Monthly Archive for March, 2011Page 2 of 3

Looking at Alaska’s Latest Update

Published
by
Dan Webb
on March 17, 2011
in Alaska
. 0 Comments

Alaska Air Group (parent of Alaska and Horizon) released its latest investor update on Tuesday, and there were a couple of items that I found interesting:

  1. Fuel prices. Alaska currently expects its economic fuel cost* for mainline flights to be $2.74 for the first quarter, up 29% year-over-year. One would have to assume other airlines are seeing such dramatic increases. The run-up in fuel prices has just been incredible.
  2. Unit revenues. The airline says that RASM for mainline flights in February was up 1.1% year-over-year, to 12.70 cents. PRASM increased 2.1%, to 10.70 cents. Alaska provided addition context to these gains, saying that they “are compared to RASM and PRASM gains of 16.7% and 13.1% in February 2010, respectively – among the highest RASM and PRASM gains in 2010.”
  3. Capacity growth plans. According to this latest update, Alaska plans that full-year mainline and consolidated capacity will increase 8-9% and 6.5-7.5% compared to 2010. This plan is the same as was forecast in January. I only find this interesting as other airlines (like American and United) have been adjusting capacity plans downward in response to higher fuel prices. Of course, this forecast could eventually change.

*Alaska’s definition of economic fuel expense:

Economic fuel expense is defined as the raw or “into-plane” fuel cost less any cash we receive from hedge counterparties for hedges that settle during the period, offset by the recognition of premiums originally paid for those hedges that settle during the period. Economic fuel expense more closely approximates the net cash outflow associated with purchasing fuel for our operation.

Speculating on Speculation

Published
by
Dan Webb
on March 15, 2011
in Uncategorized
. 10 Comments

One of my favorite things to do when meeting fellow airline dorks is to just talk about how the industry will develop over the next months and years. Such discussions are usually fun and informative, so I figured I’d try something similar here.

Last week, Helane Becker of Dahlman Rose came on CNBC to discuss the airline industry, and she made a couple of points that I think are worth discussing.

The first point that peaked my interested was Becker’s remark that United would eliminate some hubs. She said that “with so many domestic hubs as a result of the of the merger with Continental, we’re expecting Denver and Clevelend to wind up being focus cities and not hubs anymore.”

I agree completely that Cleveland’s hub status is at risk, and some comments from United leadership seem to confirm this idea. “God does not come from on high and grant you hub status,” said United CEO Jeff Smisek in November. With that in mind, however, United’s ability to reduce Cleveland service is limited by an agreement struck between the company and the Ohio Attorney General Richard Codray this past September.

As for Denver, I think the city is in is a very different situation than Cleveland. With Cleveland, United already has a very strong hub Midwest hub with Chicago. But what would replace Denver? Simply put, the city has an absolutely wonderful geographic location to facilitate domestic connections between the East and West. I’m just not sure if United’s hubs in Houston, Los Angeles, or San Francisco could really fill that void. That being said, who knows what will happen if oil keeps on climbing.

The other interesting point brought up by Becker during the interview was the prospect of consolidation.  She said that ”we think that airlines that are kind of in the mid-tier, that are small, don’t have a lot of international exposure, are gonna be the ones that are going to have to merge with the larger carriers, they’re just not gonna be able to survive as an independent airline. Sot here are good opportunities in the category of, let’s say, JetBlue, Frontier, American, US Airways, Hawaiian, Alaska, that tier of airline is probably ripe for some consolidation.”

I have a few thoughts on this. First of all, I think we’re done with consolidation for the moment. With the last two big legacy mergers we saw two alliance partners with complimentary networks that could be rationalized post-merger. No such combinations are possible today.

The only time I see additional consolidation taking place is if one of the carriers involved in a potential transaction is either in or very close to bankruptcy, when a carrier is cheap and running out of options. In that case, one of the stronger airlines could see a great opportunity to expand.

And do all of the carriers need consolidation? Take Alaska, for example. The airline seems to be doing fine on its own after posting the highest industry profit margin in 2010. Alaska is incredibly strong in the Pacific Northwest, and its position in this region allows it to benefit from codeshare relationships with Delta and American. Alaska has also put a strong focus on improving the performance of its Horizon unit. I don’t honestly see Alaska being interested in being acquired, though who knows if they’d be interested in any expansions through acquisitions.

Secondly, are some airlines really attractive for consolidation? Let’s take US Airways and American, the only two major legacy network carriers to not merge lately. A US Airways acquisition comes with an extra bonus package of labor strife and a revenue disadvantage. American, being the only major airline to not go through bankruptcy, has labor costs that put it at a disadvantage relative to other carriers. The fact that it was the only major airline to not turn a profit in what was overall a good year for the industry doesn’t help much either. Are either of these really attractive?

So, with that being said – I think we’re done with M&A for now. As long as the industry as a whole keeps capacity discipline, it should be able to maintain some form of pricing power. If oil ever reaches mid-2008 levels above $130/barrel, for example, this situation could change drastically.

Anyway – thoughts?

Thoughts on Fare Increases

Published
by
Dan Webb
on March 14, 2011
in Random and Uncategorized
. 2 Comments

If you follow airline news coverage pretty frequently, there’s a good chance you’ve encountered a few that cover increasing airfares. Many of them mention an increase by an airline, and that the move could be matched by others. I find most of stories pretty interesting, but one recent piece on higher fares by the Associated Press got me thinking a bit.

The piece claims that oil price increases driven by Middle East unrest are not the only reason for higher fares of late, noting that fares were 9% higher at the start of 2011 compared to a year ago. It also notes that other factors that are driving pricing power, such as an improving economic environment, industry capacity discipline, and airline mergers. This is just my own interpretation, but the piece seemed to imply that airlines are being disingenuous when citing increased fuel prices for fare increases.

A few things.

First, fuel prices have not stayed stagnant over the past couple of years. In fact, jet fuel prices were roughly 67% higher at the beginning of this year compared to the beginning of 2009. Here’s some data from the Energy Information Administration:

So, I think it’s unfair to exclude fuel from any explanation of increasing fares over the past few months. That doesn’t mean the other factors mentioned should be excluded, though. But some are most certainly related to fuel. For example, fuel cost is a major factor that will determine airlines’ capacity plan.

That being said, is it really all that terrible that airlines are raising fares? Believe me, I like finding a cheap fare as much as anyone else, but after researching some DOT data, fare increases do not seem outrageous at all. For example, the average airfare in 2009 was $309, only $17 higher than in 1995. That 5.8% increase pales in comparison to the rise in fuel prices over the same time period.

In fact, in real terms fares have declined nearly 25% from 1995 through 2009.

So, considering that airfares growth has been slower than inflation, some recent price moves by the airlines isn’t that big a deal. Let’s be honest, this industry hasn’t been the best at making money. Some form of sustained profitability is best for the industry and all those who rely on it for employment. If some fare increases help create that stability, then so be it.

Colgan Q400s to Operate Out of Dulles This Summer

Published
by
Dan Webb
on March 10, 2011
in Colgan, Pinnacle and United
. 11 Comments

I heard that the equipment from Providence (my local airport) to Washington-Dulles was changing this summer, and lo and behold:

Yes, some of the Colgan Q400s (originally part of Continental Connection) are marking their way to Dulles. The 78-seat aircraft will be used on regional routes out of Dulles, like Albany, Burlington, Norfolk, and Syracuse starting this June.

Colgan is not a new United Express operator at the airport, though – the carrier already provides services utilizing its fleet of Saab 340s.

Just like Newark, the Q400 appears to be a good fit for Dulles. On short-haul routes, thee speed difference between a regional jet and the Q400 is minimal. Another perk is economics – a Pinnacle investor presentation from December says the Q400 NextGen “consumes about 25% less fuel than 76-seat jets.” This is probably an important issue for airlines like United, as in many cases the mainline carrier is on the hook for the fuel expense for regional partners operating under a capacity purchase agreement (CPA).

Pinnacle also included an interesting graph in the aforementioned presentation – the Q400′s fuel burn advantage is apparent , and it only widens as fuel prices increase. (Note this is based on 300nm trip – not sure how this looks on longer stages.)

According to United’s latest fleet plan (released in January), nine Q400s are being added to the United Express fleet this year. Once these aircraft are placed into service, the total fleet will stand at 29.

Based on Bombardier’s latest update on Q400 orders and deliveries, it appears the aircraft coming online this year will clear out Colgan’s (really parent company Pinnacle’s) order backlog. So the big question is – will more be ordered? Pinnacle’s annual report notes that it has options for aircraft to be delivered this year and in 2013.

One issue, I guess, would be how the combined United-Continental scope clause eventually shakes out. Regardless, the Q400 looks pretty nice in an environment with high fuel prices, and could probably fit nicely into some United markets on the East Coast, but possibly on regional routes out of LAX and SFO as well. (I’m just thinking out loud here.)

Frontier is Now Advertising on Hulu

Published
by
Dan Webb
on March 9, 2011
in Frontier
. 2 Comments

A couple of weeks ago, I noticed one of my roommates at school watching a Frontier television spot on his computer. Most of Frontier’s advertisements are on the humorous side, so I first thought that someone sent him a YouTube clip. I was wrong – he was viewing the ad while watching a show on the video streaming website Hulu. I experienced the same thing earlier this week.

As you can see, a normal Frontier television advertisement runs, but there is also smaller ad visible to those not viewing the program in full screen. In this case, Frontier was advertising included first and second bags for its Classic and Classic Plus fares, and I’ve also seen a smaller advertisements about their onboard cookies.

I think Frontier has made a really smart advertising decision here. Note that the advertisement was “personalized” by Hulu’s Ad Tailor product. Occasionally Hulu presents its users with short survey questions, and in many cases viewers can also note if specific ads are relevant to them. I would guess that there’s something in my profile that makes me more likely to see Frontier’s advertisements. So, thanks to the Ad Tailor, Frontier can more effectively reach its target market, which means more bang for its advertising buck.

There are few other reasons I like Frontier’s decision to utilize this medium.

First, it probably doesn’t make sense for Frontier to run a whole lot of television advertising in markets where it doesn’t have a huge presence. Using a streaming service like Hulu most likely allows Frontier to access many markets economically.

Second – I wonder if television spots are more memorable on Hulu. One sees far less advertising on Hulu compared to watching the same shows on television, so do the online ads stick out more?

I am also going to guess that Hulu advertising is more measurable compared to television spots. Sure, someone can measure website traffic in aggregate as a television campaign rolls out, but Frontier should be able to measure the number of people clicking on its Hulu ads to see if the strategy is working.

Finally, I’m also wondering if Frontier is looking to advertise to a new segment of potential customers here. After catching on to Hulu a few years ago, I barely watch regular television anymore, and I’m guessing there are plenty of others out there who are using online streaming more frequently.

Anyway, I really like what Frontier is trying here. Kudos for being creative, as I’ve never seen another airline try Hulu before. (I could be wrong, though!) EDIT 3/10: Apparently JetBlue has done some Hulu advertising.

Of course, it helps that Frontier has had a very successful, award-winning advertising campaign for years.

Random Thoughts on Ancillaries

Published
by
Dan Webb
on March 8, 2011
in US Airways
. 1 Comment

Below is a chart from a December US Airways investor presentation that I stumbled upon over the weekend. It’s clearly obvious that bag fees are the biggest source of ancillary revenue for the airline. Thinking about that brought me to a few questions that I hope are at least slightly coherent:

  • How would this chart look when adjusted for availability? Bag fees are an ancillary fee that can be charged on any US Airways flights, while food, for example, is not.  I would guess bags still come out ahead but I’m interested.
  • I would love to see a chart like this from other airlines. And how do other airlines view the success of ancillary products? For example – does Delta just look at Gogo sales, or has the airline seen increased loyalty due to its wide availability of Wi-Fi?
  • Ancillary items like bag fees were the industry’s big response to oil increases in 2008. Now we’re back to oil over $100 – what can the airlines do now? How much can fares be increased before demand takes a hit?
  • Will we see higher fees? Or could there be new fees? It seems that the airlines have mainly taken away as many free things as possible already, so it would be interesting to see what happens here. And, if we see new ancillary services, how much revenue can they generate?

United Adjusts Capacity in Response to Fuel; Fleet Changes Possible

Published
by
Dan Webb
on March 8, 2011
in Continental and United
. 2 Comments

United Airlines’ February traffic news release contained some interesting commentary on capacity adjustments the company is making in response to higher fuel prices. The airline had previously forecasted that its total capacity for 2011 would be 1-2% higher compared to 2010, and is now saying the comparison will be “roughly flat.”

According to a January guidance, domestic capacity was to decrease from 0.5-1.5%, but will now be down from 1.5% to 2.5%. International capacity will still grow, but at a slower rate – 2.5% to 3.5% instead of 4.5% to 5.5%.

The news release also had a line that is sure to fuel some interesting speculation – the airline said it was “analyzing the removal of certain less fuel-efficient aircraft from its fleet.”

When we last saw oil prices north of $100, then-separate United and Continental primarily focused on their fleets of 737 Classics. In 2008, United announced that it would be retiring its entire fleet of more than 90 737-300s and 737-500s. Continental began phasing out the 737-300 completely, and also reduced its number of 737-500s. At the end of 2007, Continental had 40 737-300s and 68 737-500s, while today only 34 737-500s remain.

Could the 737 again be a target for fleet rationalization? The average age of a United 737-500 as of December 31, 2010 was 14.9 years. Three  fleets (747-400, 757-200, 767-300ER) are older. Not that age is the driving factor, I just found it interesting. One part of the United fleet that continues to intrigue be is Continental’s small fleet of 767-200ERs. United also operates fairly large aircraft – such as non-ER versions of the 777-200 and the 767-300 – on some domestic routes, if gauge is something to be considered.

The other issue, of course, is replacement. United said in its 10-K that its first 787s are slated to arrive next year, which could serve as a 767 replacement. Continental also has new 737s on order. Meanwhile, United’s A350 order is still on the books. In the case of the 757 – could United grow its fleet of 737-900ERs to replace the aircraft on certain domestic routes?

One wonders how this would all be shaking out if the 787-8 had been delivered to Continental as originally scheduled.

On a side note…if United is looking at 737 replacements, especially the -500, I wonder what they think about the CSeries? Then again, through the merger (and depending how pilot negotiations go), the Continental piece of the new United gets more flexibility with larger regional jets.

Lots of speculation to be had here.

Frontier is the Latest to Cut Capacity Growth

Published
by
Dan Webb
on March 7, 2011
in Frontier
. 0 Comments

Frontier released its February traffic results today – capacity was down 3% year-over-year along with a 2% boost in traffic, resulting in a 5 point boost in load factor, to 76%. The carrier has now reported twelve consecutive months of record monthly load factors.

But the airline, a subsidiary of Republic Airways Holdings, also said that it now expects that capacity in the second quarter to be flat compared to the second quarter of 2010. The company notes that it hasd”previously issued guidance of capacity growth in the 1.5% to 2.5% range for the second quarter.”

Frontier’s VP of Revenue Production Greg Aretakis said that “booking volume continues to outperform for the spring months compared to last year, and our revenue continues to build very positively in comparison to last year,” but Frontier is altering its schedule due to “uncertainty of future oil prices.”

Allegiant Cuts Second Quarter Growth Plans

Published
by
Dan Webb
on March 7, 2011
in Allegiant
. 1 Comment

Allegiant Air continues to reduce its plans for growth this year, according to a capacity guidance released on Friday. The carrier says that available seat miles (ASMs) in the second quarter for its scheduled services will be anywhere from 4% lower to flat compared to the same quarter last year.

This update compares to a prior forecast of flat to 4% growth. The carrier first provided capacity guidance for the second quarter in December. At that time, the company estimated that capacity would grow from 6% to 9%.

Of course, airlines (and all companies for that matter) are going to update forecasts as more recent data becomes available, but it is significant that Allegiant has essentially reversed course for the second quarter.

The guidance was part of Allegiant’s news release of February traffic. The carrier saw traffic dip by 1.3% on its scheduled service, but the decrease was outpaced by a 3% capacity cut. As a result, load factor increased 1.6 points to 93%. Allegiant estimates that unit revenues for scheduled service increased between 13.7 and 14.1% in February.

Allegiant will be presenting at an investor conference today, and it will be interesting to see what insight is added.

One would assume these capacity cuts are driven by fuel prices. I wonder…is Allegiant more exposed to fuel risk than other carriers? Obviously a fleet of MD-80s isn’t exactly the most fuel-efficient, but the majority of their passengers are traveling for leisure purposes. If consumers rein in discretionary spending due to higher prices (driven by commodity increasing prices), how will Allegiant be affected?

Obviously I’m just openly speculating here, but I’m interested.

@DeltaAssist Comes to Facebook

Published
by
Dan Webb
on March 4, 2011
in Delta
. 1 Comment

Delta Air Lines announced yesterday that it’s popular Delta Assist program, which aims to aid customers via social media, is being expanded to Facebook. It’s easy to leave feedback on Delta’s Facebook wall already, but now Delta has rolled out a new form (pictured below) that can be accessed on Facebook. My guess is that using a form is easier for both the customer and Delta – now passengers have a way to privately share information like confirmation numbers immediately, which should make helping customers a bit easier on Delta’s end. The new page is easy to access – it’s just a tab on Delta’s exisitng Facebook page.

Personally, I think Twitter remains to be the best forum for @DeltaAssist. I haven’t found a way to get to the Delta Assist page on Facebook’s mobile site or through the official Faebook app for iPhone, so Twitter appears easier for customers on mobile devices. Plus, switching from regular tweets to private direct messages is very easy. But, that being said, there are still plenty of people providing feedback to Delta on Facebook already, so it’s good to see an airline go where its customers are.

On a side note, let’s compare two unrelated events this week. Here we have Delta continuing to innovate in social media to find new ways to communicate with its customers. Meanwhile, earlier this week Southwest made the decision to not communicate with its customers even though this was going on: