Big Slick
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The smaller carrier's low-cost strategy has served it well, but American can catch up, analysts say.
Battling for survival in their north Texas neighborhood, American Airlines and Southwest Airlines are as different as they can be, company executives and industry analysts say.
American's 73,000 employees, 700 aircraft, worldwide hub-and-spoke route network and its 80-year history would suggest that any contest between them would be one-sided. But you can't argue with the bottom line.
While the great gray American eagle has lost $8.1 billion since 2000, Southwest has reported earnings of more than $2.6 billion. Its 31,000 employees, 445 aircraft, point-to-point U.S. routes and 33 straight years of profitability make a compelling case for the low-cost carrier model, industry analysts say.
And, while American flew 33.01 billion revenue passenger miles in the first quarter, a 2.1 percent increase compared with last year's first quarter, Southwest flew half as much at 15.3 billion revenue passenger miles but is closing the gap with a 15.4 percent increase compared with 2005's first quarter.
A revenue passenger mile is flying one paying passenger one mile.
Southwest flew its planes more profitably in the first quarter: Its passenger revenue yield per revenue passenger mile was 12.68 cents while its operating expenses per available seat mile were 8.6 cents, the lowest in the industry.
American's yield per revenue passenger mile was 12.85 cents. Its operating expenses per available seat mile were 10.8 cents.
American, the world's largest airline and an employer of 7,000 people in Tulsa, had long-term debt of $20 billion and cash and short-term investments of $4.8 billion at the end of the first quarter.
Southwest, the nation's leading discount carrier, had long-term debt of $1.37 billion and cash and short-term investments of $2.9 billion on March 31, according to company documents on file with the Securities and Exchange Commission.
"We believe that the low-cost carriers will be the winner in the airline battle for market share due to their more efficient business model," Matt Collins, an airline analyst with Edward Jones in St. Louis, wrote in a research report late last year. "With Southwest being the market leader in the low-cost carrier segment, we believe it will be one of the main beneficiaries of this trend.
"With a strong financial position and compelling valuation, we would consider this company as an attractive holding in the transportation sector."
One of the keys to Southwest's profitability is an aggressive fuel hedging program that permits it to lock in future fuel contracts at a set price.
In 2006, Southwest's low long-term debt and strong cash position has enabled it to hedge 70 percent of its estimated fuel requirements at $36 per barrel.
American, in contrast, has hedged 23 percent of its estimated 2006 fuel needs at $61 per barrel.
"Had fuel costs not been what they were, (American) would be a profitable airline," said Mike Boyd, president of the Boyd Group, an airline consulting firm in Evergreen, Colo. "It underscores what we've been saying: Fuel eventually will go down along with American's fuel bill.
"When that happens, then it will be American that will be making money."
Some analysts, however, are troubled by American's long-term debt.
David Strine, who follows American's parent company, AMR Corp., for Bear Stearns in New York, suggests company executives consider spinning off non-airline assets.
American's AAdvantage frequent flyer program, the oldest and largest in the world, could be sold for between $1.4 billion and $5.8 billion, Strine said in "Hidden Asset Values and Spin-Off Potentials," a report he issued Dec. 29.
American Beacon Advisors, AMR's money manager with $40 billion in assets under management, could bring up to $875 million, Strine said.
American Eagle, American's regional airline affiliate, is worth up to $1.1 billion, he estimates.
American's Maintenance & Engineering operations in Tulsa, Fort Worth and Kansas City, Mo., could be worth up to $500 million, Strine said.
American Airlines Publishing has a hypothetical value of $80 million to $200 million, the Bear Stearns analyst said.
But AMR Chairman and CEO Gerard Arpey said he isn't interested in selling assets to pay down debt.
"We clearly recognize that within the company we have a lot of strategic capabilities and strategic assets," Arpey said in Tulsa at an interview earlier this month. "We haven't monetized these assets. We are managing the company for the long term.
"Some transactions that have been done (by other airlines) have turned out to be very expensive refinancings. We are more interested in long-term competitive advantages and positioning ourselves in each venue we are in for long-term success.
"We are not interested in monetizing assets so we can boost next quarter's earnings."
Arpey said American is on "a different trajectory" than many U.S. carriers, which have shed maintenance facilities, mechanics and pensions in bankruptcy.
American is doing most of its aircraft maintenance in house, attracting third-party maintenance work to the M&E bases and transforming them from cost to profit centers.
The M&E base in Tulsa, as part of a collaborative effort between management and labor over the past two years, has trimmed 30 percent from the $1 million cost of a heavy "C" check on an MD80 while attracting $198 million in third-party maintenance work. Its goal is $500 million in third-party maintenance contracts or cost avoidance by the end of the year.
"Our goal is to make the company sufficiently profitable to replace its assets and grow," Arpey said. "It's revenue and expenses. It's not a whole lot more complicated than that."
On the revenue side, American is shifting assets to international routes, where traffic and profits are higher than the slower-recovering domestic market.
In April, American began operating a daily roundtrip flight from Chicago O'Hare International Airport to Shanghai, China, its eighth daily flight to the Far East from six U.S. gateways.
In the first quarter, international seat capacity was up 4 percent, to 37 percent of American's total capacity; domestic capacity was down about the same percentage.
"There are fixed costs, and the costs per mile are lower when the stage length (per flight) is longer because no matter how far you fly, the ground support costs are the same whether you're flying 500 or 5,000 miles," said American spokesman Tim Smith in a telephone interview. "If you can spread those costs over more miles, the costs per mile go down."
With his accounting background and his passion for the airline industry, Arpey could turn things around at American and leave Southwest in its wake, Boyd said.
"This (Southwest) airline model has a hard time working at $60 a barrel," Boyd said. "There is a limited amount of system revenue you can generate with 737s.
"In 2006, the low cost carriers and the regional airlines will have a shakeout, but I think the legacy carriers are in good shape.
"The legacy carriers have a network that can generate revenue."
I am posting this article so folks can use the numbers at their upcoming interviews. Lots of good info. Let's see how long it takes SWA/FO to respond.
Battling for survival in their north Texas neighborhood, American Airlines and Southwest Airlines are as different as they can be, company executives and industry analysts say.
American's 73,000 employees, 700 aircraft, worldwide hub-and-spoke route network and its 80-year history would suggest that any contest between them would be one-sided. But you can't argue with the bottom line.
While the great gray American eagle has lost $8.1 billion since 2000, Southwest has reported earnings of more than $2.6 billion. Its 31,000 employees, 445 aircraft, point-to-point U.S. routes and 33 straight years of profitability make a compelling case for the low-cost carrier model, industry analysts say.
And, while American flew 33.01 billion revenue passenger miles in the first quarter, a 2.1 percent increase compared with last year's first quarter, Southwest flew half as much at 15.3 billion revenue passenger miles but is closing the gap with a 15.4 percent increase compared with 2005's first quarter.
A revenue passenger mile is flying one paying passenger one mile.
Southwest flew its planes more profitably in the first quarter: Its passenger revenue yield per revenue passenger mile was 12.68 cents while its operating expenses per available seat mile were 8.6 cents, the lowest in the industry.
American's yield per revenue passenger mile was 12.85 cents. Its operating expenses per available seat mile were 10.8 cents.
American, the world's largest airline and an employer of 7,000 people in Tulsa, had long-term debt of $20 billion and cash and short-term investments of $4.8 billion at the end of the first quarter.
Southwest, the nation's leading discount carrier, had long-term debt of $1.37 billion and cash and short-term investments of $2.9 billion on March 31, according to company documents on file with the Securities and Exchange Commission.
"We believe that the low-cost carriers will be the winner in the airline battle for market share due to their more efficient business model," Matt Collins, an airline analyst with Edward Jones in St. Louis, wrote in a research report late last year. "With Southwest being the market leader in the low-cost carrier segment, we believe it will be one of the main beneficiaries of this trend.
"With a strong financial position and compelling valuation, we would consider this company as an attractive holding in the transportation sector."
One of the keys to Southwest's profitability is an aggressive fuel hedging program that permits it to lock in future fuel contracts at a set price.
In 2006, Southwest's low long-term debt and strong cash position has enabled it to hedge 70 percent of its estimated fuel requirements at $36 per barrel.
American, in contrast, has hedged 23 percent of its estimated 2006 fuel needs at $61 per barrel.
"Had fuel costs not been what they were, (American) would be a profitable airline," said Mike Boyd, president of the Boyd Group, an airline consulting firm in Evergreen, Colo. "It underscores what we've been saying: Fuel eventually will go down along with American's fuel bill.
"When that happens, then it will be American that will be making money."
Some analysts, however, are troubled by American's long-term debt.
David Strine, who follows American's parent company, AMR Corp., for Bear Stearns in New York, suggests company executives consider spinning off non-airline assets.
American's AAdvantage frequent flyer program, the oldest and largest in the world, could be sold for between $1.4 billion and $5.8 billion, Strine said in "Hidden Asset Values and Spin-Off Potentials," a report he issued Dec. 29.
American Beacon Advisors, AMR's money manager with $40 billion in assets under management, could bring up to $875 million, Strine said.
American Eagle, American's regional airline affiliate, is worth up to $1.1 billion, he estimates.
American's Maintenance & Engineering operations in Tulsa, Fort Worth and Kansas City, Mo., could be worth up to $500 million, Strine said.
American Airlines Publishing has a hypothetical value of $80 million to $200 million, the Bear Stearns analyst said.
But AMR Chairman and CEO Gerard Arpey said he isn't interested in selling assets to pay down debt.
"We clearly recognize that within the company we have a lot of strategic capabilities and strategic assets," Arpey said in Tulsa at an interview earlier this month. "We haven't monetized these assets. We are managing the company for the long term.
"Some transactions that have been done (by other airlines) have turned out to be very expensive refinancings. We are more interested in long-term competitive advantages and positioning ourselves in each venue we are in for long-term success.
"We are not interested in monetizing assets so we can boost next quarter's earnings."
Arpey said American is on "a different trajectory" than many U.S. carriers, which have shed maintenance facilities, mechanics and pensions in bankruptcy.
American is doing most of its aircraft maintenance in house, attracting third-party maintenance work to the M&E bases and transforming them from cost to profit centers.
The M&E base in Tulsa, as part of a collaborative effort between management and labor over the past two years, has trimmed 30 percent from the $1 million cost of a heavy "C" check on an MD80 while attracting $198 million in third-party maintenance work. Its goal is $500 million in third-party maintenance contracts or cost avoidance by the end of the year.
"Our goal is to make the company sufficiently profitable to replace its assets and grow," Arpey said. "It's revenue and expenses. It's not a whole lot more complicated than that."
On the revenue side, American is shifting assets to international routes, where traffic and profits are higher than the slower-recovering domestic market.
In April, American began operating a daily roundtrip flight from Chicago O'Hare International Airport to Shanghai, China, its eighth daily flight to the Far East from six U.S. gateways.
In the first quarter, international seat capacity was up 4 percent, to 37 percent of American's total capacity; domestic capacity was down about the same percentage.
"There are fixed costs, and the costs per mile are lower when the stage length (per flight) is longer because no matter how far you fly, the ground support costs are the same whether you're flying 500 or 5,000 miles," said American spokesman Tim Smith in a telephone interview. "If you can spread those costs over more miles, the costs per mile go down."
With his accounting background and his passion for the airline industry, Arpey could turn things around at American and leave Southwest in its wake, Boyd said.
"This (Southwest) airline model has a hard time working at $60 a barrel," Boyd said. "There is a limited amount of system revenue you can generate with 737s.
"In 2006, the low cost carriers and the regional airlines will have a shakeout, but I think the legacy carriers are in good shape.
"The legacy carriers have a network that can generate revenue."
I am posting this article so folks can use the numbers at their upcoming interviews. Lots of good info. Let's see how long it takes SWA/FO to respond.
