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Rivals invade Southwest's Airspace

On Your Six

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Rivals Invade Southwest's Air Space

United, Delta, U.S. Airways and, Most Likely, American Are Emerging as Giant, Lower-Cost Carriers





By Susan Carey WSJ



Southwest Co. is still known as a discount carrier.


But as Chief Executive Gary Kelly acknowledged last week in a memo that is still reverberating among investors, employees and airline rivals, the discount part is waning.

Southwest Airlines is facing increased competition. Pictured, passengers at the Fort Lauderdale, Fla., airport.




Mr. Kelly's missive to 38,000 employees warned that if cross-town rival American Airlines emerges from bankruptcy-court protection, it will have substantially lower costs than before and will join the other remade "legacy" carriers that are giving Southwest a run for its money in ways they never did before.

On Tuesday, Southwest delivered a more upbeat signal, announcing a $19 billion order for 208 Boeing Co. 737s. But those new planes, too, are a reflection of Mr. Kelly's efforts to head off challenges from larger but slimmer rivals. Rather than expanding Southwest's fleet, they will replace less fuel-efficient 737s, leading to savings that are central to Southwest's strategy to remain a low-cost carrier.

If American parent AMR Corp. does "emerge from bankruptcy, as I believe they will, they will join the new United, new Delta and new US Airways as giant, lower-cost airlines," Mr. Kelly wrote.

"They are, collectively, much more formidable competition than their predecessors."


With its historical edge on costs, Southwest was able to undercut competitors' fares and stimulate new business by winning first-time fliers and luring others from cars and buses, a phenomenon that came to be known as the "Southwest effect."

But with new competition from leaner, larger airlines and from such low-cost carriers as Jetblue and Spirit Inc., "our advantage is cut in half," Mr. Kelly said in the memo.

The memo also reminded employees that Southwest's labor rates are the highest in the domestic industry and said that the airline's enemy "is our own cost creep, our own legacy-like productivity, and our own inefficiencies."

Michael Linenberg of Deutsche Bank said on an investor call last week that in his time following Southwest, Mr. Kelly's statement that Southwest can no longer stimulate new traffic is "one of the most profound statements we have heard about its business model." He suggested that to increase revenue Southwest may have to add international routes, charge passengers for assigned seating, operate red-eye overnight flights, and buy more types of aircraft to better match supply and demand. (Unlike most of its peers, Southwest is strictly domestic, doesn't assign seats and has flown only Boeing 737s.)

But Duane Pfennigwerth, an Evercore Partners analyst, had a different take. He said Southwest still has a cost advantage over rivals and a strong balance sheet free of expensive pension liabilities. He ascribed the Kelly memo to "realistic table-setting in advance of the next round of labor negotiations."

"I think he probably is trying to manage expectations," agreed Charles Cerf, president of the Transport Workers Union local that represents 7,800 ground workers who have been in contract talks since the summer. "They seem to overstate negative financial news at the beginning of negotiations."

Southwest declined to make Mr. Kelly available for an interview. But his note made clear that the company intends to preserve pay rates and benefits for the foreseeable future. Southwest has never furloughed an employee or requested concessions from labor.

Bob Jordan, a Southwest executive who heads AirTran Airways, which Southwest bought in May, said Mr. Kelly sends at least one employee memo a year, and "has done a number of rally-the-troops memos around...high fares and competition." He denied the memo was a warning shot to labor.

Over the past decade, as its legacy competitors collectively lost billions amid bankruptcy reorganizations, Southwest expanded rapidly, earning a total of $4.5 billion. Now the leading transporter of domestic passengers, its capacity in 2010 was two-thirds greater than it was a decade earlier, and it has moved into new airports, including Denver, Philadelphia and New York's LaGuardia. Its May acquisition of fellow discounter AirTran has brought it to the world's busiest airport, Hartsfield-Jackson Atlanta International.

But after years of outearning premerger Delta and United, both international carriers, Southwest this year is expected to earn $213 million, a quarter of Delta's anticipated profit and a sixth of United Continental's.


"While they still have an advantage, that advantage is a shadow of what it once was," said Bill Swelbar, a researcher at the Airline Data Project of the Massachusetts Institute of Technology.


Godspeed!


OYS
 
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On Your Six

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Delta Says Margins Remain Solid
By SUSAN CAREY -- WSJ
DECEMBER 14, 2011

Delta Air Lines Inc., which expects to earn $1.1 billion this year, said its fourth-quarter operating margin should be between 6% and 8%, an improvement from a projection given in October.

At an investor-day event, the Atlanta-based carrier also said it will cut its fourth-quarter capacity by 4% to 5% compared with the year-ago period, part of its continuing campaign to match its supply with demand. The carrier's unit revenue—the amount taken in for each passenger flown a mile—is expected to rise 11% to 12% in the December quarter.

For all of 2012, Delta said it will offer 2% to 3% less capacity than it did this year. Transatlantic capacity will be down 7% in 2012, reflecting the recessionary effects of the euro-zone crisis, said Ed Bastian, president of the world's No. 2 airline by traffic.

On the expense front, Mr. Bastian said Delta's goal in 2012 is to return its unit costs—the cost to fly a seat a mile, excluding fuel—to 2010 levels excluding fuel and other factors. Delta is focusing over the next two years on wringing efficiencies from its maintenance operation, boosting employee productivity and adjusting its fleet by eliminating more 50-seat regional jets, he said.

Richard Anderson, Delta's chief executive, said in opening remarks at the New York event that the company will earn $1.1 billion excluding one-time items for all of 2011 in spite of a $2.5 billion increase in its fuel bill. Delta also will generate $1.5 billion in free cash flow for the year, a rare instance where an airline has covered its fuel expenses and more, he said. The carrier will end the year with $5.3 billion in unrestricted cash.

Mr. Anderson said Delta expects to be "solidly profitable" for all of 2012.



Godspeed!



OYS
 

SplitBar

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The new planes don't arrive for more than 5 years. In the mean time how do they become more efficient? I think they have already perfected efficiency as that has always been their passion. I don't see how they can squeeze anymore blood from the turnip when it comes making their operation more efficient.
 

whoknows

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I am sure this is OYS's first rodeo and you can't fault a man (I use the term loosely) for being ignorant. I think the following quotes need repeating:


But Duane Pfennigwerth, an Evercore Partners analyst, had a different take. He said Southwest still has a cost advantage over rivals and a strong balance sheet free of expensive pension liabilities. He ascribed the Kelly memo to "realistic table-setting in advance of the next round of labor negotiations."

"I think he probably is trying to manage expectations," agreed Charles Cerf, president of the Transport Workers Union local that represents 7,800 ground workers who have been in contract talks since the summer. "They seem to overstate negative financial news at the beginning of negotiations."


But his note made clear that the company intends to preserve pay rates and benefits for the foreseeable future. Southwest has never furloughed an employee or requested concessions from labor.
 

learherkjay

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Debt of each airline at the end of last quarter:

Delta = 15.3 Billion, Debt/Equity Ratio = 18.5

Southwest = 900 Million, Debt/Equity Ratio = 0.65

I think it's great that Delta has turned the corner with the help of bankruptcy laws and cutting costs with lower pay for pilots and erasing pensions.

Regardless, the overall health of an airline is a better measure of success, and Delta is going to need a consecutive string of about 13 quarters at 700 million profit to get below a 1.0 debt/equity ratio. I hope they can do it, because it means the industry is doing well, but you can't chirp too loud because the way Delta has achieved it was at the sacrifice of your career and pay....
 

redflyer65

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Debt of each airline at the end of last quarter:

Delta = 15.3 Billion, Debt/Equity Ratio = 18.5

Southwest = 900 Million, Debt/Equity Ratio = 0.65

I think it's great that Delta has turned the corner with the help of bankruptcy laws and cutting costs with lower pay for pilots and erasing pensions.

Regardless, the overall health of an airline is a better measure of success, and Delta is going to need a consecutive string of about 13 quarters at 700 million profit to get below a 1.0 debt/equity ratio. I hope they can do it, because it means the industry is doing well, but you can't chirp too loud because the way Delta has achieved it was at the sacrifice of your career and pay....

Ouch! Those are some pretty big differences in debt to equity ratio.

I think Gary Kelly is on the right track by purchasing Airtran, switching to 800's (almost 50 more px on every flight) and adding near international. The 737-800 range will push past Central America into South America. Hawaii and Alaska are right around the corner as well. There's plenty of growth on the horizon at SW. Delta? Not so much...probably more codesharing and outsourcing.
 

shootr

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It has worked well for sw for years now.

Wishing for another's failure and actively WORKING towards that failure are not the same thing. SWA has never wished for anything. SWA has earned it's position (for good and bad) on it's own with no help from luck or the bankrupty courts.
 

Ky.BrownBourbn

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Is it just me or is it comical that "up your six" posts an article about "rivals invading Southwest Airspace" with the upcoming issues in ATL.

Since she likes to quote Gary Kelly so often, digest this! When I was a new hire, GK came in and said that He could see us doing all Delta Airlines domestic flying, I laughed it off thinking, we don't even fly to ATL, the Union's Scope (DALPA) would never allow that, etc.

1 year later in recurrent, Mike Van De Ven came in and said they were looking at flying to LGA, MSP, EWR and ATL. I'm thinking I have no desire to go to any of those places!

Now here we are, 5 years later

And before any one questions that it's BS for the CEO, president, VP's would talk openly with the Flight Crews. This happens often here and they do this at "new hire breakfasts", during recurrent training, and hold "round table" events bringing in different work groups. Just one more thing that makes this place different!

Hey "Up your six", you might wanna watch your back!

Later,
KBB
 

Dan Roman

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Wishing for another's failure and actively WORKING towards that failure are not the same thing.

Are you serious??? Are you saying your "warrior spirit" includes trying to undermine other carriers but you hope it doesn't hurt them? That it's OK to try and work towards someone else's failure but that is not what you want?
 

Dan Roman

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Is it just me or is it comical that "up your six" posts an article about "rivals invading Southwest Airspace" with the upcoming issues in ATL.

Since she likes to quote Gary Kelly so often, digest this! When I was a new hire, GK came in and said that He could see us doing all Delta Airlines domestic flying, I laughed it off thinking, we don't even fly to ATL, the Union's Scope (DALPA) would never allow that, etc.

1 year later in recurrent, Mike Van De Ven came in and said they were looking at flying to LGA, MSP, EWR and ATL. I'm thinking I have no desire to go to any of those places!

Now here we are, 5 years later

And before any one questions that it's BS for the CEO, president, VP's would talk openly with the Flight Crews. This happens often here and they do this at "new hire breakfasts", during recurrent training, and hold "round table" events bringing in different work groups. Just one more thing that makes this place different!

Hey "Up your six", you might wanna watch your back!

Later,
KBB


What does flying in the same city as Delta have to do with "flying all of their passengers"? Do you really think all of Delta's passengers are going to switch to SWA? Any of them? I would'nt be to surprised if some of AT ex pax's will actually opt for DAL
Sounds like "Gary" will say anything to your new hires to instill that "warrior spirit"
 
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Mach 80

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It's awful that SW has to compete with bankruptcy instead of other airlines.

It's hilarious when pilots brag about how well their airline is doing with no mention of how their airline screwed investors and dumped debt through bankruptcy. Who couldn't be succesful with that strategy? Oh, and let's not leave out shredding employee contracts and cutting promised pensions, but oh yes ...please continue to tell how well you are doing and how well managed you are.
 

Dan Roman

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It's awful that SW has to compete with bankruptcy instead of other airlines.

It's hilarious when pilots brag about how well their airline is doing with no mention of how their airline screwed investors and dumped debt through bankruptcy. Who couldn't be succesful with that strategy? Oh, and let's not leave out shredding employee contracts and cutting promised pensions, but oh yes ...please continue to tell how well you are doing and how well managed you are.

Welcome to America!
 

slaquer5

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Are you serious??? Are you saying your "warrior spirit" includes trying to undermine other carriers but you hope it doesn't hurt them? That it's OK to try and work towards someone else's failure but that is not what you want?



Dan you are so out of touch with the common person. Do you think it is OK for airlines to charge 1000 dollars for a one way ticket, to a destination that is a forth of the mileage of one of there 200 dollars tickets?.

They charge 1000 dollars because they can, ( no competition )



It is you mother ,grandmother, your sister that they are screwing out of getting to go on vacation or seeing loved ones.

Dan you think that only the rich should be able to fly. Get off your high horse old man.
 

Dan Roman

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Dan you are so out of touch with the common person. Do you think it is OK for airlines to charge 1000 dollars for a one way ticket, to a destination that is a forth of the mileage of one of there 200 dollars tickets?.

They charge 1000 dollars because they can, ( no competition )



It is you mother ,grandmother, your sister that they are screwing out of getting to go on vacation or seeing loved ones.

Dan you think that only the rich should be able to fly. Get off your high horse old man.

I buy tickets from time to time for my college student daughter to get home or visit relatives. SWA is rarely the cheapest. I did get a SWA ticket for her this weekend to fly from BWI to LAX. I think the prices were competitive, but I knew she would have two bags, paid for the $10 priority check in too!

Funny you should get that impression. My stand is Deregulation has been a good thing. I totally believe that competition has made the surviving airlines much better, it has created 1000's more airline pilot jobs than their would have been and MOST important, millions of people have traveled that would not have had a chance to if not for deregulation.
 

LearLove

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But Duane Pfennigwerth, an Evercore Partners analyst... He ascribed the Kelly memo to "realistic table-setting in advance of the next round of labor negotiations."

I'm no big fan of "analyst" opinions/advice but I'd agree with this one.
 
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