Trouble ahead for Low Cost Carriers???

[UpNDownGuy]

Just have to do it...

I figured someone would have posted this already...Whatever you may think of Mike Boyd, he DID predict this very occurance....



Hot Flash - December 8, 2003

We Called It...
One Bit Of "Bad News" On LCCs
And Wall Street Does A 180..

It's a jungle out there. Jane Goodall could have done a PBS special on last week's events:

Monkey-See: LCCs.
Monkey-Do: Glowing Stock Report.
Monkey-Tell: Go Buy Stock.
Monkey-Hear: "Bad" News About LCCs.
Monkey-Do: Negative Stock Report.
Monkey-Tell: Go Sell Stock.

Moral: Monkey Don't Have A Clue.

Let's go back several months.... Hot Flash of July 7, 2003.

"...A lot of the underpinning of an airline's stock price is supported by investor perceptions of the carrier. And many of those perceptions are simply the result of glowing media stories about the airline, some of which are nothing more than go-with-the-flow puff pieces. But let one leeeetle piece of "bad news" happen at one or more low-fare airlines, like a falling load factor, or lower earnings than expected - whether it’s actually bad news or not - and things can change. Overnight, the same pie-eyed reporters who yesterday wrote glowingly about the wonders of new-entrant carriers will quickly be filing stories with dumb headlines like 'Turbulence In The Low Fare Skies' ...The perception of the airline and its stock can go from gold to rust in several column inches of newsprint. So can its stock value." (For the whole article, click here.)

Well, that's pretty much what just happened. On Friday, the analyst herd just stampeded like a pack of wildebeests. JetBlue announced that its fourth-quarter profit margin would be "only" 13% to 14%, instead of 15% to 17%. Not having a clue that under any conditions a 13% margin at an airline is the corporate equivalent of winning the lottery, the usual Wall Street suspects immediately issued "warnings," causing a a sell-off of JetBlue stock, and a 17% drop in share price.

Peddle that stock, baby. Hype that value. Spin that story. Up until now - literally, right now - the noisy din from the Wall Street crowd and a lot of the media talking heads was about the invincibility of low cost carriers - like, how they were going to take over the airline industry. Suddenly, it all changes faster than Hillary Clinton's stance on Afghanistan. JetBlue announces they're only going to make a lot of money, instead of mega-gazillions, and boy, all that blather about the invincibility of LCCs disappears. Case in point: shares in Frontier and AirTran tumbled as well.

A week ago, "everybody knew" that LCCs had an unlimited future. Today, those same "everybodys" are talking about how LCCs may be facing big problems. The fact is that the fundamental direction, value, and future of these airlines have not changed. All that's different is the spin put on by some analysts whose forecasting horizon is zero.

We'd also point out another observation we made earlier this year. We noted that the major carriers are not dead-meat on which LCCs (what few there are) can just feed at will. Mega-carrier systems can and are striking back. (Go There) Naturally, that went against the grain - "everybody knows" that the "legacy" carriers simply can't compete. That changed in a flash last week, too. Suddenly, we have this "bad" news about JetBlue (which it wasn't) plus a story about higher costs at Southwest, and, Bingo!, the veneer analysts are now commenting about how the Legacy carriers really can compete, and the LCCs may be in trouble. Nice pirouette, guys.

This is just the start. We haven't seen the article headlined "Turbulence In The Low Fare Skies" - yet. But it's coming.

 

[jetblue320]

Good Article

Thanks UpNDown Guy. Too bad it took almost 200 posts to finally get aligned with the theme of this thread!

Of course, I am sure not everyone agrees that this is a good article, but that's ok, this IS America afterall.

Happy Holidays.

 

[jetblue320]

Define "Trouble"

If jetBlue is in so much trouble (both now and in the future) then why is this happening?

jetBlue officially announced adding addtional flights to BOS starting on January 30th. The amazing thing is that we haven't even started service there and we are already boosting frequencies due to sales. The additional flights will be to MCO & FLL. The first flights will be on January 7th to DEN (1), MCO (3), TPA (2), FLL (2), and LGB (2). The additional service added on January 30th will bring MCO to 4 and FLL to 2. It seems that BOS is excited about the new entrant and the pre-service sales certainly reflect that.

If this is trouble, give me more!

Gonna be interesting, eh General?

See ya there!

 

[Andy]

jetBlue320,
Here's where JetBlue will be in trouble. Margins for airlines are very thin. If competitors are able to shave 10% off of JetBlue's LF, they go from being profitable to losing money.
If you've got an extensive route system where you can make a pile of cash on some routes, you can afford to take some lumps on other routes. That's where the legacy carriers can hurt LCCs (except SWA; they've gotten too big to be able to crush) by targeting an LCC's route structure.
Right now, JetBlue is growing like a weed. This smells like a classic setup ... let a startup get to a certain size, with commensurate additional fixed costs, and then you attack them like a pack of wolves. When the LF falls, you quickly go from large profits to large losses. Just look at the legacy carriers' quarterly results before and after 9/11.
Keep in mind that the legacy carriers don't have to match JBLU's fares; they just need to take away enough traffic from JBLU to make their routes unprofitable. (I'm WAGing it at diverting 10% of JBLU's pax).
I did a quick comparison between JBLU and UAL on the DEN-BOS and DEN-JFK/LGA routes. The prices are similar. If UAL kicks off an advertising campaign, they could easily siphon off enough traffic from JBLU to chase JBLU out of the DEN market.
DAL has deployed Song to defend DAL's north-south routes on the east coast. If DAL decides to go after JBLU's JFK-SLC route, that'll further erode margins.
AMR and AWA are starting to cut into JBLU's transcon margins with low fares.
With the economy starting to turn, JBLU could easily find themselves in the crosshairs of several airlines. JBLU is walking all over UAIR's territory; don't be surprised to see UAIR go after JBLU's pax (however, I don't expect UAIR to survive long term). Although NWAC and CAL don't have much overlap with JBLU, DAL could easily enlist their alliance partners to 'assist' them in containing JBLU.
The above scenario may never happen; I don't claim to be omniscient. However, that's the general blueprint for how legacy carriers have killed startups since deregulation.
JBLU's best hope for survival is that the US economic recovery is very weak, so as to not allow the legacy carriers to be highly profitable on the majority of their route structure. If the legacy carriers aren't making enough excess profits to build up a fare war chest, then JBLU will survive. However, if the legacy carriers can command high ticket prices on monopoly routes, it will give them the war chest that they need to run JBLU out of business.

 

[Joe Peeoznotz]

Andy??????????

Wishful thinking!!!! With that type of analyzation they would have been out of business by now if 9/11 never happened.

Jetblue isn't going anywhere. They are well entrenched, and have a very loyal following. They have close to $600M in cash, and it would take a depression to close them down. Many of the legacys have a huge infrastructure to support including unfunded pensions that need to be addressed.

Costs are only part of the legacys problems. When you have unhappy employees the "attitude" transcends the entire organization. UAL, UAIR, and a few others will be long gone before Jetblue is history. They are a well run organization, and will present a formidable challenge for all carriers.

You owe me one, blue!

 

[Andy]

Joe, we've all got our opinions. However, JBLU is starting to be caught in the crosshairs of multiple carriers. I didn't mention AMR's aggressive response to JBLU expanding service in BOS.
The number of carriers that are aggressively battling JBLU increases daily. It's just like the game of Risk ... it doesn't matter if you're the strongest one on the board if you've got 5 opponents simultaneously gunning for you. Eventually they'll weaken you enough that you'll lose.
While $600 mil may sound like a lot, UAIR currently has $1.9 bil in cash and financial analysts are already preparing the fat lady for her encore in CCY.

 

[SpeedBird]

Andy, et al:

I agree with some of your generic points about the business. For example, you said that airlines historically have razor-thin margins. That is a true statement and the historic average has been less than 5% for the legacy airlines. Since the industry's inception back in the 1920s, the airlines collectively have lost over $1.5 billion when you add up all their profits and losses from their inception until last year. You are also right to say that a relatively small drop in LF can generate a big drop in profitability.

However, I must disagree with a couple of points on this issue as it relates to jetBlue. First, jetBlue has maintained superior operating margins (averaging over 16%) during the last three years when they first reported a profitable year in 2001. This operating margin is considered respectable in most industries and unheard of in the airline business....in other words, its hardly razor-thin!

Your theory to siphon off a small percentage of passengers would still not make enough of a dent in jetBlue's operations to turn it negative, at least as you have outlined it. Legacy carriers will have to put up a much more concerted effort to truly put jetBlue into serious financial jeopardy, based soley on competitive response. Despite AMR's significant reductions, I just don't think they've done enough to put them over the top as an effective juggernaut against LCCs like jetBlue. But then again I applaud their recent strategy changes to take the fight to jetBlue wherever the opportunity presents itself. It's really the only option they have. The real question is will it be enough to kill them off? I highly doubt that as long as jetBlue remains as operationally efficient and nimble as they've demonstrated themselves to be up to this point.

Your other idea that the legacy carriers lie in wait to kill of LCCs as they build up a certain amount of mass is just not the case; especially if you use AMR as an example. AMR went after Legacy (remember them?) long before they initiated their first revenue flights out of Love Field by trying to tie them up in court. Once Legacy began flying, AMR pounched on them almost immediately with their 56-seat F-100 service out of DAL on several of Legacy's key routes. Your point about the big airlines waiting for the LCCs to get plump enough to massacre them is just wishful thinking on your part.

In case you haven't been paying attention, jetBlue will very likely reach $1 billion in revenue this year. They will technically become a "major" carrier using DOT's own criteria. None of the legacy carriers would want to let an LCC get that big before they "really" put the hurt on them. Why, because the airline now as a sizeable network with enough diversity operationally that they don't have all their eggs in one basket, and thus not prone to being annihilated by any one legacy competitor in any specific market the serve.

You made the point yourself saying that it was an advantage used by the legacy carriers in dropping fares and dumping seats in markets where they compete with LCCs. I believe that AMR has admitted that they now compete with LCCs in over 70% of their domestic markets. I ask you how much extra high-yield markets remain for them which can be used to underwrite the growing markets where they must compete vigorously with LCCs to retain marketshare. Once again, the old ways of competing with LCCs are less of slam dunk today, and only serve to extend indefinately the sizeable risk that legacy carriers maintain with ever increasing, and unprecedented long-term debt loads.

I believe that this is where the legacy carriers will find themselves under the greatest pressure over the long-run as they continue to compete with LCCs in an overall domestic market which prevents any significant return of high-yield fares, and thus healthy profitability. As the next upswing in the business cycle appears to be on the horizon, will it last long enough for the legacy carriers to make sizeable enough profits to make a big dent in their LT debt levels, and gain some reserve for the next downturn? The odds of that happening are bleak if you use history as a predictor of the future.

Bottomline, the legacy carriers didn't just decide last week to go after jetBlue. It's been happening in several markets for a quite awhile now. The effects of Song and AMR's full-court press in LA and JFK have not demonstrated any effect on jetBlue's LF percentages which remain at industry highs, despite adding new capacity YOY at approximately 50%. David Neeleman came out last week and pre-announced to Wall Street that this quarter's results will be down due to revenue and capacity pressures. This will bring down their operating margins somewhere around 13-14%. Still an industry-leading OM, and just ahead of Frontier and Southwest.

IMO, I think the competition against jetBlue and other successful LCCs will be effective in slowing down their rapid growth and marketshare gains, but I don't expect any of them to put jetBlue out of business directly. The only ones who can do that are management and employees at jetBlue, who have almost full control over their destiny, and provided they do not step on their collective schlongs in a major way. The good thing in this regard is that they've had plenty of great soap opera examples to watch as some of their other competitors have failed in this area in a big way.

SB

 

[SpeedBird]

Here's a link for some additional background information from previous post:

Airline Debt Concerns

 

[Joe Peeoznotz]

andy

In looking at cash, you have to look at your expenses. $1.8B can go down the tubes rather quickly when your monthly infrastructure costs are enormous (just witness the past 24 months). Jetblue's monthly infrastructure costs are peanuts compared to the legacys. Their LF's would need to drop to the low 60's for them to lose $100M per year, and that would take 6 years of cash burn to bankrupt them.

They are here to stay, and the sooner the legacy's accept that, the easier it will be to focus on their internal problems.

 

[General Lee]

Joe,

When the economy gets better, it is good for every airline. But, it is really good news for the larger legacy airlines because a better economy will cause more people to fly, and not necessarily on the lowest fare. Businesses send their employees out to help spur their own business, and that translates into fuller airplanes, and rising fares. Also, a better economy gives people more money to spend or more confidence---which translates into more leisure trips to destinations that were too "expensive" when the economy was tanking. International travel will jump this Summer, and travel to the Carribean and Hawaii for warmth will jump this Winter. Sure, it is good for all of us, but it really helps bail out the majors. More seats will be full for higher fares than last year.

Bye Bye--General Lee