canyonblue
Everyone loves Southwest
- Joined
- Nov 26, 2001
- Posts
- 2,314
Who goes first? Legacy Carriers a key topic of the Wall Street Transcript Airline Industry Report
Tuesday April 12, 10:13 am ET
67 WALL STREET, New York--April 11, 2005--The Wall Street Transcript has just published its Airlines Report offering a timely review of the sector to serious investors and industry executives. A roundtable panel of leading industry analysts, in-depth interviews with top management from 2 firms, examine the Airlines sector in this 19-page report.
In this brief excerpt, the panel discusses the outlook for the embattled legacy carriers.
The airline industry remains a challenging sector for long-term investors. The panel believes the winners, however, will be the airlines with low cost, the LCCs. These companies are also outperforming on service like better on-time arrivals and lost-baggage statistics. Two of the legacy players are already in bankruptcy, Delta is on the verge of it, and three other majors are racking up sizable operating losses. The current environment, given high fuel prices and overcapacity, which is keeping fares pretty weak, even for the low-cost carriers, is problematic even for LCCs. Topics include: Market share battles; Higher fuel costs; Hedging against fuel prices; Future of regional airlines; Bankruptcies and shakeout; Restructuring of European airlines; Lower costs and productivity; Outlook for fare increases; Benefits of e-ticketing; Transcontinental market; Possible liquidations or mergers; Foreign low-cost airlines; Stock picks; Stocks to avoid.
TWST: Chris, give us your perspective. What's your take on legacy airlines versus the new guys?
Mr. Lozier: We do cover the legacy carriers here at Morningstar, though we believe they're terrible long-term investments. We have a zero dollar fair value assigned to the two that are currently in bankruptcy, and we think the chances of Delta Airlines (DAL) going into bankruptcy, despite the lifeline that was thrown to them by American Express and GE, are still pretty good. We don't, however, foresee all of the legacy carriers going away. Surely, in the end, the low-cost carriers should remain the most profitable, but we continue to think that the service provided by the legacy carriers is going to continue to be in demand for a long time.
TWST: To follow up on that, doesn't the question, "Should they remain in business," arise? Why should the legacy carriers continue to be around?
Mr. Corridore: Obviously, the argument is that they fly where people want to go. They contribute to a viable national transportation system that, obviously, we need in this country. But they have to figure out a way to do it and not have these huge billion-dollar losses.
TWST: Chris, since you still cover them, is there really a place for the legacy industry as we look out?
Mr. Lozier: I would qualify what I said before this way. We tell our subscribers, first and foremost, that the airline industry is a poor place for long-term investors to put their money, regardless. Still, we think there is a place for the legacy airlines. They do some things that the low-cost carriers don't have the capacity to do and probably, in the long run, don't want to get involved with, such things as flying different types of aircraft, including widebody jets, and providing, in some cases, fuller service. Jim mentioned that by some service rankings, low-cost carriers outperform the legacies, but that's largely based on better on-time arrivals and lost-baggage statistics. We think that there will always be a demand for first class seating and inclusive meals on the long routes that the legacies seem intent on protecting.
TWST: Since they're providing services that nobody seems willing to pay for, how long can they continue to do it, Chris?
Mr. Lozier: That's the question. It's also the reason we see them rationalizing their networks away from shorter haul routes and more toward international markets where fuller service can actually differentiate their offering. In terms of how long they have to make their models competitive, there are non-market factors that come into play that slow the evolutionary process. If the Pension Benefit Guarantee Corporation starts to take over the defined benefit pension plans, that would bring the legacy airlines much closer to sustainability. Also, in the end, you have a Congress that's probably not going to let too much of the economy's critical infrastructure collapse, and that's a real insurance policy.
I mentioned that we have zero fair values on some of the legacy carriers. What we pay closer attention to, basically, is their liquidity situation - you've got two players in bankruptcy, Delta precariously avoiding it, and three other majors racking up sizable operating losses.
TWST: Jim, how about your take if we look out five years?
Mr. Corridore: Certainly there has to be some kind of shakeout - maybe not in five years, but five to 10 years down the line. It's very hard to kill a major airline. The bankruptcy process is such that you've seen UAL (UALAQ) in bankruptcy for three consecutive years - they keep extending the time it's going to take them to come out, getting new financings. US Air is getting financing from its regional partners. It's just very hard for these carriers to go out of business. So over the long term, there needs to be consolidation. Certainly there will be a shakeout among, obviously, the legacy carriers, but I also believe there will be a shakeout among the regional partners because if there are fewer legacy carriers, there will be a fight among them for the remaining spokes.
TWST: Not a pretty picture. Sam, any comments on the impact of fuel prices?
Ms. Panella: We use our energy team here at Raymond James, and we're basically using right now $46 per barrel for the second, third and fourth quarters of 2005 and $47 for 2006. Obviously, with fuel prices currently above $55, there could continue to be pressure on earnings.
I guess the one offset is that if fuel remains at these levels, it hurts the legacy airlines much more than the low-cost airlines, and it could cause some capacity to come out, which could improve the revenue environment. We are seeing some airlines taking back their capacity plans. Northwest Airlines (NWAC), for example, just announced it would be doing, I believe, flat capacity in 2005, whereas it was previously looking for 2% growth. We're also starting to see some fare increases stick, which was not the case in 2004. So while high fuel prices negatively impact earnings, there could be some offsets to that.
Tuesday April 12, 10:13 am ET
67 WALL STREET, New York--April 11, 2005--The Wall Street Transcript has just published its Airlines Report offering a timely review of the sector to serious investors and industry executives. A roundtable panel of leading industry analysts, in-depth interviews with top management from 2 firms, examine the Airlines sector in this 19-page report.
In this brief excerpt, the panel discusses the outlook for the embattled legacy carriers.
The airline industry remains a challenging sector for long-term investors. The panel believes the winners, however, will be the airlines with low cost, the LCCs. These companies are also outperforming on service like better on-time arrivals and lost-baggage statistics. Two of the legacy players are already in bankruptcy, Delta is on the verge of it, and three other majors are racking up sizable operating losses. The current environment, given high fuel prices and overcapacity, which is keeping fares pretty weak, even for the low-cost carriers, is problematic even for LCCs. Topics include: Market share battles; Higher fuel costs; Hedging against fuel prices; Future of regional airlines; Bankruptcies and shakeout; Restructuring of European airlines; Lower costs and productivity; Outlook for fare increases; Benefits of e-ticketing; Transcontinental market; Possible liquidations or mergers; Foreign low-cost airlines; Stock picks; Stocks to avoid.
TWST: Chris, give us your perspective. What's your take on legacy airlines versus the new guys?
Mr. Lozier: We do cover the legacy carriers here at Morningstar, though we believe they're terrible long-term investments. We have a zero dollar fair value assigned to the two that are currently in bankruptcy, and we think the chances of Delta Airlines (DAL) going into bankruptcy, despite the lifeline that was thrown to them by American Express and GE, are still pretty good. We don't, however, foresee all of the legacy carriers going away. Surely, in the end, the low-cost carriers should remain the most profitable, but we continue to think that the service provided by the legacy carriers is going to continue to be in demand for a long time.
TWST: To follow up on that, doesn't the question, "Should they remain in business," arise? Why should the legacy carriers continue to be around?
Mr. Corridore: Obviously, the argument is that they fly where people want to go. They contribute to a viable national transportation system that, obviously, we need in this country. But they have to figure out a way to do it and not have these huge billion-dollar losses.
TWST: Chris, since you still cover them, is there really a place for the legacy industry as we look out?
Mr. Lozier: I would qualify what I said before this way. We tell our subscribers, first and foremost, that the airline industry is a poor place for long-term investors to put their money, regardless. Still, we think there is a place for the legacy airlines. They do some things that the low-cost carriers don't have the capacity to do and probably, in the long run, don't want to get involved with, such things as flying different types of aircraft, including widebody jets, and providing, in some cases, fuller service. Jim mentioned that by some service rankings, low-cost carriers outperform the legacies, but that's largely based on better on-time arrivals and lost-baggage statistics. We think that there will always be a demand for first class seating and inclusive meals on the long routes that the legacies seem intent on protecting.
TWST: Since they're providing services that nobody seems willing to pay for, how long can they continue to do it, Chris?
Mr. Lozier: That's the question. It's also the reason we see them rationalizing their networks away from shorter haul routes and more toward international markets where fuller service can actually differentiate their offering. In terms of how long they have to make their models competitive, there are non-market factors that come into play that slow the evolutionary process. If the Pension Benefit Guarantee Corporation starts to take over the defined benefit pension plans, that would bring the legacy airlines much closer to sustainability. Also, in the end, you have a Congress that's probably not going to let too much of the economy's critical infrastructure collapse, and that's a real insurance policy.
I mentioned that we have zero fair values on some of the legacy carriers. What we pay closer attention to, basically, is their liquidity situation - you've got two players in bankruptcy, Delta precariously avoiding it, and three other majors racking up sizable operating losses.
TWST: Jim, how about your take if we look out five years?
Mr. Corridore: Certainly there has to be some kind of shakeout - maybe not in five years, but five to 10 years down the line. It's very hard to kill a major airline. The bankruptcy process is such that you've seen UAL (UALAQ) in bankruptcy for three consecutive years - they keep extending the time it's going to take them to come out, getting new financings. US Air is getting financing from its regional partners. It's just very hard for these carriers to go out of business. So over the long term, there needs to be consolidation. Certainly there will be a shakeout among, obviously, the legacy carriers, but I also believe there will be a shakeout among the regional partners because if there are fewer legacy carriers, there will be a fight among them for the remaining spokes.
TWST: Not a pretty picture. Sam, any comments on the impact of fuel prices?
Ms. Panella: We use our energy team here at Raymond James, and we're basically using right now $46 per barrel for the second, third and fourth quarters of 2005 and $47 for 2006. Obviously, with fuel prices currently above $55, there could continue to be pressure on earnings.
I guess the one offset is that if fuel remains at these levels, it hurts the legacy airlines much more than the low-cost airlines, and it could cause some capacity to come out, which could improve the revenue environment. We are seeing some airlines taking back their capacity plans. Northwest Airlines (NWAC), for example, just announced it would be doing, I believe, flat capacity in 2005, whereas it was previously looking for 2% growth. We're also starting to see some fare increases stick, which was not the case in 2004. So while high fuel prices negatively impact earnings, there could be some offsets to that.
