canyonblue
Everyone loves Southwest
- Joined
- Nov 26, 2001
- Posts
- 2,314
The following is from this week's Plane Business Banter by Holly Hegeman.
Many of you are familiar with Vaughn Cordle. Cordle is not only a 777 Captain with United Airlines, he is also a CFA, and since last year has done financial analysis work as AirlineForecasts, LLC.
This week Vaughn checked in with us, and I thought he had a couple of interesting comments to pass along, including the fact that Delta Air Lines has been paying some bills with credit cards. Hmmmm.
"Over the next several quarters, I would anticipate that several legacy airlines will be bringing down domestic capacity. The driver to this action will be the need to maintain a certain level of unrestricted cash. Profitable pruning is one of the few options available for most and many will be forced to stem the gushing red ink in the domestic market. Our recent work suggests that cash-flow for the big six and seven LCCs will be inadequate by $3 to $5 billion in 2005 based on $35 to $45 oil. Oil could remain in the low to mid $40s in 2005 and may run up to $60 in the near term. A $10 swing in oil impacts the big six and seven LCCs by $3.2 billion, and this includes the benefits of the various fuel hedge programs.
Unrestricted cash will reach bankruptcy levels for NWAC, AWA, ATA, DAL, FRNT, and CAL if oil stays above $45 over the next 12 months. AMR has enough cash to last until the 3d or 4th quarter of 2006, but will still need to bring costs down an additional $500 to $800 million per year if capacity does not come out of the system. Updated earnings estimates are for the group to lose $4.8 billion this year and between $1.8 and $2.8b next.
Delta is on track to lose $1.8b, which excludes nonoperating charges. Delta is on the edge of bankruptcy, even if they get $1b from the pilots. ATA, USAir, and United are on the endangered species list and are at risk in terms of a chapter seven liquidation.
Liquidation is less likely for other airlines because they have - in relative terms - better balance sheets, smaller pension liabilities, and better margins. In solvency and liquidity terms, USAir and UAL are dead last.
Delta and NWAC are next in line, and Delta may file bankruptcy after November 18th when a debt exchange offer ends.
I'm of the opinion that Southwest will exercise a "leap frog" option and buy some used 737s to accelerate growth. They are buying market share with their low fares and are not earning their cost of capital. By growing much faster than planned, they can lower labor and non-labor unit costs and preempt the lower-cost competitors like JetBlue. They are the big winner when big money-losing airlines pull down capacity and fares firm up after the shakeout.
I spent a day with the National Aerospace Credit Managers Association this week and the feedback was rather sobering in terms of their assessment of the airline industry. Delta has been paying some bills with credit cards and has asked the suppliers to reduce costs by 10%. Suppliers are not happy and from what we understand, terms are tightening for most of the airlines.
Labor is in the driver seat in terms of whether or not United and US Air survives. Without additional concessions - in the 15% to 20% range - United will be facing liquidation. This is a reality that the unions and employees have yet to catch up with. Perhaps a deal could be worked out where labor gets some of the cuts back if oil falls to below $35. It's a war of attrition and if two big airlines liquidate, the other airlines will recover because pricing power will allow them to raise fares - at least in the short and perhaps intermediate term. This is why other airlines will not liquidate, with the exception of perhaps ATA. Domestic yields are plunging, fuel costs are spiking, and the economy is not expanding as fast as originally anticipated.
The magnitude of the structural shift down in average fares and the real costs of the DB plans has caught everyone by surprise. It's much worse than most know and the other shoe to drop will be the request for large additional pay concessions at United and several other airlines. (Editor's Note: That has now already happened.) United's ALPA has been telling pilots that exit financing is available...and it's a matter of whether or not United wanted their terms. This is wishful thinking and does not reflect reality. As usual, pilots and the unions are the last to know and tend to lack a balanced understanding of the situation. It appears that management and the unions are just now catching up with the real - as opposed to the rosy scenario ATSB loan application reality - reality of United's situation.
Most believe that we need to lose a carrier or two for the industry to regain health. United is one that is in serious trouble and the employees will face a choice between liquidation and lower costs. How the unions behave and what they say publicly will impact the company's risk profile and cost of exit financing. The open-ended question is whether or not current management can persuade the unions to accept the new reality, which is a function of today's and tomorrow's revenue environment.
The next question is whether or not current management can survive. Most would argue that shopping for a CEO that tells the unions what they want to hear is a bad idea. United is at the mercy of the capital markets and the next representative of shareholder capital will not be as labor-friendly as Mr. Tilton. We are in the final stages of a major industry shakeout. It will be quite traumatic for the employees who lose their jobs and for those that have to take sizable pay and benefit cuts. Those that survive will have to adapt to a more modest lifestyle if they are to continue to work in the airline industry."
Many of you are familiar with Vaughn Cordle. Cordle is not only a 777 Captain with United Airlines, he is also a CFA, and since last year has done financial analysis work as AirlineForecasts, LLC.
This week Vaughn checked in with us, and I thought he had a couple of interesting comments to pass along, including the fact that Delta Air Lines has been paying some bills with credit cards. Hmmmm.
"Over the next several quarters, I would anticipate that several legacy airlines will be bringing down domestic capacity. The driver to this action will be the need to maintain a certain level of unrestricted cash. Profitable pruning is one of the few options available for most and many will be forced to stem the gushing red ink in the domestic market. Our recent work suggests that cash-flow for the big six and seven LCCs will be inadequate by $3 to $5 billion in 2005 based on $35 to $45 oil. Oil could remain in the low to mid $40s in 2005 and may run up to $60 in the near term. A $10 swing in oil impacts the big six and seven LCCs by $3.2 billion, and this includes the benefits of the various fuel hedge programs.
Unrestricted cash will reach bankruptcy levels for NWAC, AWA, ATA, DAL, FRNT, and CAL if oil stays above $45 over the next 12 months. AMR has enough cash to last until the 3d or 4th quarter of 2006, but will still need to bring costs down an additional $500 to $800 million per year if capacity does not come out of the system. Updated earnings estimates are for the group to lose $4.8 billion this year and between $1.8 and $2.8b next.
Delta is on track to lose $1.8b, which excludes nonoperating charges. Delta is on the edge of bankruptcy, even if they get $1b from the pilots. ATA, USAir, and United are on the endangered species list and are at risk in terms of a chapter seven liquidation.
Liquidation is less likely for other airlines because they have - in relative terms - better balance sheets, smaller pension liabilities, and better margins. In solvency and liquidity terms, USAir and UAL are dead last.
Delta and NWAC are next in line, and Delta may file bankruptcy after November 18th when a debt exchange offer ends.
I'm of the opinion that Southwest will exercise a "leap frog" option and buy some used 737s to accelerate growth. They are buying market share with their low fares and are not earning their cost of capital. By growing much faster than planned, they can lower labor and non-labor unit costs and preempt the lower-cost competitors like JetBlue. They are the big winner when big money-losing airlines pull down capacity and fares firm up after the shakeout.
I spent a day with the National Aerospace Credit Managers Association this week and the feedback was rather sobering in terms of their assessment of the airline industry. Delta has been paying some bills with credit cards and has asked the suppliers to reduce costs by 10%. Suppliers are not happy and from what we understand, terms are tightening for most of the airlines.
Labor is in the driver seat in terms of whether or not United and US Air survives. Without additional concessions - in the 15% to 20% range - United will be facing liquidation. This is a reality that the unions and employees have yet to catch up with. Perhaps a deal could be worked out where labor gets some of the cuts back if oil falls to below $35. It's a war of attrition and if two big airlines liquidate, the other airlines will recover because pricing power will allow them to raise fares - at least in the short and perhaps intermediate term. This is why other airlines will not liquidate, with the exception of perhaps ATA. Domestic yields are plunging, fuel costs are spiking, and the economy is not expanding as fast as originally anticipated.
The magnitude of the structural shift down in average fares and the real costs of the DB plans has caught everyone by surprise. It's much worse than most know and the other shoe to drop will be the request for large additional pay concessions at United and several other airlines. (Editor's Note: That has now already happened.) United's ALPA has been telling pilots that exit financing is available...and it's a matter of whether or not United wanted their terms. This is wishful thinking and does not reflect reality. As usual, pilots and the unions are the last to know and tend to lack a balanced understanding of the situation. It appears that management and the unions are just now catching up with the real - as opposed to the rosy scenario ATSB loan application reality - reality of United's situation.
Most believe that we need to lose a carrier or two for the industry to regain health. United is one that is in serious trouble and the employees will face a choice between liquidation and lower costs. How the unions behave and what they say publicly will impact the company's risk profile and cost of exit financing. The open-ended question is whether or not current management can persuade the unions to accept the new reality, which is a function of today's and tomorrow's revenue environment.
The next question is whether or not current management can survive. Most would argue that shopping for a CEO that tells the unions what they want to hear is a bad idea. United is at the mercy of the capital markets and the next representative of shareholder capital will not be as labor-friendly as Mr. Tilton. We are in the final stages of a major industry shakeout. It will be quite traumatic for the employees who lose their jobs and for those that have to take sizable pay and benefit cuts. Those that survive will have to adapt to a more modest lifestyle if they are to continue to work in the airline industry."
