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Rivals invade Southwest's Airspace

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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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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
 
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.
 
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.
 
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....
 
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.
 

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