Virgin Records Another Annual Loss, But 4Q Numbers Have Some Positive Signs

Published
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Dan Webb
on May 11, 2012
in Virgin America
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Virgin America released its fourth quarter and full-year 2011 results last week, and I finally got a chance to soak with all the numbers. The carrier reported a full-year net loss of $100.4 million, larger than the $68.7 million loss in 2010. Net margin was -9.7%, a bit worse than the -9.5% result in 2010. Not good.

But the results for the fourth quarter, however, had some decent signs.

First, the airline’s operating margin improved by 3 points, to -2.9%. The improvement was even greater when adjusted for unrealized gains/losses on fuel hedges: 7.2 points higher, to -2.8%.

Virgin’s net profit margin in the fourth quarter was -11.1%. While that’s a disappointing result, it is a 2 point improvement from the same quarter a year ago. It’s also an improvement from the third quarter of 2011, where net margin had declined 4.8 points year-over-year.

Things looked pretty good on the unit revenue side as well, as total revenue per available seat mile rose 12.2% year-over-year. As shown below, that result was better than most other airlines (those numbers are consolidated when applicable, and the Southwest comparison includes AirTran).

Spirit clearly was the best of the bunch in this area, but a 7% decline in stage length did help as well. Virgin also noted that RASM in mature markets (open for 12 months or more before 4Q2010) saw RASM growth of 18%.

On the cost side, Virgin saw its CASM ex-fuel decrease by 3.4% year-over-year in the fourth quarter to 6.55 cents. It’s nice to see a decrease there, especially since CASM ex-fuel increased during every other quarter.

So, while it’s disappointing to see another annual loss from Virgin, the end of the year at least had some promising signs. The question, of course, is how 2012 develops for the carrier. There’s some other interesting stuff going on with Virgin’s financials, and I’m hoping I can write more once I get some more time with the numbers.

Chart of the Day: Average Airfares (Nominal and Real)

Published
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Dan Webb
on May 8, 2012
in Uncategorized
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Last week the DOT released the latest data on average fares, and while the data showed that while fares in the fourth quarter 2011 jumped significantly from the same period one year prior, but on a real basis are still lower than they were over 15 years ago.

The average domestic airfare in the fourth quarter last year was $368, a 10% year-over-year increase, and 28% higher than the average airfare in 1995. But when adjusted for inflation, fare are 13% lower than they were over 15 years ago. The DOT uses the Consumer Price Index (CPI) to make its adjustments to the nominal fare numbers, so one could conclude that the prices of other consumer goods have increased more than airfare.

So — yes, fares are higher than they were a year ago, but when looking at this long-term air travel still looks pretty affordable.

Random Chart of the Day: Change in Net Margins

Published
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Dan Webb
on May 4, 2012
in Uncategorized
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Well, it’s certainly been awhile since I’ve posted. I’m currently wrapping up the semester at school, and a bunch of committments there have really been hampering my blogging time. Sorry about that!

It’s also been awhile since I’ve whipped out one of my random charts. Here’s a graph of the change in net profit margin for the first quarter, using the net profit ex-item numbers reported over the past couple of weeks.

One caveat — the Southwest result for the first quarter of 2011 does not include the AirTran results.

But the results are interesting. The first quarter appears to have been very strong for Delta, who generated an ex-items loss of $39 million, a large improvement from a $320 million loss in the same period the year prior. American and US Airways also saw their margins improve by 3 points or more.

Of course, this chart just looks at the change in margin, and ignores size of the profit/loss. Alaska, for example, noted that it posted its second-best first quarter profit ($28.3 million), while American lost $248 million ex-items.

Alaska Ordering Even More 737-900ERs

Published
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Dan Webb
on April 20, 2012
in Alaska
. 2 Comments

Alaska Airlines is once again bolstering its orderbook for the Boeing 737-900ER, increasing its orders for the type from 19 to 22 aircraft.

“We recently exercised one, and intend to exercise another two options for 737-900ERs that will be delivered in the fourth quarter of 2013,” said Alaska CFO Brandon Pederson on the airline’s earnings call yesterday.

Alaska’s first three 737-900ERs will be delivered later this year, and the airline will now receive twelve more next year. Seven more -900ERs will follow in 2014. The airline also has orders for four 737-800s.

Despite the increase in 737-900ER orders for 2013, Alaska still expects its total fleet count (including Horizon aircraft) to be at 177 at the end of 2013 as three of the carrier’s 17 737-700 aircraft are now slated to leave the fleet that year.

Pederson explained that Alaska is “finalizing a deal to sell and lease back under short-term leases three 737-700s that will leave the fleet at roughly the same time the three new -900ERs arrive.” He continued, “In short, we’re swapping out three smaller -700s for three larger -900ER airplanes. The economics of up-gauging are attractive, and the move reflects our bias toward larger aircraft.”

Earlier in the call, Pederson touted the 737-900ERs fuel efficiency, saying that “with 181 seats, the -900ERs will be even more efficient than our current airplanes on a per-seat basis.”

The company noted in an investor update yesterday that it has options for 39 additional 737s, down from the 42 it reported last month.

US Airways Reaches Deals With AA Labor Unions (Update 1)

Published
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Dan Webb
on April 20, 2012
in American and US Airways
. 2 Comments

While there were plenty of  news stories yesterday about this topic yesterday, US Airways noted in an SEC filing this morning  ”that it had reached agreements for collective bargaining agreements that would govern the American Airlines employees represented by the Transport Workers Union, Association of Professional Flight Attendants and Allied Pilots Association.”

In a joint statement, the TWU, APFA, and APA said “a merger between American Airlines and US Airways is the best strategy and fastest option to complete the restructuring of American Airlines, enabling it to exit the Chapter 11 bankruptcy process and restore American Airlines to a preeminent position in the airline industry.”

“Our intention would be to put our two complementary networks together, maintaining both airlines’ existing hubs and aircraft, and create an airline that could compete successfully with United, Delta and other carriers within our industry,” said US Airways CEO Doug Parker in an employee letter filed with the SEC.

Parker says in his letter that a merger with American would lessen the number of job losses, writing that “in American’s standalone strategy, over 13,000 employees at American will lose their jobs. Our merger contemplates saving at least 6,200 of these positions.”

The Allied Pilots Association has more details on what a combined airline would look like:

First and foremost, the combined carrier will be branded American Airlines, based in Fort Worth Texas and headquartered at CentrePort. It will be comparable in size and scope to Delta and United, with a robust domestic network capable of supporting significant international expansion. American Airlines’ relationship with oneworld will be maintained and strengthened. All of American Airlines’ aircraft orders with Boeing and Airbus will proceed. The former US Airways route system will be realigned with the American Airlines system to add more cities, more markets and better frequencies. The new American Airlines, under a lean, energetic and highly capable management team, will be able to compete on an equal footing to win back high-value customers. On the East Coast, which is the largest and most lucrative airline market in the world, American Airlines will go from No. 5 to a strong No. 1. In the Midwest, we will go from No. 4 to No. 1. In Miami, our dominance to South America will be enhanced by stronger East Coast traffic flows. For the first time in years, American Airlines will be in a position of strength in Chicago.

Doug Parker’s letter is below:

Dear Fellow Employees –

Today, we filed a statement (a form called an 8-K) with the Securities and Exchange Commission disclosing that we have signed agreements with the three unions that represent nearly 55,000 American Airlines employees. These unions are the Allied Pilots Association (APA), the Association of Professional Flight Attendants (APFA) and the Transport Workers Union (TWU), which represents all of American Airlines’ mechanics and fleet service employees. Shortly after our disclosure, these three unions issued a public statement announcing their support of a US Airways-American Airlines merger and that they have agreed to terms that would govern collective bargaining agreements for their members at the merged airline. I want to explain to you why we have done this and what it means.

First of all, today’s news does not mean we have agreed to merge with American Airlines. It only means we have reached agreements with these three unions on what their collective bargaining agreements would look like after a merger, and that they would like to work with us to make a merger a reality. To get to an actual merger, many more things must happen including gaining the support of AMR’s creditors, its management team and its Board of Directors. But this is obviously an important first step along that path and we are hopeful we can all work together to make this happen.

All of you have heard me talk about the benefits consolidation has created for US Airways and our industry. You have also heard me say that US Airways does not need to merge with anyone, as evidenced by our team’s outstanding results. That is still the case, but after studying American Airlines’ current state and their future plans, we have concluded that a merger with American, while they are undergoing their bankruptcy restructuring, represents a unique opportunity that we should not ignore. These beliefs are shared by the three American labor unions and we are delighted to have their support. Like us, they recognize the potential of a merger to improve the current and future careers of both airlines’ employees.

Combining American Airlines and US Airways would create a preeminent airline with the enhanced scale and breadth required to compete more effectively and profitably. Our intention would be to put our two complementary networks together, maintaining both airlines’ existing hubs and aircraft, and create an airline that could compete successfully with United, Delta and other carriers within our industry. A merged airline would provide competitive, industry-standard compensation and benefits, as well as improved job security and advancement opportunities for all employees of the combined airline. Most importantly, in American’s standalone strategy, over 13,000 employees at American will lose their jobs. Our merger contemplates saving at least 6,200 of these positions. For the US Airways team, the agreements we have reached with the unions representing employees at American would also provide enhancements to the compensation and benefits currently in place here.

Today is one step in what will be a much longer process. For now, it remains business as usual. We must continue to provide the outstanding service that customers have come to expect from US Airways.

In the meantime, if you have any questions, please stay connected via Wings (www.wings.usairways.com) and we will continue to provide updates on our progress. Thanks for all that you continue to do to take care of our customers. Together, whether a merger is our future or not, we will continue to run a great airline and have a bright future ahead of us.

Sincerely,
Doug

Updated at 10:16am with more details on combined carrier.

Southwest’s Interesting Pricing Comment

Published
by
Dan Webb
on April 12, 2012
in Southwest
. 2 Comments

As I’ve written here plenty of times before, there’s currently a DOT proceeding taking place for the allocation of a few beyond-perimeter slot exemptions at Washington-National, and a bunch of carriers are competing for the (rare) opportunity to fly longer-haul routes out of the airport. One of the airlines competing for an exemption is Southwest, which plans to fly from National to Austin (the flight would then continue to San Diego).

In a recent filing defending its application, Southwest made a very interesting statement about its pricing strategy: “the main driver in Southwest’s pricing strategy is distance – not the number of competitors, or the identity of competitors.” That line caught my attention, and I headed over to some DOT data to run some numbers.

Of course, distance is a major factor for any airline when planning a new flight. Two of the major costs that must be considered – labor and fuel – are directly related to the length of the flight. But it seems odd for Southwest to discount competition as a factor in its pricing.

In it’s original application, Southwest included a yield curve that showed the relationship between yields and distance flown. (The fitted equation for the curve is y = 2290.2x^-0.722, where x is distance.) Southwest noted in its application that its projected Austin fare was based on this yield curve.

I decided to take a quick look at a major market for Southwest, intra-California, to examine its pricing. I chose Los Angeles to Oakland and San Francisco, both of which are 337 miles long. Based on Southwest’s yield curve equation, the fare should be identical, but for the year-ending third quarter 2011, fares on direct Southwest flights to Oakland were about 11.5% higher than San Francisco.

The big difference between the two routes is competition, and in my opinion that could be what’s driving the difference in prices. Southwest had a monopoly on OAK-LAX until the middle of the third quarter of 2011 when Delta started service, while many other airlines (American, Delta, United, and Virgin America) compete on the SFO-LAX route.

So, is distance a big factor in pricing for Southwest? Of course, and it’s very important for any other airline because major costs are linked to stage length. But one should not ignore the competition present in a market and how it affects pricing.

JetBlue Seeks Codeshare With Emirates

Published
by
Dan Webb
on April 11, 2012
in Uncategorized
. 0 Comments

JetBlue Airways has requested authority from the Department of Transportation (DOT) to place Emirates’ code on some of its domestic flights around May 1, according to a filing with the agency. The two carriers became interline partners in late 2010.

Initially, the codeshare will involve JetBlue service from its New York (JFK) hub to Boston, Buffalo, Burlington, Charlotte, Chicago, Fort Lauderdale, Washington (Dulles), Jacksonville, Orlando, Portland (Maine), Raleigh, and Tampa.

The deal means that Emirates will have a new US-based codeshare partner (none are currently listed on its website). The airline had previously codeshared with Continental, but that arrangement ended last year.

JetBlue’s codeshare deal with South African will also be expanding at the beginning of next month as well. South African noted in a recent DOT filing that its code will be placed on JetBlue’s JFK-Cancun flights.

 

Looking at Allegiant’s Latest Traffic Numbers

Published
by
Dan Webb
on April 9, 2012
in Allegiant
. 0 Comments

Allegiant just put out its March traffic results, and the carrier saw its load factor decline by 1.3 points, to 92.4%, as a 26.6% increase in traffic was outpaced by a 28.3% capacity rise. In addition, passenger revenue per available seat mile decreased 1.3-1.7% year-over-year. For the entire first quarter, PRASM was up between 2.7% and 3.1% year-over-year. Earlier this year Allegiant had estimated first quarter PRASM would be up 1-3%.

The most interesting part of the release, however, was the capacity guidance. Allegiant now plans scheduled service departures up 9-13% year-over-year in the second quarter, with scheduled ASMs slated for an 18-22% increase. While that’s still significant growth, it is a fair bit lower than previously anticipated. Last month, Allegiant said second quarter scheduled departures would be up 16-20%, and ASMs up 25-29%.

I would guess that much of this change in capacity growth can be attributed to fuel prices, but I’m sure we’ll hear more when Allegiant reports first quarter earnings in a couple of weeks.

Pinnacle to Wind Down Q400 Operations

Published
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Dan Webb
on April 3, 2012
in Uncategorized
. 0 Comments

As everyone has probably read by now, Pinnacle filed for Chapter 11 bankruptcy protection this week. This development, while certainly not happy, is not surprising, either. Pinnacle has already been working on restructuring, and CEO Sean Menke wrote in January that it was “possible that we may ultimately conclude the best way for us to achieve our goal is to use the court-supervised Chapter 11 process.”

One of the more interesting parts of Pinnacle’s plan is a complete cessation of Q400 flying for United, an operation that the airline had picked up in its acquisition of Colgan Air. Menke wrote in January that “the payments being received from United/Continental are not covering the expenses to operate the Q400s.” A chart of the wind-down can be found in one of Pinnacle’s court filings:

The big question, of course, is how United replaces that feed, and there have been very few details on that. United told the Cranky Flier that the airline is “working with Colgan to transition their flying for United Express to other carriers,” but there aren’t many details beyond that.

Looking Through the DCA Beyond-Perimeter Slot Exemption Comments

Published
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Dan Webb
on March 28, 2012
in Southwest and Virgin America
. 0 Comments

Yesterday, comments were due for the beyond-perimeter slot exemptions up for grabs at Washginton-National, and boy there were plenty for them. Seven airlines (Air Canada, Alaska, Frontier, JetBlue, Southwest, Sun Country, Virgin America) are competing for the eight exemptions (enough for four roundtrips), so a large volume of comments from airlines and other interested parties is to be expected.

I haven’t finished looking through all of the comments yet, but Southwest’s response was one of the first I went through. The airline, which is seeking to fly to Austin, argued that there were “serious flaws” with Virgin America’s proposal. “Despite its claims about disciplining pricing in the DCA-SFO market, Virgin America has had little to no effect on United’s fares in both the IAD-SFO and IAD-LAX markets,” the airline argued. I’ve been meaning to take a closer look at some of Virgin’s transcon markets for a while, so I figured now might as well be the time.

Southwest included the following graphs to support its claim:

I found it interesting that Southwest just focused on data from a few years ago, so I decided to do some of my own digging into the DOT database. I looked at United itineraries that listed Dulles as an origin or a destination.  Meanwhile, I excluded itineraries with bulk fares, fares that the DOT considers non-credible, and those with a change in ticketing carrier. I also excluded fares under $30 in an attempt to weed out free tickets that are mainly composed of taxes and fees. I also decided that I should compare all of my results to the first quarter of 2007, since the first quarter of 2008 was the first full quarter with Virgin service to both Los Angeles and San Francisco.

When compared to all United’s (domestic) results over the past few years to the first quarter of 2007, it appears that Virgin has indeed has an effect on United’s traffic and fares in the Los Angeles and San Francisco markets. Passenger numbers have not declined as they have in all markets, and fares have not seen a large increase:

Why I Picked Acela Over Flying

Published
by
Dan Webb
on March 27, 2012
in Uncategorized
. 3 Comments

Next week, I’m slated to be on Virgin America’s inaugural flight to Philadelphia from Los Angeles, which should be a blast. Of course, my going on the trip meant I had find a way to get back to Rhode Island. Fares to Providence from Philadelphia have been pretty reasonable over the past few years thanks Southwest’s presence on the route, but they pulled out of the market earlier this year. The cheapest one-way fare on US Airways was over $380, and I wasn’t too keen on paying that much, so it was time to look for a different option.

After some poking around, I decided that Acela was the way to go. Sure, the train ride is about three hours longer than a flight, but the train compensates in some areas. For example, there will be a shorter cab ride from my hotel to the train station than the airport. More importantly, I can arrive at the train station a lot closer to departure time. With all those factors considered, I’m guessing the train will only be about an hour and 45 minutes (ish) longer than a flight would have been. That’s still a bit less convenient , but I’m not sure if that time savings is worth the more than $200 fare difference.

Plus, Acela has some other nice perks like 2-2 business class seating with over 40 inches of pitch. In addition, while my electronics usage would be limited on a flight, I can work for the entire ride on Acela, which also features power at every seat and Wi-Fi, though the latter has been a bit spotty for me in prior experience.

I’m sure US Airways knows better than I do on how to price its short-haul markets, and I’m certainly a bit more price-sensitive than other travelers thanks to my college student budget. Still, in the Northeast Corridor (one of the few places in the US where high speed rail makes sense, in my opinion) I think there’s a very strong competitor in Acela, especially when there’s such a big fare difference. While a stronger case for taking Acela over flying can be made for slightly shorter trips like Boston to New York, I think it’s also a viable option for both business and leisure travelers alike on the trips that are a bit longer.