Monthly Archive for August, 2011

More Details on the Delta 737-900ER Order

Published
by
Dan Webb
on August 31, 2011
in Delta
. 0 Comments

Yesterday Delta Air Lines released more details about its order for 100 737-900ERs in an SEC filing yesterday, and here are the highlights:

  • Delta said that “In exchange for the cancellation of existing 737-800 options and rolling options, the agreement includes new options to purchase an additional 30 737-900ER aircraft.” In its second quarter 10-Q, Delta noted that it had 60 737-800 options and 66 rolling options.
  • The difference between the two option types: “Aircraft options have scheduled delivery slots, while rolling options replace options and are assigned delivery slots as options expire or are exercised,” according to the 10-Q.
  • Delta now has “total aircraft purchase commitments of $6.8 billion, including $55 million for the six months ending December 31, 2011, $210 million in 2012, $540 million in 2013, $760 million in 2014, $770 million in 2015, $780 million in 2016 and $3.7 billion after 2016.”
  • For comparison’s sake, in its 10-Q Delta reported $2.6 billion in aircraft purchase commitments as of June 30. This number included $30 million in the second half of 2011, $70 million in 2012, and $2.5 billion from 2020 to 2022. Those figures “relate to 18 B-787-8 aircraft and 14 previously owned MD-90 aircraft.”

Quick Thought on Southwest and the 717

Published
by
Dan Webb
on August 25, 2011
in Southwest
. 1 Comment

I realize I’m playing catch-up here, but during Southwest’s quarterly media call earlier this month, CEO Gary Kelly had some interesting comments on the AirTran 717s and that size of aircraft in general:

We have broad discussions underway with Boeing on a number of issues, and at this point we don’t see a reason why we would want to have a different aircraft other than the 737. So, that’s not to say that we don’t want the 717 because we’ve got them, but we don’t see a reason to keep the 717s longer than we have to, or find a unique replacement for the 717 that is anything other than the 737.

Gary also said during the call that it has lease commitments on 717s through 2024.

Those comments made me do a little more digging.

First off, the vast majority (80 of 88, according to Southwest’s most recent 10-Q) of those AirTran 717s are leased aircraft, and it appears that most of these are leased from Boeing. AirTran is the biggest customer of Boeing’s leasing arm, Boeing Capital Corp., representing 29.9% of the firm’s total portfolio at the end of the first half of 2011. In addition, AirTran accounted for 21% of Boeing Capital’s total revenue during the first six months of this year, according to regulatory filings.

The way I look at things – it appears that if Southwest wanted to get out of those 717 leases early, it probably could work something out with Boeing. Something like that could happen if Southwest was interested in making some new orders anytime soon.

Of course, this all depends on how Southwest feels about the 717 overall. After doing some of my own number crunching, it appears the aircraft might not be a great fit from a cost perspective. Using total operating costs from Form 41 financial data, and ramp-to-ramp time from Form 41 traffic data,  the operating cost per block hour for the AirTran 717 in all of 2018 is around $3,211, higher than the $2,922 I calculated for the airline’s 737-700 aircraft.

Now, Form 41 data doesn’t always paint the clearest picture – and of course every airline has their own internal data that is the best source of cost information – but the public government data does suggest that that the cost performance of the 717 might leave a bit to be desired.

Either way, it will surely be interesting to see how Southwest utilizes the 717, and also how the airline considers that gauge of aircraft in the future.

 

Southwest Comes to Atlanta

Published
by
Dan Webb
on August 23, 2011
in Southwest
. 0 Comments

Yesterday, Southwest Airlines announced it would be launching its own service Atlanta beginning February 12. Of course, this announcement isn’t much of a surprise but is still interesting. Here are the routes Southwest will be launching:

  • Baltimore (four dailies)
  • Chicago (four dailies)
  • Houston (three dailies)
  • Denver (two dailies)
  • Austin (two dailies)

All three Houston flights and one Austin flight will continue on to Dallas, according to Southwest’s website.

Overall, I’d say that other than Austin none of these new destinations are very surprising, as they are large markets themselves and also open up Atlanta to many existing Southwest cities.

It’s also worth noting that AirTran already has its own flights to all of these cities but Austin, and some reductions in AirTran’s schedule appear to coincide very nicely with the new Southwest service. For example, on February 6th there are six flights each from Atlanta to Baltimore and Chicago, but that there are only four on February 13. When comparing those same two dates, Denver flights decrease from three to two and Houston flights decrease from five to three.

Southwest also talked about some reciprocal benefits between elites on either airline. That’s great, but I’m scratching my head a bit about one benefit – Southwest elites will receive free Business Class upgrades when flying AirTran. Why provide a benefit that’s going to be going away soon anyway?

Meanwhile, I have been thinking that Southwest would eventually allows bookings that involve both airlines, but so far we haven’t seen anything (unless I’m missing something obvious). EDIT: That’s slated for the first half of next year, as Cranky Flier noted.

A Few Thoughts On The United Product Announcements

Published
by
Dan Webb
on August 22, 2011
in United
. 2 Comments

Naturally, everyone’s talking about the press release United put out yesterday about product improvements. To be honest, many of the details in the release, such as flat-beds on the Continental 767-400s and Wi-Fi on some aircraft, aren’t new. Even the news that Channel 9 was coming to Continental aircraft was even mentioned in a newspaper article a few months ago (though I completely missed it). But there are some interesting details.

First, the 14 United 767-300s that are in a denser domestic configuration will be receiving flat beds. If I were to make a guess, the 14 shipsets of winglets ordered by United earlier this year will be going on those aircraft. Where those are deployed is a different question.

United also said that its A319 and A320 aircraft will be receiving larger overhead bins. Yay! United also said it would “refresh the interiors of its Airbus fleet,” but does not offer any other details. It will be interesting to see how that shakes out, especially since United has two different versions of the A320 – those that have always been mainline and the ex-Ted aircraft.

Meanwhile, streaming entertainment is coming to United’s 747s! This is fantastic news, considering the lack of (good) entertainment in Economy on these aircraft. Untied said it is “selecting a vendor” for the service, so we’ll have to see if United will go with Gogo, the option that American has selected. Of course, a laptop running this entertainment will likely not survive, say, a LAX-SYD flight, but United had something promising to say on FlyerTalk:

Our goal is to also install in-seat power outlets as well. We’re still finalizing the details there, but we recognize the need average length of this aircraft’s missions.

United also mentioned that its p.s. aircraft flying from JFK to LAX and SFO will be getting an upgrade, noting that the aircraft “will offer flat-bed seats, Economy Plus, power ports at every row, on-demand audio and video and Wi-Fi service.”

I think United was pretty vague in this department, and is also lumping in existing features as upgrades. p.s. already features power outlets, Wi-Fi, and Economy Plus. In fact, the fleet today only offers First, Business, and Economy Plus. United is dumping First Class altogether, and will also introduce regular economy seating on the p.s. fleet. (As United noted, though, legroom in Economy Plus will increase.)

I do have a couple of other comments…but for some reason I haven’t able to download any data at all from Transtats …so those will be coming later.

PHOTOS: The First United 787 Comes Together

Published
by
Dan Webb
on August 19, 2011
in United
. 2 Comments

United Airlines’ first Boeing 787-8 aircraft has begun final assembly…and the airline was kind enough to pass along some photos!

Continental and United each ordered 25 787s before their merger. Continental was set to receive the 787 before United, which had planned to begin taking 787s and A350s in 2016.

The carrier said this week that the aircraft will have 36 BusinessFirst flat-bed seats, along with 63 seats in Economy Plus and 120 in economy, a total of 219 seats. Continental had previously said that the 787-8 would seat 228. My best guess for the change is that the announcement was made in August last year, months before United said Economy Plus would be coming to the Continental fleet.

Continental last year announced that it would use its 787s to fly from Houston to Auckland, New Zealand and Lagos, Nigeria beginning this November, but such a route is (obviously) no longer possible. Service from Houston to Lagos, however, will operate this year with Continental’s 777-200ERs.

United said this week that it will receive its first 787 early next year, and will announce 787 schedule details in the coming months.

The Potential Downsides of Hedging

Published
by
Dan Webb
on August 17, 2011
in Uncategorized
. 3 Comments

Oil hedging has been an interesting airline topic for more than a few years now, but I always think it’s worthwhile to examine the practice every now and then. In many cases, fuel hedging  with financial instruments (often options strategies) can provide a bit more certainty to an airline’s fuel expense and can provide protection against moves in prices.

Fuel hedging this way is by no means a replacement of “natural” hedges that actually reduce fuel consumption such as engine washing, winglet installations, fleet replacement, etc., but it can still provide benefits to an airline’s bottom line, with hedging gains offsetting the fuel price boosts.

But there are costs (and downsides) associated with the practice. Hedging can get expensive, and quick.

Let’s say I want to by a crude oil call option (a relatively common instrument for airlines), which provides the option to buy oil at a set strike price once the underlying commodity hits that price. Such a move can provide profits if oil prices go up eventually, but in the short term I need to pay a premium to purchase the option, tying up my cash. Depending on an airline’s hedging portfolio/strategy, millions of dollars could be tied up in items like option premiums.

The other issue is the risk of declining prices, which can cause losses for the airline as the value of its hedges decrease. A fuel hedge portfolio can be tailored to help minimize this risk, but an airline could have been better off not being hedged at all.

With that said — the past couple of weeks or so have got me interested in hedging again, as we’ve some volatile moves in oil, with West Texas Intermediate (WTI) crude temporarily going below the $80/barrel level. That made me go digging a bit further as to how airlines might be affected by such price movements.

It’s tough, of course, to always quantify how exact airlines will be affected by swings in oil prices. The amount and type of information disclosed by carriers varies greatly from airline to airline. Plus, airlines report this data at one point in time, with both prices (and portfolios) changing greatly afterward. A few data points from a few industry players, however, paint a decent enough high-level picture.

For example, let’s take a look at Alaska, which provides a nice breakdown of its economic fuel price per gallon (which includes settled hedges) in its regular investor updates. Let’s compare the July 21 and August 12 updates:

The July 21 forecast was based on $100/barrel oil, but that estimate slipped to $90 in the latest update. (Meanwhile, Alaska’s refining margin estimate also changed.) In addition, while hedging would bring down Alaska’s fuel price based on a prior update, the current forecast indicates it would increase the price. Alaska still pays less for fuel, but hedging dims the benefit slightly.

Why did this happen? Probably due to declining oil prices. As Alaska said in its 10-Q: “The Company pays a premium to enter into crude oil option contracts. In order to receive economic benefit from the contract, the market price of crude oil must exceed the total of the contract strike price and the premium cost per barrel at the time of contract settlement.”

The company noted in its latest update that it had hedged 50% of its remaining 2011 consumption at a weighted-average crude price was $86, plus an $11 premium per barrel. In addition to call options, Alaska also explained that it uses refining margin swaps for hedging purposes.

Southwest and Delta also provided some interesting data points on how declining oil prices will affect its hedges in their recent 10-Q filings with the SEC.

Southwest said that as of August 1, its economic jet fuel cost per gallon for the third quarter would be $0.04 above an unhedged price at an average WTI price of $85/barrel. Four cents doesn’t sound like much, but that translates into millions of dollars for an airline the size of Southwest.

Delta’s 10-Q estimates are a bit older, as the airline says they are “based on our open fuel hedge contracts at June 30, 2011,” but a similar picture is still stated. For example, were WTI crude to be at an $80/barrel, Delta said total fuel expense for the second half of 2011 would be $730 million lower (compared to $95/barrel oil) , but it would incur an estimated $160 million hedging loss at the same time.

Anyway — I’m not trying to judge any airline’s particular hedging strategy, and it should be noted that these are all estimates from the airlines at one point in time. Hedging portfolios can change, and prices can move greatly from an airline’s last forecast.

But hopefully this post helps explain the downside risks of hedging. It should be interesting to see how hedging results play out this year, especially as US Airways’ strategy of not hedging worked well last year.

Edited at 11:27 AM to fix a dumb typo.

A Few Thoughts on the Eagle Divestiture

Published
by
Dan Webb
on August 16, 2011
in American
. 0 Comments

It’s been a few weeks since AMR originally announced that it would be divesting its American Eagle subsidiary, but I think the topic is worth revisiting now that more details about the spin-off have been released.

The benefits to American are pretty clear – the airline can now seek to diversify its regional feed with more airlines (Eagle provides over 90% of American’s regional service). The only carrier other than Eagle to provide regional service to American is Chautauqua, which only operates a handful of ERJ-140s under the AmericanConnection brand – an operation that finds its roots in the Trans World Express days.

I find this deal much more interesting from an American Eagle point of view, though – here are a few are a few of the pros and cons floating around in my mind (in no particular order).

Pros

New Business Opportunities
According to AMR, the spin-off will allow Eagle to “grow its business by better competing to offer regional flight services to other mainline carriers.” Eagle also outlined in an SEC filing that it believes there are better ground handling business opportunities at existing and new locations as an independent company.

Guaranteed Revenue (For a Few Years)
As per the current plan, Eagle will have a nine-year air services agreement (capacity purchase agreement) with American, along with an eight-year ground handling deal. While the scope of these agreements could possibly shrink over the years (see below), at the very lease Eagle has some guaranteed revenue that should help the company’s transition to independence.

American’s Scope Clause
While we’re on the topic of guarantees, Eagle said that “American’s current labor agreement with the Allied Pilots Association restricts American’s ability to use regional carriers other than us for flying the CRJ-700 aircraft on its behalf.” While AA’s agreement with the APA could change, this portion of flying looks safe for now.

Advantages for American Bids
Eagle said that American must “notice of any and all requests for proposals pursuant to which it seeks regional flight operations” and it has “the right and option to submit a bid to American for such regional flight operations.” The airline also noted that “for a certain number of aircraft for which bids are received before 2017, we will have a right of first refusal in connection with any third party bid.”

American is On the Hook for Eagle’s Airplanes
As part of the transition, Eagle will begin leasing its active fleet from American. The company noted in its filing “upon completion of the spin-off, we will not own any of our active aircraft and will not have any residual liability for the aircraft that we operate for American.” In addition, “upon expiration of any underlying aircraft lease or sublease, American will be solely responsible for redeploying the aircraft.” If Eagle does lose some of the flying it does for American, these terms lessen the blow significantly. It also means that Eagle has no aircraft-related debt.

Cons

Eagle Could Lose Some American Business
Right now, Eagle is slated to operate 281 aircraft for American, but that number can decrease…and soon. Starting next year American can remove up to 12 ATRs per year, and up to 40 jets per year beginning in 2014. In addition, “American’s right to withdraw aircraft each year is cumulative so that any number of aircraft not withdrawn in any year may be withdrawn in a subsequent year, subject to certain limitations,” according to Eagle. Over time, Eagle may also lose some ground handling business from American as well.

Rates Eagle Charges to American Are Subject to Change
Here’s an interesting twist that helps protect American. In case Eagle finds a deal to fly aircraft with more than 60 but less than 86 seats, the company “must notify American of the material terms of the proposed agreement and American may reduce our rates related to CRJ jet aircraft to match the rates in the proposed agreement.”

The agreement between Eagle and American also appears to have some protection against further industry scope relief, if that were to happen:

…we will be required to offer American the opportunity to enter into a new agreement with respect to additional airline services on substantially the same economic terms as any agreement we enter into with a third party at any station for regional flight operations using aircraft with more than 86 seats.

Right now the largest regional jets operated for mainline carriers are right at 86 seats. This includes the CRJ-900s and E-175s operating as US Airways Express, though the total number of seats on those aircraft is slated to decrease as first class is installed on them.

More Powerful Competitors
We’ve some interesting consolidation activity in the regional industry since AMR’s first attempt to divest Eagle in 2007 (SkyWest nabbing ExpressJet and Pinnacle acquiring Mesaba comes to mind). All of these larger competitors, like Eagle, are likely focused on cost control to help remain competitive for mainline contracts.

Changing Regional Industry Dynamics
In May 2011, there were (on average) slightly more than 5800 daily departures operated by ERJ-135/140/145 and CRJ-100/200, down from nearly 6700 in May 2008, according to DOT traffic statistics. This downward trend will likely continue in the future as capacity purchase agreements expire and mainline carriers adjust their regional service to the realities of today’s industry, such as higher oil prices. Of course, growth in the larger RJ segment has helped to offset this decrease.

Eagle May Have to Build Up Its Fleet
In order to gain new business, Eagle may have to start acquiring aircraft, which can become an expensive affair. Eagle said it plans to “initially seek to enter into capacity purchase contracts where we would lease aircraft from the mainline carrier,” but there’s no guarantee that will happen.

Concluding Thoughts

Despite all of the nice parts of the deal, I’m not really convinced that Eagle will be able to thrive on its own. Here’s the question bouncing in my head: “Why will Eagle fare better independently than ExpressJet did?”

Either way, it’ll be fun to see how this all plays out.

A Quick Look at Some Virgin America Financials

Published
by
Dan Webb
on August 15, 2011
in Virgin America
. 1 Comment

I’ve been spending some time over the past couple of weeks with some Virgin America financials – specifically its latest (Q4 2010) balance sheet with the DOT.

Here’s an interesting data point – the value of the carrier’s owned aircraft at the end of 2010 was roughly $40.9 million. That’s down over $60 million than at the end of the third quarter of 2010, and only about $2.1 million higher than the third quarter of 2007, when Virgin began operating.

The latest decrease in this line item appears to be driven by sale-leaseback transactions. According to the carrier’s fourth quarter 2010 cash flow statement, Virgin generated about $59.5 million through sale-leasebacks during the quarter. During the same time period, Virgin saw negative cash flow $55.5 million to pay off notes and also received $35.2 million through the issuance of new debt.

A similar decline in the flight equipment line occurred during the fourth quarter of 2009, according to DOT balance sheet data, though Virgin’s cash flow statement doesn’t mention any sale-leasebacks during that time period.

Other interesting balance sheet data point — Virgin’s purchase commitments (an asset on the balance sheet) were listed at $38.3 at the end of 2010, up from $18.3 million at the end of the third quarter. If I had to make a guess, I would say the increase could have been driven by the carrier’s 60-strong A320 order, which was finalized at the end of December.

Hopefully more on these topics soon – unfortunately the DOT’s release of first quarter financial data is many weeks behind schedule, though supposedly second quarter numbers are still due next month.

 

June Was a Good Month for Delta

Published
by
Dan Webb
on August 12, 2011
in Delta
. 1 Comment

Based on the latest Air Travel Consumer Report from the DOT, Delta Air Lines’ performance in areas such as complaints, baggage handling, and on-time arrivals appears to have improved considerably.

First off, let’s take a look at complaints. In June 2010, Delta was the worst of all carriers, with 3.08 complaints to the DOT per 100,000 enplanements. Complaints in June of this year, however, were only 1.03 per 100,000 enplanements.

Of course, it might be unfair to look at only one month of complaints. But Delta’s complaint performance for the first half of 2011 has also been good, at 1.27 complaints per 100,000 enplanements, a decrease from 2.20 during the same period one year ago. Perhaps the additional training Delta has been giving to its customer service agents has been making an impact?

Delta’s performance on baggage handling has also improved, recording 2.99 mishandled baggage reports per 1,000 passengers in June, a decrease from 3.47 reports a year ago. Reports for the first six months of 2011 decreased to 3.00 reports from 3.67 reports in 2010.

Finally, Delta’s on-time performance relative to peers has also improved. 78.5% of Delta’s flights arrived on-time in June, enabling Delta to beat American, Continental, United, and US Airways in this metric for the second month in a row.

I asked Delta why on-time performance has been improving compared to last year, and the airline provided a few interesting reasons. A major factor was weather, especially in important areas in Delta’s network like the Southeast and New York. Summer thunderstorms can gum up any airline operation, especially when ground stops and delay programs are implemented by ATC.

In addition, Delta earlier this year launched initiative focused on D0 (“D-zero”) times, a metric that summarizes how many flights leave on time. Naturally, such an initiative involves many employee groups, including pilots, flight attendants, gate agents, ground crew, and dispatch.

Another reason that Delta’s on-time numbers look better this year is that in 2010 the carrier faced some hurdles as it ramped up flying for its summer schedule. The airline had already been operating the mixed Delta-Northwest fleet for awhile last year, but Summer 2010 was the carrier’s first under a combined operating certificate. In some cases, Delta had problems with aircraft availability due to maintenance issues. The airline has added seven line maintenance bases (five in summer/fall 2010, and two in 2011) in its network to help improve reliability.

But back to D0 times. I played around with the raw DOT on-time numbers and found some interesting results. When one compares June 2011 to June 2010 results, it appears that Delta has been making progress with this latest effort. This year, 51% of Delta mainline flights from Atlanta had pushed back by scheduled departure time, 5 points higher than one year ago. Granted, I’ve only looked at one year-over-year comp, so more digging is needed, but nevertheless I find this interesting.

Highlights from JetBlue’s 10-Q

Published
by
Dan Webb
on August 11, 2011
in JetBlue
. 0 Comments

JetBlue filed its 10-Q with the SEC last week – here are a few of the highlights. First, here’s part of the second half outlook:

Due to uncertain economic conditions, we do not anticipate unit revenue growth as strong as we experienced in the first half of the year for the remainder of 2011. However, our strong liquidity position affords us some flexibility to navigate the challenging fuel environment and to re-focus our efforts, if needed, to proactively respond to changes in the demand and pricing environments.

JetBlue yesterday reported its July traffic and estimated that PRASM rose 5% year-over-year – the lowest increase it has reported so far this year.

In terms of ancillary revenue, JetBlue said in its 10-Q that revenue from Even More Space (formerly even more legroom) was up $15 million year-over-year for the first half of 2011, and up $10 million for the second quarter “as a result of increased capacity and revised pricing.” The carrier increased fees for Even More Legroom in March 2011, and also said during its latest earnings call that it would add up to six more even more Even More Space seats “in the very near future.”

Finally – JetBlue has yet to finalize its order with Airbus that was announced at Paris this year. The airline said it plans “to execute a new purchase agreement incorporating the details of this memorandum of understanding with Airbus later this year.”

Teamsters Sue Republic Over FAPA Concessions

Published
by
Dan Webb
on August 10, 2011
in Frontier and Republic
. 0 Comments

The International Brotherhood of Teamsters has filed a lawsuit against Republic Airways Holdings and Frontier Airlines, alleging that Frontier’s then-pilot union, the Frontier Airlines Pilots Association (FAPA) colluded with management in an attempt to interfere with a pilot election taking place at Republic.

(The Teamsters announced the suit on Wednesday last week — though I didn’t notice the suit until I was scanning through Republic’s second quarter 10-Q, filed with the SEC last evening.)

“On the eve of the ballot count, FAPA gave pay cuts and other concessions to management in a desperate effort to avoid a vote of the pilots and short circuit the NMB [National Mediation Board] election,” said Captain David Bourne, IBT Airline Division Director in a news release. Bourne also said the deal would “help FAPA perpetuate itself at Frontier no matter what the outcome of the votes of the pilots.”

Republic unveiled a $100 million restructuring program for Frontier earlier this year, though that $100 million target was later upped to $120 million. As part of that program, a concessionary agreement was created and then overwhelmingly approved by FAPA membership in June. The Teamsters now seek to nullify this agreement.

In its 10-Q, Republic said if “the restructuring agreement is declared null and void, Frontier would lose approximately $9 million to $10 million in cost savings per year over each of the next five years”. The company also said that the IBT’s “allegations are baseless.”

Republic had previously outlined the savings from the pilot deal in an earlier SEC filing, saying that they would peak at $12 million in both 2012 and 2013, though savings would be realized from 2011 though 2016. The net present value of these cost cutting measures was calculated to be $39.3 million, the value of FAPA’s equity stake in Frontier.

The lawsuit comes after a period of interesting developments in the pilot labor situation at the Republic carriers. Earlier this year the NMB concluded after an investigation requested by the Teamsters that all of the Republic carriers were operating as a single transportation system. A union election was subsequently authorized. The Teamsters, the union that had already represented pilots at Republic carriers such as Republic Airlines, Chautauqua, and Shuttle American, won this election in June.

Before the Teamsters succeeded in their election bid, however, Republic had attempted to delay the tally of the election results, arguing that its restructuring and a planned reduction in its stake in Frontier could affect the ruling that all of the Republic airlines were composed of a single transportation system. The NMB denied this request.