap shoot any way. General Lee?

 

[General Lee]

badog,

No doubt that the LCCs have an advantage now. But, as the lagacy carriers try to get leaner and try to cut costs, the LCCs will get a little more expensive to operate year after year. Each year that goes by---employees salaries go up, plane maintenence goes up, and other costs. So, the Majors costs are trying to come down, and the LCCs costs are slowly going up. The only problem is that the Majors also have higher debt and pension problems also and now higher fuel prices also. This may turn out to be a battle of attrition in the end.....

Bye Bye---General Lee

 

[GogglesPisano]

Then why is UAL still bleeding dry?

 

[badog]

Crapshoot

Let's all hope that crude doesn't go to $50 a barrel cause the whole shootin' match will come to a screeeeaching halt.

 

[storminpilot]

http://www.marketwatch.com/news/yho...o&guid={7D5BDA21-C8C5-401D-8D35-72679F24E556}

Little relief in sight for airline industry -- Rising oil, jet fuel costs frustrate recovery

By August Cole, CBS.MarketWatch.com
Last Update: 6:58 PM ET March 22, 2004


SAN FRANCISCO (CBS.MW) -- While OPEC's meeting at the end of the month in Vienna may see some backslapping, expect chagrin in the executive suites at the major airlines as executives wrap up a quarter that saw the highest oil prices in more than a decade.

Investor sensitivity to oil's ascent is clear: airline stocks hit a 7-month low on Monday. See full story.

And oil prices probably won't come down anytime soon.

"Fuel prices last week hit the highest level since the original Persian Gulf War in 1990," said Northwest Airlines CEO Richard Anderson in a weekly recorded phone message to employees.

"Like most airlines, no one had anticipated fuel prices at 14-year highs and so far we don't see any real abatement," Anderson said. Northwest is not hedged this year against rising fuel costs.

Frustrating the airline industry recovery, it's all but impossible to raise ticket prices to compensate for high fuel costs in a hyper-competitive market. Not even a $10 a ticket hike. Many of the biggest airlines have tried recently, but failed to make higher fares stick.

Accordingly, profits are going to be crimped, analysts say. With the fuel-price gains, airlines big and small face one of the biggest hurdles since SARS and the run-up to the Iraq campaign last year, as jet fuel prices threaten to undo cost cuts.

Others, like Southwest Airlines, are well protected. The discount airline is 80 percent hedged on its fuel needs for this year at $24 and next year is 80 percent hedged at $25.

"We really view hedging more as an insurance policy just as you would want to protect yourself with health-care insurance in a similar fashion," said Southwest Airlines' senior director of investor relations, Tammy Romo. Southwest is already beginning to take small positions as far ahead as 2006 through 2008.

To gauge how those over-the-horizon bets can pay off, a $1 move in oil prices can have a pretax impact of $500 million on the industry's results, according to Merrill Lynch analyst Michael Linenberg.

Consider that United Airlines (UALAQ: news, chart, profile), which is not hedged, estimates that a 1-cent change in fuel prices impacts the bottom line by $22 million.

Already, Merrill's Linenberg expects an industry net loss of $2.1 billion this year, with fuel prices expected to average $35 a barrel in 2004 -- up from $32 a barrel and a loss of $700 million.

The implications for next year's results are serious, with more red ink ahead if crude prices remain near $35 a barrel, says Lehman Bros. analyst Gary Chase.

It could get worse if higher energy costs start to crimp personal and corporate travel spending plans.

"Oil prices are a double-edged sword for the industry," said Air Transport Association economist John Heimlich. A sharp one, at that. Expectations that 2005 could be a profitable or breakeven year for the industry are becoming much less sure, he said.

For months, oil traders have been making sport of the volatility. From their perspective, higher energy prices are here to stay. Oil refining capacity is tight. And though OPEC is reportedly reconsidering production cuts, they aren't doing much yet to cool prices.

"The mid 20's we were all so comfortable saying is now the mid 30's and we see this being the new norm for years to come," wrote Phil Flynn, senior analyst at Alaron Trading in Chicago, in a Monday report. At those elevated levels, hedging gets more expensive. And it gets more difficult to find willing parties for hedging arrangements.

Short-term relief could come if OPEC delays its decision to cut oil production to June 1. In the case of the airlines, as early as January the ATA advocated reducing the rate at which the U.S. fills its petroleum reserves, and affects the supply and demand equation that is contributing to higher oil, and jet fuel, prices.

Further confusing the markets is elevating violence in the Mideast, as well as terrorism concerns at home and abroad. See Futures Movers.

That leaves little hope on the fuel front for the airline industry. "Other than the strategic reserve policy and OPEC action, it's just a crossing-your-fingers activity," said ATA's Heimlich.

August Cole is spot news editor at CBS.MarketWatch.com in San Francisco.

 

[enigma]

I keep hearing that President Bush is an oil industry insider, why hasn't he convinced the Saudi's, etc, to keep the prices low?

enigma

 

[FLB717]

ANWAR is starting to look good to some I bet.

 

[C77MD80]

As an oil industry insider it would behoove him to keep oil prices high thus making more $$. Too long though and no second term.

 

[MW44]

Somebody tell me if I'm reading this wrong but the article states that a 1 cent change in fuel affects UAL's bottom line by 22 million dollars. So if United paid a 1 dollar more per barrel than say SWA then they would be saddled with an additional 2.2 billion dollars in cost?? That seems outrageous.

Even more alarming if the article is correct Ual will pay around $10 more per barrel than SWA due to fuel hedging. Does that mean Ual's fuel bill will be 22 BILLION dollars higher than SWA. That is astronomical. Why do they even waste their time worrying about concessions when fuel has such a dramatic effect on the bottom line. You would think they would have a team of executives working around the clock on fuel prices.