Trouble ahead for Low Cost Carriers???

[General Lee]

Reuters
UPDATE - Shares of JetBlue, others drop sharply on warning
Friday December 5, 4:35 pm ET


(Recasts, adds detail, closing stock prices)
NEW YORK, Dec 5 (Reuters) - An uncharacteristic earnings warning from JetBlue Airways Corp. (NasdaqNM:JBLU - News) spooked investors on Friday, driving its stock down 18 percent and pulling share prices in the rest of the low-cost airline sector lower.

JetBlue's stock, a favored but pricey pick on Wall Street, posted its largest-ever one-day percentage loss during the session, and closed down $5.58 to $25.80 in active trade on the Nasdaq, where it was the net loss leader.

Nearly all lower-cost, regional carriers traded sharply lower on Friday, and shares of major U.S. airlines dropped as well, on new fears that fourth-quarter revenue will disappoint.

The low-cost sector losses were led by JetBlue and America West Holdings (NYSE:AWA - News), which was down 14 percent.

New York-based JetBlue said late on Thursday that lower air fares and the recent California wildfires would push its fourth-quarter operating margin down to between 13 percent and 14 percent, compared with the 15 percent to 17 percent it had previously projected.

In the third quarter, JetBlue's margins hit nearly 20 percent, a level almost unheard of in the struggling U.S. airline industry.

"We're faced with a challenging revenue environment due to capacity additions resulting in lower average fares, particularly in our western markets," Chief Executive David Neeleman said in a statement.

JP Morgan analyst Jamie Baker said in a research note that JetBlue's outlook could have consequences across the low-cost carrier segment.

Lehman Brothers analyst Gary Chase said the JetBlue announcement and signals of some weakness from low-cost pioneer Southwest Airlines (NYSE:LUV - News) caused him to cut estimates and stock price targets on most of the companies he follows.

"While we had hoped for significant strength in the holiday period, it now appears that the industry is less confident in current revenue trends," Chase said.

Shares of airlines across the board have plunged this week, in reaction to the drop in confidence and news that oil prices are likely to stay high.

Regional airlines America West (NYSE:AWA - News) fell 13.7 percent to close at $11.91, while AirTran Holdings (NYSE:AAI - News) dropped 10 percent to close at $12.05, both on the New York Stock Exchange (News - Websites) . Frontier Airlines (NasdaqNM:FRNT - News) dropped 8.7 percent to close at $13.81.

Southwest also fell, closing down $1.01 at $15.59 on the Big Board.

Lehman's Chase said he now expects JetBlue to earn 16 cents per share in the fourth quarter, down from his earlier forecast of 22 cents.

JP Morgan's Baker also cut his profit estimate for the quarter to 16 cents a share from 23 cents. He is lowering his earnings forecasts to 99 cents a share from $1.10 for 2004 and to $1.25 from $1.33 for 2005.

JetBlue and other airlines were hurt in October when dense smoke shut down San Diego's airport, and Southern California airports were closed for more than 12 hours when a blaze threatened an air traffic control facility near the city. (Additional reporting by Kathy Fieweger)




Now you can also say that the Majors stock prices couldn't fall much lower, and it has been tough on everybody. But, the addition of new LCCs---like Song and TED---will add excess capacity and take away passengers from Jetblue etc because the passengers will get the same price for a ticket, but get other things like better frequent flyer programs, and better IFE. Let's face it---passengers these days want the lower fare and the extras. They get really mad when they look at their onboard meal and say, "What is this?" even though they only paid $59 for the ticket. Airlines have to go out there and offer more for less. But, if your business is only based on low cost domestic travel, you could be stuck. That is where the Majors will do better----there isn't as much competition on INTL routes. For example, Delta can charge whatever they want on some of their INTL routes--like ATL--Munich or ATL--Tokyo because there are businessmen who want convienence and will pay more for saving time. It is good to have more than one side to an airline business, not only a low cost domestic version. But, I don't see Jetblue or Southwest going away anytime soon, but they will have to fight each other, especially when Jetblue gets some of those EMB-190s. Where are they going to put them? On the East or West Coast? Then throw Song 757s in there with 199 seats flying in and out of the NE. How about Spirit? ATA? TED?This is going to get crazy, and the high priced INTL tickets may be the one savior for some of the Majors.....

Bye Bye--General Lee

 

[~~~^~~~]

But General Lee : JetBlue had a "earnings warning." How long has it been since Delta had any "earnings?"

Delta has run up 10.4 billion in debt and continues to finance losses at 10% rates. So it cost Delta $1.00 to reduce Jet Blue's earnings by $0.50 and Delta financed the dollar to begin with.

In 2005 those dollars have to be paid back. I'm hoping for a miracle and building a financial life raft since your MEC appears intent on sinking the ship.

~~~^~~~

 

[General Lee]

Fins,

We can argue how we got to that state (buying a lot of RJs for your use), but I won't. We have already cut a lot of the "fat" out, and we (the pilots) are in negotiations to help with our share. A paycut from us will allow the airline to gain access to more of the financial markets, and help refinance that debt at lower rates. As I have said before, debt is ok as long as you can service it. With the strengthening economy comes higher fares and better times. The pension problem you have elluded to often is shrinking with the higher stockmarket and interest rates. If the economy was still tanking, I would be a lot more worried. As far as when will we have profits again, you probably know that profits are just an opinion. Arthur Anderson had lots of opinions on that subject. Yes, since Enron things have changed a bit, but numerous "one time charges" all bundled up now make things look bad. Last Summer we had a couple months of operating profits, and the bad Fall season that we knew was coming is over, and the holidays have started off well, with a good Spring and Summer ahead of us.

The Dalpa MEC employs an Investment Bank and numerous other specialized people who have looked at the Delta books and made decisions on the amount of money Delta NEEDS, not what they WANT. We also won't give up money to buy you more RJs. Nope. (Your CASM is a lot higher than ours--we need bigger jets flying some of your routes) Any money we give up will hopefully go to helping with the debt, and not lining management's pockets either. It was interesting seeing that statement in the recent Dalpa proposal to the company, "Career protection within Delta/DCI brand." What does that mean???


Anyways, the whole point of this thread was to question "What happens when all of the LCCs start fighting eachother, and will there be any profits to be found with the large discounted tickets." I stated that Delta and other Majors luckily have another outlet which does not have a lot of stiff competition, and that is the INTL arena. I was looking ahead to the future of the LCCs and what might happen.

Bye Bye--General Lee

 

[R985]

ATA- Who?

Once again ATA gets left out of the dialog. ATA went against the trend and their stock closed up today at $9.75 a share. Up 2.02% today. Just out of curiosity I checked the one year performance of the stock. Up approximately 69% since 12/01/02.

 

[DrunkIrishman]

We can argue how we got to that state (buying a lot of RJs for your use

Yeah, its buying rj's that got delta where it is. It has nothing to do with flying empty airplanes.

 

[Ty Webb]

I think you're barking up the wrong tree, General. As someone else pointed out- decreased earnings are just that- decreased. That's a far cry from losing money.

If fares ever get to the point where the LCC's are losing money in the long-term, you can bet that the majors will have been relegated to the LA Brea tar pits of history.

 

[rjcap]

---like Song and TED---will add excess capacity and take away passengers from Jetblue etc because the passengers will get the same price for a ticket

Most likely those passengers flying on Song and Ted are cannibalized from Delta's and United's mainline operations.

Regarding those wonderful mileage programs. Most passengers have already realized the cards are stacked against them when redeeming those mileage points.

Gen Lee.

Leo's got his 16 million and you guys are left holding the bag of debt ( from all those RJ's of course).

Who got screwed ??

One more question. Is mainline going to submit an RFP for those 45 RJ's ??

 

[General Lee]

Ok, I will try to answer all of those:

R985,

If you look at my first response after I put the article up, three lines up from the bottom, I put ATA in there. I know they are a good LCC.


Drunkirishman,

The RJs aren't the "magic answer" either. We lose customers who feel uncomfortable on them on long flights (DFW--OAK or DCA--DFW), and now that jetblue or Airtran will start overlapping them and start charging super low fares, we don't have enough seats to cover the costs. RJs aren't the cure-all. Sure, they gave us market presence when we needed it, but now we need larger airplanes to spread out the costs. A lot of our current debt is due to current RJs we are still getting, but the kicker is that our guys in ATL worked out such a deal---that if we say no to them now, we will actually take more of a hit because we got them in a "quantity" deal. So, we still have to take the ones we bought. Why is Delta asking for 45 more (not from Comair or ASA probably)? Good question.


Ty,

Yes, I would rather have decreased earnings than losses. Who wouldn't? My question was what will happen when there is such a large amount of LCC's all fighting with eachother, and what will that due to future profits? You have noted many times that our costs will have to come down, and we are doing just that. We have 2500 less pilots than pre-9-11, and 16,000 less total employees, more Kiosks, etc..... Your costs at Airtran will eventually go up, like you pilot pay costs---you said it yourself--you will be making more coming up here. I, as it looks like today, will be making less. The LCCs are not keeping their costs the same, but they are increasing theirs too. Southwest pilots pay is getting really good, and the other employees (like the flight attendants) want more too. Do you see my point? More LCCs and more cheap seats will not help your future profit margins. I just said that the INTL side of the Majors is not really faced with that right now.


RJCAP,

Yeah, the $16 million Leo got stung, but I think we will be better off. As far as Song and TED taking prime mainline routes, I disagree. I still think the prime money out there is at the hubs. We all know that people in the big cities want cheap fares and nonstop service. So, we made Song to take those cheap people nonstop and left seats open for people who have to go through ATL or CVG to get to somewhere that doesn't have LCC service. All those people you fly into ATL on your RJ are paying a little more or a premium to fly through ATL and connect onto that 767-400 to FLL or MCO. Therefore, the seats at the hubs are worth more. We don't want those people who want the cheap fares in BOS, for example, to use that premium seat in ATL to go onto FLL---we want it to be sold to that person you just flew in from Peoria. It will cost that person a little more. So, that cheapo in BOS flies on Song, likes the IFE, and comes back again and again, and stays out of ATL. Also, Song only flies two flights a day out of ATL(to JFK), and then avoids CVG and ATL. TED, on the otherhand, will be fighting Frontier's presence directly at the hub in DEN, and will be cannibalizing some of their own United mainline routes already established from DEN---like to PHX, RNO, and FLL for example. Song keeps those expensive seats at the hubs.

Also, I don't think mainline is doing the RFP for those RJs.

Bye Bye--General Lee

 

[DrinkSweetTea]

Im not certain that the FLASH of the LCC will LAST. It certainly has for Southwest, but Jetblue is yet to be seen. How long will the forced "fun" flying last on Jetblue? Do you see passengers saying "Quit making jokes, and lets go". I can see that happening. I can also see now with projected economic increases that people will once again be flying from high fared airports rather than driving the distance to a lower fare carrier served airport. The song product seems to be a good product thus far, and also allowing passengers to earn miles or use miles while flying to airports not served by that portion. Just some thoughts...

 

[General Lee]

DrinksweetTea,

I don't think low fares will ever become out of style, and there will always be a portion of the flying public that will only fly for the lowest fare. As the economy gets better, the business section will fly more, and they will help with our bottom line. The Internet has also been a huge factor, and one that will probably be there in the future. But, it has helped us cut costs in the reservations department. Those that were very cost concious after 9-11 or when the economy was tanking, may not drive an extra hour to JFK to pick up that cheaper flight. And, now that cheaper flight can be found on other airlines, even ones that are closer to them.

Bye Bye--General Lee

 

[Ty Webb]

General Lee:

Thanks for your articulate, well-reasoned response- and I mean that in all sincerity. I will try to respond:

My question was what will happen when there is such a large amount of LCC's all fighting with each other, and what will that due to future profits?

I don't pretend to be a guru, but from what I have seen in the trenches, we generally avoid going head-to-head with other LCC's. There is too much low-hanging fruit, and most of the LCC's have a different niche to fill.

For example, SWA has generally avoided congested airports, and does not serve ATL. Therefore, most of our routes don't compete with theirs directly. For example, they avoid BOS, EWR, LGA, LAX, SFO, DCA and (and, until now, PHL) and in places where we both have a presence, like TPA, MCO, BWI etc. we generally are going to ATL or are doing direct flights to non SWA-direct cities, so, in that regard, we co-exist just fine.

The JB incursion into ATL was an aberration, and we were largely responsible for discouraging their ATL ambitions, I think. It is one thing to have competition from a major, but another to get it from another LCC, and on their home turf!

You have noted many times that our costs will have to come down, and we are doing just that. We have 2500 less pilots than pre-9-11, and 16,000 less total employees, more Kiosks, etc.....

True. But I doubt you will see anywhere near the 8 cent level you need (especially with RJ's doing 49% ASM) but we will never know, since DAL chooses not to reveal the unit CSM's.

Your costs at Airtran will eventually go up, like you pilot pay costs---you said it yourself--you will be making more coming up here. I, as it looks like today, will be making less.

This is true, but as was noted in a Motley Fool article today, our labor costs only make up 29% of our overall costs. Here is a link to the article (which you have to join, but it is free and painless) http://www.fool.com/news/mft/2003/mft03120501.htm?ref=foolwatch

The LCCs are not keeping their costs the same, but they are increasing theirs too. Southwest pilots pay is getting really good, and the other employees (like the flight attendants) want more too. Do you see my point? More LCCs and more cheap seats will not help your future profit margins.

LCC workers want more money, it's true, but they also work their butts off to control costs. How many strings on the DALPA website are devoted to APU usage, or brake wear, or ways to safely decrease turn time? I don;t know, but from watching some of these DAL skippers taxi, it would seem that the majority must be about "How to taxi more slowly to increase pay"!

Just kidding, but LCC work requires a moitivated work force, and it is very hard to get people to go backwards (ie give up bennies and pay and still be productive).

TW

 

[Bake]

Ty, I am going to get completely off the subject but SWA hardly avoids LAX. OK, you can continue your discussion. Thanks for your time.

 

[Ty Webb]

Sorry, I thought SWA served the outlying airports, but not LAX. I see from their website that I was mistaken.

 

[Bake]

No worries, I make 1 mistake per minute. Just ask my wife.

 

[General Lee]

Ty,

I thought your response was good too. I think you are correct on some points. True, you do not go head to head with many LCCs---it seems that Airtran likes to raid hubs. (Not only ATL, but PHL, and now DFW) That is an interesting practice, and one that has done well for you so far. The only thing that can bite you there is looking for more gate space to increase those endevors. (yes, you are building a new terminal in ATL) I think setting up shop in DFW against AA was great, but I am trying to think of more hubs you can raid next. You will need to go to a hub that doesn't have another LCC there. Your BWI mini-hub has Southwest there, but you don't really fly to the same cities. (except some in FLA--MCO/FLL/TPA) I guess IAH could be next (although you go to Hobby I believe), ORD doesn't really have the space or slots, and DTW and MSP might be prime if you buy enough Type 4 de-ice fluid. The Airtran hub raiding strategy is a good one, but with the ever growing LCCs, there will be some overlap. You mentioned PHL and Southwest. That may not help your cause there, and Song does not serve there at all.


As far as our costs with CASM, you are right again---our CASM is higher becasue we INCLUDE ASA and COMAIR in our average. Our Mainline costs are actually not that high---probably in the 8's, but add on the 14.5 CASM from Comair and ASA, and the average rises. Only the pilots are paid higher than most, partly because we have only one union and one contract. That contract is currently being renegotiated a tad....which will probably lower the CASM a little too.


As far as LCC workers working their butts off, I believe it. But, the Southwest flight attendants don't want to pick up trash between flights now. Hmmm. They must have not worked at a "commuter" (now called a regional). That was standard practice, and even the pilots helped. As far as I know, we do not keep on the APU 1 minute longer than we have to, and we taxi out on one engine unless there is no waiting anticipated.
I don't think we fly around with the gear down wasting gas either. We absolutely have bullitens on our sign in computers giving ways to save the company gas and other helpful hints that most of us follow when we can. We have been shifting airplanes around now to better fit the loads, like sending 737-200s to Montreal in the Winter, and MD-88s to PHX in the Summer. This frees up our 757s to go over to Song and compete vigorously with Jetblue. Delta is trying to get their costs under control, and they really want us to give up the farm in pay, but I doubt that will happen. We will help though.

Bye Bye--General Lee

 

[DrunkIrishman]

General-

Again, empty airplanes got Delta where they are. I never said anything about rj's other than not being the cause of Delta's problems. I agree, rj's are not the magic answer, nor do I think they are being taughted as such.

BTW, I am curious if you would have the same attitude about rj's being too costly if mainline owned and flew all of them.

 

[SWAdude]

General,

You are quite mistaken about the trash issue with our flight attendents.

They don't have a problem with the responsibility. They just want to be paid the same as others in the industry that do not or will never accept the responsibility.

We have unquestionably the finest flight attendants in the industry and they deserve at least their industry average.

Its all they are asking.

SWAdude

 

[StopNTSing]

Do you see my point? More LCCs and more cheap seats will not help your future profit margins. I just said that the INTL side of the Majors is not really faced with that right now.

Bye Bye--General Lee

General:

Just a guess, but I believe there may be a lot more competition on those international routes than you realize. If your costs get too out of whack with your SkyTeam "alliance partners," who do you think will get a bigger share of those intl routes?

 

[MedFlyer]

The LCC's are going to bump into each other eventually. There are only so many routes out there that can produce a volume that is great enough to fill the 717/737/A320,etc. However, for the time being there is still plenty of traffic out there for the LCC's.

Why should Airtran worry about WN when they've still got plenty of passengers they can poach from DL? Airtran continues growing at DL's expense and DL has done little to fight back. DL's costs are much higher than Airtran and so far they haven't come down. DL's overall product is pretty sad and DL's frequent flyer program isn't that great either. Don't forget, Airtran has a frequent flyer program too. Right now, Airtran is offering to comp any frequent flyer who has elite status at another airline to elite status at Airtran....more poaching.

Sure, DL can dump more capacity on Airtran and drive down yields, but that strategy is doomed to fail. Lower yields may hurt Airtran, but they'll kill DL. Imagine how poorly Song must be doing right now if yields are so bad that even JBLU is seeing its margins get reduced. Song has higher unit costs than JBLU, lower unit revenues than JBLU and lower loadfactors than JBLU....sounds like a recipe for disaster.

Sure, international traffic can offset some of the domestic bloodbath, but remember DL only receives about 20% of its revenues from the international market. That 20% can't possibly offset the remaining 80% where DL is getting hammered.
Even if someday the LCC's really do get into heavy fare wars that drive down yields even more (can they go much lower???), the majors are the ones that will be caught in the middle.

 

[SWAdude]

Whats interesting about the low cost carriers is that they really don't compete with each other except on a few routes maybe. They develop their own niches and stick with them.

Thats one of the problems with the Deltas and uniteds is that they have way too much competitive pressures to weather the storms.

I really don't see the LCC's making the same mistakes that the others have made by ruling the airline world.

You will always get the full sevice guys to try and compete with the LCC's on some levels but when their sector of the business recovers they will see that redeploying those assets to what they do best is what gives them a better bottom line.

In reality the full service carriers doing a low cost business makes about as much sense as SWA going into the full service business to compete with those guys. We plainly just can not do that.

SWAdude