Monthly Archive for June, 2011

A Couple of Thoughts on Delta’s Latest Second Quarter Guidance

Published
by
Dan Webb
on June 29, 2011
in Delta
. 1 Comment

Hooray, its guidance season! :D I love it when many airlines provide investor updates prior to their earnings releases, as it usually provides some interesting data points. Delta is no exception. For example, the airline said passenger revenue per available seat mile (PRASM) for the second quarter is expected to be 10% higher year-over-year and the Japanese earthquake and tsunami are supposed to hurt Pacific revenues by $125 million.

But, someone once taught me that what’s really important when looking at an investor update is how it compares to prior guidance given by the company. Delta provided its initial second quarter guidance with its first quarter earnings, and then also provided the same metrics during an investor presentation last month. Let’s take a look:

Delta is expecting a lower operating margin than originally planned, and unit cost growth will be 2.5-3.5 points higher than originally stated in April. The airline provided an explanation for the unit cost increase in the investor update, saying that ”non-fuel unit costs for the quarter are forecast to be higher than expected due to higher maintenance costs combined with lower capacity than planned.”

Here’s what’s interesting to me. Now, I don’t know how much additional maintenance expense Delta is incurring, but the capacity argument is really interesting me. 2-3% system capacity increase falls perfectly within the originally guided range given in both April and May, so is capacity enough to explain the increase?

Operating margin is also interesting to me – what’s driving that lower forecast? Delta’s fuel price ($3.23) is indeed $0.03 higher than the company said in May, but at the same time it’s $0.03 cheaper than Delta expected in April, when the airline was also saying it would earn a higher operating margin.

Continental Pilots File Grievances Against United

Published
by
Dan Webb
on June 28, 2011
in Continental and United
. 0 Comments

I realize some parts of this story are a week old – but I figured it’s worth a quick look!

First, the Continental pilots have filed grievances against United for allegedly violating parts of their contract. One grievance says that a certain ratio of Continental to United flying for widebodies is not being maintained.

The second grievance deals with the sale of 767 aircraft, according to ALPA. They didn’t specify a variant, but that’s very interesting considering that Jeff Smisek has said the 767-200s might be toast. Also interesting – a Continental 767-200 was parked at Goodyear last month and hasn’t flown a scheduled flight in over a month. It’s still registered with Continental if you check the FAA registration database, though both ATDB and Ch-Aviation say the aircraft is off to Omni Air International.

The other interesting thing – United’s old negotiations website is back! This website includes a management proposal from October 27. Things have probably changed since then, but what’s fascinating is that the company was interested in pursuing scope for 250 regional jets under 95 seats. United currently has just over 150 E-170s and CRJ-700s. RJs at 94 seats would be the largest in the country, as far as I know, with the US Airways Express Mesa CRJ-900s and Republic E-175s close behind. It would also mark a significant change from Continental, where no large regional jets are allowed. As many readers recall – this was a bit of an issue between Continental pilots and management at the end of 2010.

This will be interesting to watch…at least from the outside.

The Republic neo Order Makes Sense! Sort of!

Published
by
Dan Webb
on June 23, 2011
in Frontier
. 1 Comment

Yesterday, it was announced that Republic had signed an MOU for up to 80 A320neo-family aircraft. The fact that the company made the order in the first place isn’t all that shocking, as the carrier had dropped a major hint about it during its first quarter earnings call.

What was more interesting was the make-up of the order – 40 A319neos and 40 A320neos. The latter makes perfect sense. But the former is a bit of a head-scratcher since Republic already has Bombardier’s CS300 on order, which is basically the same size.

Now, if were Republic to mention that it had canceled its CSeries order, that would’ve made sense, especially because Republic also has 40 of those aircraft on order. But Republic has said yesterday that the order is still on!

The other confusing item is that Republic decided to go with CFM for the engines. The only engine option for the CSeries is Pratt & Whitney’s new P1000G. That engine is also an option for the A320neo family, though it’s a slightly different version than the CSeries. Either way, it seems like Republic might want to keep things simple and have the same engine family powering its two narrowbody flights of the same size but from different vendors.

But, as I did some research, the order began to make more and more sense, especially when you place it against the backdrop that Frontier is essentially in survival mode these days and in the midst of restructuring….and Frontier’s engine choice seems to have a lot to do with it.

Frontier’s current Airbus fleet is powered with CFM56 engines, and Frontier’s MOU with CFM about the LEAP-X includes “a reduction in the overhaul cost of existing Airbus engines,” according to an SEC filing.

Now, here’s the other part of my theory. CFM is a 50/50 joint venture between GE and Snecma. Many of Frontier’s aircraft are leased from GECAS, another part of GE. That same SEC filing said that Frontier was able to renegotiate its A319 leases with them. Four aircraft are now going back next year, but the remaining 18 are sticking around for an extra three years at a reduced lease rate. Synergy!

So does Republic’s order necessarily make sense from a long-term fleet perspective? Probably not, and we’ll see if the CSeries order sticks around. Even if the order stays around, Republic now has a lot of airplanes starting to come in the 2015-2016 timeframe, and those will probably all end up with Frontier barring a new branded operation or massive scope relief at a mainline carrier.

But, this move does make sense for an airline that’s trying to survive and restructure, and this deal has plenty of pieces to make Frontier’s short-term results improve.

Of course, I do have some other questions. First, would this still have happened if FAPA had not approved those labor concessions?

Secondly, what’s up with Airbus’ $25 million loan to Frontier? The airframer’s financial services arm made it in October 2009, and according to a Republic 10-Q from the time, “the loan is scheduled to be repaid in twelve quarterly installments with interest beginning in January 2010.”

Yesterday’s SEC filing said this:

In connection with the term sheet the Company entered into (i) an amendment to the Credit Agreement with Airbus Financial Services, dated as of October 30, 2009 between the Company, Frontier and Lynx Aviation, Inc., a subsidiary of the Company, and (ii) an amendment to Frontier’s purchase agreement with Airbus.

So in review…Frontier is probably still getting money from Airbus, they probably got neos cheap, they probably got engines cheap, they got cheaper lease rates for a significant portion of its fleet, and also now have cheaper engine maintenance rates.

Not too shabby.

Anyway, it’ll be interesting to see how this plays out, especially from the CSeries angle.

(Updated to reflect change in Airbus loan…completely missed that in the filing!)

Spirit’s New Check-in Fee (and Other Things!)

Published
by
Dan Webb
on June 22, 2011
in Spirit
. 2 Comments

Spirit Airlines has introduced new fees for check-in. For tickets purchased yesterday onward and for travel starting on November 1, checking in at the airport and having an agent print your boarding pass will cost $5. Kiosk check-in will stay free, but starting June 26, 2012, boarding passes printed there will cost $1.

The $5 fee will not be charged “in cities where Spirit does not have airport check-in kiosks or if a customer is not able to use the automated kiosk to print their boarding pass.”

Of course…this news should shock no one. Spirit’s strategy is to generate as much ancillary revenue as possible. In the first quarter, it averaged $42.62 in ancillaries per passenger flight segment – up from $30.90 during the same period a year ago. Ancillary revenue as a percentage of total revenue increased from 25.6% to 34.1%.

Not surprisingly, Spirit’s fees encourage passengers to have minimal contact employees – you’ll pay the least if you check in and pay for bags online.

Meanwhile – Spirit also announced a bunch of new routes out of Chicago…I’m currently scratching my head on that one.

A Quick Look at Virgin America’s Dallas Load Factors

Published
by
Dan Webb
on June 21, 2011
in Virgin America
. 0 Comments

Last week the DOT released March traffic data, and I figured it’d be worth doing a quick check of Virgin’s load factors at DFW:

Virgin’s loads were pretty weak at the beginning, but the trend is good. The increases seen in March are probably due to Virgin becoming a bit more established along with seasonality. And any sale activity (remember the Groupon deal?) by Virgin may have helped as well.

Which brings me to my next point – we have no idea what fares people were buying until the first quarter DB1B data comes out in a few months. (There is fourth quarter data available, but since Virgin was only in Dallas for a couple weeks of December, I don’t think it’s worth examining.)

It will be very interesting to check out the April numbers when they are released next month. Virgin added a third frequency from both LAX and SFO, so it will be interesting to see what that capacity boost did to loads.

(P.S. – Obviously JetBlue’s order is the big US news today…I hope to have some thoughts tomorrow or Thursday.)

Random Chart of the Day: Late Aircraft Delays

Published
by
Dan Webb
on June 20, 2011
in Southwest
. 5 Comments

One handy feature of the the DOT on-time database is that it breaks down delays by cause. One of these is a “late aircraft arriving delay,” which the DOT says occurs when the “previous flight with same aircraft arrived late which caused the present flight to depart late.” The database has the length of the delay, but I just tracked the existence of such a delay. It’s also possible for a flight to have multiple reasons for a delay.

Anyway, I found the total number of flights operating (i.e. excluding cancellations and diversions), and then found the percentage of those flights that had late aircraft delays:

I was a little surprised here. While I expected some of the regionals to be terrible here, I was not expecting Southwest to be the worst here. What I’ve heard anecdotally is that with Southwest’s tight turn times, sometimes a flight can start running behind early in the day and never recover.

 

A Few Thoughts on United’s Computer Issues

Published
by
Dan Webb
on June 19, 2011
in Uncategorized
. 3 Comments

As I’m sure most people already know, United had a bout of computer issues on Friday evening. It’s not been a great couple of weeks for the airlines in the press in this area, as US Airways had its own meltdown exactly one week prior.

United’s systems were down for over five hours beginning Friday evening. United told me that as a result of these issues, 16 flights were canceled on Friday and 15 on Saturday, and there were about 100 delays. Personally, I don’t think that’s as big as some of the headlines made it sound…but obviously for the passengers impacted it was a big deal.

So a few thoughts….

  • Kudos to all the United employees who were on duty at the time…I’ve seen some reports of agents resorting to handwritten(!) boarding passes, so I’m going to assume it was a pretty stressful night! In addition, I’m sure some United front-line employees were on the receiving end of some undeserved anger about the outage.
  • United was actually tweeting about this! Early Saturday morning! I tend to use exclamation points too often!
  • But seriously, while United might not be as social media savvy as say, Delta, it is nice to see them using the tools to respond to big events like this one – hopefully United will continue here.
  • Most importantly, what lessons can United learn from this event, both from a customer service and an IT perspective? Will the lessons from this weekend have any impact on the (eventual) move to a single IT system for the combined airline?

A Few Thoughts On Virgin America’s First Quarter Results

Published
by
Dan Webb
on June 16, 2011
in Virgin America
. 0 Comments

A week ago Virgin America released its first quarter financial results. I was going to write about this on Monday, but decided to hold off and hope the DOT would release fourth quarter financial data this week so I could get some more data (Virgin doesn’t share a balance sheet in the press release, for example), but sadly that didn’t happen.

So, here are a some quick thoughts on the results….and once the DOT releases fourth (and hopefully first) quarter financial data in a couple of weeks, I hope to write a more comprehensive post on this topic. Anyway…

Overall, Virgin’s first quarter numbers weren’t exactly stellar. Its operating loss increased 36.4% year-over-year to $29.4 million, though this loss was on higher revenue, so operating margin stayed constant at -14.7%. The airline’s net loss grew by 25.5% compared to the first quarter of 2009, to $44.6 million.

Net profit margin improved slightly year-over-year, from -24.2% to -22.1%.

These numbers were a bit concerning to me, to be honest. Virign had posted some positive momentum in terms of profitability during the first three quarters of 2010, but that ended in the fourth quarter. The carrier didn’t reach its goal for having a breakeven year in terms of operating profit. I’m hoping this doesn’t turn into a trend.

Total revenue per available seat mile was up 11.6% year-over-year, though Virgin noted that in mature markets – those that have been open for nine months or more – RASM increassed 20%. So one wonders how much of a drag markets like Dallas were on earnings. Virgin said that new markets represented 19% of capacity during the quarter.

Meanwhile, cost per available seat mile also increased 11.6% – and not surprisingly fuel was responsible for much of that. But CASM ex-fuel also rose 5.3%. The company says this was “as a result of cost of idle capacity, primarily new teammates in training and new aircraft being modified to Virgin America standards.”

I think the point Virgin is trying to make here is that growth can be expensive, which is absolutely the case. According to its news release, Virgin is “growing from 28 aircraft in service in the first quarter of 2010 to a projected 52 aircraft by the second quarter of 2012.” 35 aircraft were in service at the end of the first quarter of 2011. So with over 15 more aircraft coming in the next year – how will Virgin perform during this growth phase?

Virgin also reported it has $25 million in cash. That’s $5 million less than the fourth quarter of 2010. Interesting note in this area – Virgin said it sold and leased back two A319s this past December.

As most people reading this blog know – I’m a big fan of Virgin. They have a delightful product and they also seem to have a great company culture. But eventually the business needs to become sustainable.

Fortunately – I think Virgin has some good things going for it. The carrier has a great hard product that really sets it apart from everyone else. And as it adds new markets and boosts schedules in existing ones, Virgin becomes more relevant. But the persistent issue is competition – Virgin continues to enter crowded markets dominated by legacy carriers with much more capacity (e.g. LAX-DFW, SFO-ORD), which means Virgin has very limited pricing power, obviously creating margin pressure.

So we’ll have to see how Virgin’s financial results shape up in response to its growth. I’m especially interested in how Chicago and Dallas develop – though the fact that Virgin is offering triple points on those routes dims my optimism slightly.

As mentioned earlier – these are just my quick thoughts, and I’ll hopefully have more once the DOT releases more financial data.

A Quick Look at Ancillary Revenue

Published
by
Dan Webb
on June 14, 2011
in Uncategorized
. 2 Comments

I’m sure that, without a doubt, most people reading this blog have seen plenty of reports in the media about airline baggage fee collections. Sadly, baggage and reservation cancellation/change fees were the only pieces of fourth quarter financial data released by the DOT yesterday. This data was originally slated to be released weeks ago, and first quarter 2011 data (originally slated for release next week) has now been delayed with no new release date given.

Anyway…

You may have seen mentioned in media reports that total bag fee revenue for 2010 was 24% higher than a year ago. This is true, but the trend in year-over-year comparisons (comparing one quarter to the same one a year ago) reveals a much more interesting trend:

The trend in change fee revenue is also interesting:

A few notes:

  • I think the main conclusion that can be drawn here is that the easy stuff is done when it comes to ancillary revenue. Of course, bag and change fees will remain to be an important revenue stream, but I don’t see much more growth in these areas for carriers already charging for these services.
  • Of course, these numbers might be placed in a better context on a per passenger basis. The problem is…I’m not sure what numbers to use. I see the WSJ is using 416 million as their number, though a source isn’t cited. They best I can find with that number is this article, but that’s only for domestic flights, and DOT financial data should have international fees as well. The BTS says there were 786.7 million enplanements last year, but connections can skew that. Basically what I’m getting at – if anyone has any suggestions on good (free) data in this department, send it my way!
  • As has happened in the past, it’s being reported that Delta raked in the most fee revenue. This statement is true – but it doesn’t take size into account. While the DOT hasn’t released this data for the fourth quarter yet, if we look at third quarter data ancillary revenue made up 7.7% of Delta’s total operating revenue. 6.7% of Southwest’s operating revenue came from ancillary fees. Not surprisingly, Spirit has come in on top in this category in the past.
  • One thing to consider, though, is that the DOT data on ancillaries isn’t necessarily complete. To quote the DOT’s own press release: “Ancillary revenue includes baggage fees, reservation change fees and miscellaneous operating revenue, including pet transportation, sale of frequent flyer award miles to airline business partners and standby passenger fees. Revenue from seating assignments and on-board sales of food, drink, pillows, blankets, entertainment, or any other ancillary items are reported as Transport Related Revenue and cannot be identified separately.”
  • While bag fees and change fees are among the largest sources of ancillary revenue, I think the categories that are lumped in with regular operating revenue is where we’ll see some interesting movement in the coming months and years.

 

Frontier Reaches Tentative Deal With Pilots

Published
by
Dan Webb
on June 13, 2011
in Frontier
. 2 Comments

Apologies for the lack of content of late…at least I’m back on track for today! :)

Anyway…

So, as of late, Frontier Airlines hasn’t been doing terribly well. According to parent company Republic’s latest 10-Q, the Frontier segment of the business had an operating loss of $46.4 million in the first quarter. Granted, that’s still an improvement from $61.4 million operating loss during the same period in 2010, but it was still more than enough to wipe out the profits in Republics fixed-fee and “other” segment for a total operating loss of $0.6 million.

Photo credit: Jay Bowie.

During last month’s first quarter earnings call Republic management announced a new program to restructure Frontier and make it profitable. We’ve already seen some interesting changes. For example, 17 E-170s are leaving Frontiers fleet, and 14 of these are entering service with Delta Connection (the remaining three will enter service for a mainline partner as well).

Friday afternoon we saw a new development, as Republic made a filing with the SEC outlining a new tentative agreement with its pilots as part of this program. Frontier’s pilots are represented by the Frontier Airlines Pilots Association (FAPA). Let’s take a look at the deal:

What the Pilots Give:

  • Some pay increases are postponed
  • Republic contributes less to the pilot 401(k) retirement plan
  • Reduced vacation/sick day accrual
  • Extension of collective bargaining agreement for two years

These changes are being referred to as the “investment” by FAPA, by the way.

What Pilots Get:

  • An equity stake in Frontier
  • Republic agrees to “certain other conditions which must be met during the term to continue the Investment by FAPA,” including:
    • “Aircraft growth at Frontier”
    • Raising $70 million in liquidity “through one or more debt issuances or other financings”
    • “Material execution” of Frontier’s restructuring plan by the end of this year
    • Republic make a “good faith effort” to attract new investment into Frontier that reduce Republic’s stake in the company to “a minority interest by December 31, 2014″
  • Republic will also launch profit sharing for all employees

The agreement was reached on Friday, and pilot voting is expected to be completed this Friday, so things are moving on a pretty fast timeline.

Overall, I like this deal. I think it speaks volumes that management and FAPA were able to reach a deal quickly. Of course, I might eat my words if this deal doesn’t pass a vote, but the Frontier pilots seem willing to do what is necessary to improve Frontier’s performance and long-term viability.

The other reason I like this agreement is that it rewards the pilots if the plan to turn Frontier around is successful. For example, the equity stake will increase in value if Frontier becomes profitable. And, of course, all employees will benefit if that happens through the new profit sharing program.

What’s really throwing me for a loop is the line about making an effort to attract investor(s) so that Republic’s shareholding will decrease. How exactly should this be interpreted? Does it indicate any unhappiness (on either side) about Republic’s investment in Frontier?

The other questions floating around in my head:

  • What are the next adjustments coming down the pike for Frontier? (We might not be hearing about this until the next earnings call.)
  • Who’s willing to give Republic $70 million, and at what interest rate? (If they pursue debt financing.)
  • Are some at Republic regretting their decision to acquire Frontier?
  • One of the issues (supposedly) that halted a possible Southwest acquisition of Frontier was the lack of a labor agreement between FAPA and SWAPA. Are there some Frontier pilots out there who would rather be Southwest employees right now?
  • Two big things that can affect Frontier – what happens with Continental/United in Denver and AirTran/Southwest and Milwaukee after their respective mergers?

Looking at The American/Qantas Joint Business Agreement

Published
by
Dan Webb
on June 8, 2011
in American
. 1 Comment

Yesterday, American and Qantas filed with the DOT (registration required) for approval of their joint business agreement, or JBA. It’s worth noting that the carriers are not applying for anti-trust immunity (like Delta and V Australia) here “in light of the existing lack of competition between American and Qantas and the inability of American to operate its own service to the South Pacific.”

That line is footnoted, and says that American doesn’t have the aircraft, and that it is “precluded from operated nonstop services on the stage lengths for U.S. – South Pacific Services.”

That point is further explained in another footnote:

American has six Boeing 777-300 aircraft on order with expected delivery dates in 2012 and 2013 . While these aircraft have a range of approximately 9,000 miles, they will not be configured or delivered anytime in the immediate future. Nor does any plan exist to use these assets to serve Australia/New Zealand. The aircraft to be delivered are not yet committed to particular routes, and given that American is currently short on long range aircraft to serve its existing routes, American will be carefully considering where these assets will be deployed and how they will be configured. In any event, the terms of American’s current collective bargaining agreement with the Allied Pilots Association would not permit service to Australia/New Zealand. That agreement cont ains a 14:30 flight time limitation. According to block times published by Qantas, service from Sydney to Los Angeles has an elapsed time of 14:35 to 15:00 depending on equipment type flown. Service from Sydney to Dallas/Fort Worth has an elapsed time of 15:25.

There are a few interesting things here. First – apparently American has ordered another 777-300ER! It will be interesting to see where those are deployed.

I also found the limitation on flight time to be interesting, frankly because I had forgotten about its existence! But based on my research, it appears that very long-haul flights are possible. For example, American cites a 14:35 and 15:00 hour elapsed times for a transpacific flight (these are the block times for Qantas’ 747 and A380 LAX-SYD flights, respectively). But American’s flight from Chicago to Delhi is 14 hours, 40 minutes – longer than one of Qantas’ flights to Australia. What gives?

Well, it according a news release from the Allied Pilots Association (APA) from a few years ago, their contract with American “contains language governing extended long-haul flying…on a city pair-specific basis only.” Of course, that language can lead to some drawn out negotiations, which is exactly what happened when American was looking at Dallas – Beijing flights.

So, yes, American’s current contract with the APA doesn’t allow for free reign on American’s part to add very long-haul routes. But it does appear that some kind of arrangement can be made in specific cases to allow for such flying. Granted, negotiating specific routes could certainly be a cumbersome process, and there’s no guarantee that such negotiation will be fruitful.

Maybe this will be hammered out when the APA and American negotiate a new contract? (Though who knows when the two sides will reach a tentative agreement?)