Ted's Not-So-Excellent Adventure...

[flying@swa]

By Tim Beyers - The Motley Fool
February 13, 2004

Coming of age in the 1980s, I remember when "Ted" referred to Keanu Reeves, as Ted "Theodore" Logan in Bill & Ted's Excellent Adventure. Alas, no more. Now, Ted is an airline.

On Thursday, bankrupt UAL Corp.'s (OTC BB: UALAQ.OB) subsidiary United Airlines launched a new lower-fare affiliate called Ted, with an inaugural flight from Denver to Ft. Lauderdale. Billed as a hip alternative to such low-fare rivals as JetBlue (Nasdaq: JBLU) and Southwest Airlines (NYSE: LUV), Ted supposedly combines bargain prices with outstanding service.

United may be one of the finest in the air for passenger service, but is this really a differentiator in the world of no-frills airlines? Uh, no. More airlines are getting into the discounting business daily and passengers expect more for less. Witness Delta's (NYSE: DAL) Song, which is a distant cousin to Ted. Then there's AirTran (NYSE: AAL) and Denver-based Frontier (Nasdaq: FRNT), both modestly successful no-frills carriers.

Cool new paint aside, Ted is the same old thing. Both Ted's and Frontier's websites showed that the airlines charge the exact same price for a proposed trip to Vegas from Denver, leaving a week from today and returning on Monday, Feb. 23.

Of course, the biggest problem is that Ted actually raises United's costs. UAL says it will dedicate 45 planes to Ted and plans to keep them in the air 20% more than its remaining fleet, which will use additional fuel and jack up payroll. The additional seating in each of Ted's A-320 aircraft could offset those expenses, but that depends on taking customers from competitors. It's a failed strategy, according to aviation consultant Mike Boyd, who has followed the industry for 20 years. In an interview, Boyd cited bankrupt carrier Braniff and United's defunct Shuttle by United Service as prime examples of the failed Ted model.

So what should investors do? For one thing, it would be Foolish to keep a microscope on UAL's finances. Last month, the company reported that it reduced fourth-quarter operating expenses by 16% from the same period a year ago. Ted could reverse that trend without adding substantial revenue gains.

Certainly the no-frills airlines business is a good one, just ask Southwest. But none of the larger carriers have successfully encroached on Southwest's turf. Continental Airlines (NYSE: CAL) ditched its low-fare subsidiary five years ago, and AMR Corporation's (NYSE: AMR) American and Northwest Airlines (NYSE: NWB) are ignoring the lower end of the market. See the pattern here?

 

[MW44]

Ok I don't get it...

The article says that since TED plans to use their aircraft 20% more per day that is going to use additional fuel and jack up their payroll, effectively increasing UAL's costs. What in the world do they mean by that???

Do they not realize that by utilizing their aircraft more they will get additional revenue from the extra flights? Lets say you have a fixed monthly lease payment and now you fly 120 flighs/month as opposed to 100 then you are definitely going to reduce your costs, assuming you charge people to fly on the extra flights. They seem to imply that this additional aircraft usage is only going to increase costs. It's almost as if the Motely Fool thinks that a TED flight is going to take 20% longer to get from point A to B than Ual would. Am I reading that wrong?

And what is with this Mike Boyd guy? Give me a break. He's like a weatherman, getting paid to state the obvious and give vague predictions regarding the future. He's got one of the best scams around. It's like aviation junk food. If he really knew anything he would be getting rich actually running an airline. Here is my Boyd-esque industry prediction, "Due to US Airways failure to reduce their CASM to an acceptible level I see continued negative earnings as the LCC's aggressively compete with their route structure." Maybe The USA Today would send me a check in the mail for that one..

 

[spinup]

SWA/Airtran, not-so-excellent fares

Discoun-Ted

The numbers are now in, and it's clear that United's little brother Ted intends to get out front and set the pace in pricing when the new airline arrives at Dulles April 7.



As of press time, a price check shows Ted beating the competition on most of its four routes from Dulles. What's more, it's even giving traditional price-setter Southwest a run for its money on flights from Baltimore Washington International.

Although the discount carrier owned by United is entering the market during the spring break season, when fares are traditionally higher, it is offering $194 round-trip, nonstop fares to Fort Lauderdale, Fla. Delta beats that price by $1, but with a required stop. The next closest competitor: discount carrier AirTran, with a one-stop fare of $243. Upstart JetBlue is even higher: $306.70. Southwest's cheapest available fare for April 7: $317.90, with a stop.

The major airlines' determination to compete with low-cost carriers that have been eating away at their territory is clear in flights to Orlando. Ted beats everyone with a nonstop fare of $251. But United and US Airways also have lower fares than discount carrier AirTran. From BWI, Southwest's best available fare on April 7 : $354.

Ted's nonstops to Tampa came in at $178. The next cheapest fare, and with a stop, was $228. From BWI, the price to beat was Southwest's $307.80.

To LasVegas, Ted's nonstop fare of $256 was matched by America West. Once again, the major airlines were coming in cheaper than the other so-called discount airlines. Northwest, Delta, United and American all beat Air Tran's fare of $326, and JetBlue's $363.90, for the test dates.

 

[merikeyegro]

Mike Boyd

Mike Boyd actually has some pretty good insight and knowledge of the industry. He's an aviation consultant in Evergreen, CO. He hates the TSA, think Ted is a bad idea, and thinks that United is simply foundering in BK court.

Sounds like a smart guy, actually. Check out his Web site and read all of his stuff. He has two good columns on goings-on and aviation security. www.aviationplanning.com.

Have fun.

 

[skykid]

I would like for anyone, whether it be this Motley Fool, boyd, or whoever on this board to 'splain' how getting more productivity from the aircraft will result in increased costs which will negate any additional revenue. Would anyone argue with me that Southwest has been a master at using the hell out of their airplanes? Did I miss something, or has this been a failure for them? Do planes become free if they are at the gate or in the desert? How does fuel factor in to this at all! Here is an extension of the Fool's logic - there are an estimated 20% more Chinese that will fly from their mainland this year. Because of having to buy that silly gas, should United let NWA go get them all and go bankrupt too? Jack-up payroll?!? United pilot work rules = fly the FARs. United has thosands fewer mechanics, baggage handlers, FAs, and 3500 fewer pilots now than 2001 (which with new work rules and no more FEs, I would argue are more productive at the lower level). Is that the definition of jacked-up?

What boyd and now Motley Fool are good at is using sarcasm and unsupported ideas to make predictions. Example...

"Boyd cited bankrupt carrier Braniff and United's defunct Shuttle by United Service as prime examples of the failed Ted model."

Why not say "the flawed Zulu attacks on the British are prime examples of the failed US military model," and then not say why. I'm dying for anyone to use some facts, numbers, anything concrete to show how this mantra of "United, USAIR, Delta, and whoever else failed in the past so this is bound to fail." WHY!! Here is an example of no sarcasm, no namecalling, but some numbers to show how TED is different.

I am an insider who flew the Shuttle out of SFO. Before contract 2000, Shuttle pilots made a small % less than mainline - ballpark of 5%, same work rules. After contract 2000 - same hourly rates. In 2001, as a FO I made roughly $120/hour to fly the Shuttle. My total career insurance premium until Apr 2003 was $0.00. Because of vacation override, I could turn roughly 20 days vacation into well over 2 months off. Factor in the Captains, who made significantly more per hour, and a VERY conservative estimate is the average Shuttle pilot costed $150K per year. Because of the great work rules, United needed - conservatively -3 more pilots than SWA per plane, yes even on the Shuttle. That is $450K to staff 1 plane that SWA, the main competion, didn't have to pay. Everytime we pulled into a gate at a hub, the person who picked up the wands to park the plane, by contract had to be the highest paid person on the ground, a mechanic. Ending this requirement and other changes reduced the IAM ranks by thousands.

So now with TED - mechanics, FAs, and pilots are working a bigger plane with dozens more seats whose leases have been reduced by double digit amounts, are making less than the 737 Shuttle guys 3 years ago, have work rules that can not by law be stretched further, have mgt which is finally capable of exploiting these work rules to keep the planes flying, work for a company that by 2005 will spend 12mil/day less than 2002, and because there is not a separate pay scale, boyd says its the same old package. It may sound like I'm proud of all the pay and work rule cuts we are enduring to get in line with the LCCs - not so - I think it sucks. I am proud that United endured what it did on Sep 11, and some people I never thought could change have changed. I had an Air Force Academy classmate and a T-34 instructor friend from my cross-service days murdered while they were doing their dream job - I would like to keep United going for them!

 

[F9 Driver]

Cute New Planes, Same Old Problems

http://yahoo.businessweek.com/magazine/content/04_09/b3872053.htm

"Cute New Planes, Same Old Problems
Ted and Song won't solve their parent airlines' chronic money shortfalls

Executives at United Airlines Inc. (UAL ) are patting themselves on the back over Ted, their new discount subsidiary that took off from Denver on Feb. 12. In its first four days, 81% of seats were filled and 90% of flights left on time. Better yet were the compliments from happy passengers, who snapped up gift bags of "Ted Tunes" CDs, Ted bears, and other goodies.

Looks like a winner, right? Well, not exactly. Ted and Delta Air Lines Inc.'s (DAL ) similar low-cost airline wannabe, Song, are no cure for what ails the network carriers. Sure, these sub-brands should have an edge. With lower-paid flight attendants and 9% more seats on each Song plane, for instance, Delta figures that Song's unit cost -- or the cost of flying one seat for a mile -- is 23% less than for a Boeing 757 in the parent operation.

But analysts question whether the costs will be low enough to truly compete with the likes of fast-growing discounters Southwest (LUV ), JetBlue, (JBLU ) and AirTran, especially if these units aren't subsidized by their parents.

More important, Ted, which will grow from four aircraft today to 45 by yearend, and the 36-plane Song are just a sliver of the size of their ailing parents. Worse yet, they could prove costly distractions to the main event: the need to dramatically lower the costs of the parent airlines, which are still fighting for long-term survival. "If you're going to fix the factory, fix the factory. Don't create a sideshow somewhere else," says airline consultant Robert W. Mann Jr. of R.W. Mann & Co. That's a sentiment shared by American, Northwest, and Continental, which have shunned sub-brands after watching similar efforts fail before.

While it's true that the network airlines are enjoying a recovery of sorts, they're hardly in the clear. After three years of massive losses and painful cost-cutting, they could almost break even this year. And by 2006, they could earn $3 billion or more, predicts analyst Samuel C. Buttrick of UBS (UBS ). But, he notes, "that would not constitute a great return on capital."

Unfortunately, the cost-cutting hasn't gone far enough in the face of spreading low-fare competition and continued penny-pinching by business travelers. United pilot and airline analyst Vaughn Cordle of Airlineforecasts LLC reckons that the six biggest network airlines will bring in $11 billion less in revenue in 2005 than in 2000. He also figures that their total costs per employee are still 40% higher than those of their low-cost rivals. And while the biggies' first-class cabins, globe-spanning networks, and other amenities allow them to collect a premium for each seat flown a mile, that revenue premium is now about 15% and dropping.

"CRIPPLED". On top of those problems, the Big Six have piled up $20 billion more in debt since 2000 and face $20 billion in unfunded pension liabilities. "They will be financially burdened at best and perhaps crippled in some cases throughout the next business cycle," says credit analyst Philip A. Baggaley of Standard & Poor's (MHP ).

Certainly, airline managers aren't blind to their troubles. But it's difficult to shed unneeded hubs and aircraft, hidebound work practices, and expensive senior employees to match the low-cost carriers. "The risk is that you blow up the airline trying to do that," says Daniel M. Kasper of economic consultancy LECG Inc.

Indeed, United is drawing the ire of its flight attendants as it tries to cut retiree benefits as part of its bankruptcy reorganization -- after slashing overall labor expenses by 30% last year. And struggling US Airways Group Inc. (UAIR ) faces another labor showdown as it seeks more concessions after its bankruptcy and two rounds of givebacks.

Against this bleak backdrop, Ted and Song seem like so much marketing buzz. And buzz won't help the carriers fly though the inevitable industry transformation that lies ahead. "

But hey... All of these analysts are morons. Right?

 

[flying@swa]

Say what you want

about the financial anaylsts, but one thing should be understood. These guys and girls are sales people. They work for investment bankers.

Their "customers" are mostly large money management firms and major investors who are looking for a place to put their hard earned capital. If the return on investment (ROI) looks bad, they invest in something else.

Legacy carriers do not look like very good investments right now. This will make it very difficult for them to raise much needed capital, which means that the debt that is piling up will eventually be a VERY heavy burden to carry.

The next 3-5 years will be very interesting indeed for the likes of AA, UAL, DAL, NWA, USA & CAL.... it would not be a huge surprise if one of these companies does not survive.

 

[B1900DFO]

I am curious why the total cost per employee is 40% higher at the legacy carriers than SWA, for example. After hearing the SWA pilots detail their salaries I would imagine the reverse would be true. Ual and probably Amr pilots are working to FAR limits so I can't imagine that SWA pilots are working much more and I believe the ramp rats at the majors make close to minimum wage?

 

[Trojan]

I think a gypsy with a crystal ball would sound more knowledgable than "the highly paid expert analysts". Boyd and the rest of the anti-legacy mouthpeices fail to acknowledge that the aviation economic model has changed, and will remain changed throughout the rest of this decade. We need some economists, who know how pricing models actually work, to chime in and tell the "experts" that the same old arguments of 2000 have drastically changed, ie. SWA ground and flight crews making as much as UAL crews, JBA actually having to spend money on maintenance soon, customers getting sick of RJs, passengers driving instead of flying to avoid security, etc.

But what hasn't changed is that pilots still seem to wish ill upon fellow pilots who are getting their paycheck signed by someone else. After 10,000 hours, I still can't understand this mentality. If you have never shared the cockpit with me, and hide behind a keyboard to hurl anonymous slurs because I fly for a different airline, we are all screwed. On a website like this, I would have expected more comraderie, more threads like "if management only understood what the public and labor needed, we all could have great jobs with career security", or "hey UAL guys, hope that Ted actually allows you to get back to the cockpit and put your kids through college".

Off the soapbox and back to FSTV (if your cable/satellite doesn't carry it this channel, ask for it, or you may forever swallow the corporate-company line for life).

T

 

[skykid]

The trouble with the Businessweek article F9 posted is it goes back and forth talking about Delta and United, and then lumping all the network carriers together. I would like to see more than just a statement saying the network airlines costs per employee are 40% higher. Show me how you got that figure. As far as fix the factory vs create a sideshow, Ted is going to be about 10% of the fleet and is only part of the plan, why ignore all the other changes and keep reporting on this same thing. Why is changing all or some of the product bad? What about the advertising campaign focusing on business travel, what about the focus on China and the new markets/reopening of markets that are being announced almost weekly. This article lumps the 'parent airlines' together and says the costs here should be dramatically reduced. Maybe an analyst could explain how to do this - is there a double-secret CH22 filing where you can wring out even more savings? I think the network airlines will earn 900 trillion more by 2006 than Buttrick said, and I think the revenue figures Cordle mentions are off by 182 to 185 million. I'm not going to show how I got my figures either.

 

[B1900DFO]

They all just regurgitate each other's articles and substitute TED for SONG, or United for US Airways, or NWA for DAL, etc. It is sickening after a while.

 

[skykid]

Trojan, agree with you 100%. I want Ted to succeed, don't wish ill on anyone, and would like to see our flying stay American. The reason I have gotten on my soapbox on this thread is the unbelievablly weak analysis from the motley fool in the original article posted. I agree with flying @swa though - I doubt all the overseas carriers are going to be here in five years. That is just the history of the biz. It wouldn't suprise me to see some shakeups for those who only fly in North America, either. Look at all the planned growth, and the new discounters like Virgin USA, and you have to wonder if the economy will be big enough in this country for everyone.

 

[AAPilot]

Re: Mike Boyd

Mike Boyd actually has some pretty good insight and knowledge of the industry. He's an aviation consultant in Evergreen, CO. He hates the TSA, think Ted is a bad idea, and thinks that United is simply foundering in BK court.

Sounds like a smart guy, actually. Check out his Web site and read all of his stuff. He has two good columns on goings-on and aviation security. www.aviationplanning.com.

Have fun.

Boyd is an idiot and should get that big tounge of his trimmed down so you can actually uderstand what he is saying, even then I wouldn't listen to him!

 

[spinup]

well said Trojan

 

[Trojan]

thanks