Monthly Archive for October, 2011

JetBlue Adjusts E190 Delivery Schedule

Published
by
Dan Webb
on October 28, 2011
in JetBlue
. 1 Comment

JetBlue has cancelled and deferred some of its orders for the Embraer’s E190 aircraft, a move that comes after the New York-based airline said this summer that it would “optimize” its fleet of the narrrowbody aircraft.

The airline noted in an investor update this week that it had deferred orders for seven 2013-2014 E190 deliveries to 2018, and had also cancelled orders for 12 aircraft that would have been delivered in 2014, 2017, and 2018. By comparing that update to JetBlue’s second quarter 10-Q, we can see how all those changes shake out:

JetBlue also noted this week that “subject to payment of a termination fee, JetBlue may cancel prior to July 31, 2012 seven EMBRAER 190 aircraft scheduled for delivery in 2018.”

The move from JetBlue is interesting, especially because earlier this year the airline said it had reached an agreement to sell 11 E190s to a third party. That deal is now off the table, according to the airline.

In other JetBlue fleet news, the airline has firmed up its Airbus order that was announced earlier this year, according to an Airbus press release and a JetBlue SEC filing. The only item worthy of note I could find is that JetBlue noted that its A320neo deliveries would take place from 2018 through 2021, and said in a separate filing that it would receive 10 of the aircraft in 2018.

Chatting with Virgin America CEO David Cush

Published
by
Dan Webb
on October 27, 2011
in Virgin America
. 0 Comments

A few weeks back (September 30) I had the opportunity to chat with Virgin America CEO David Cush about the latest happenings at the California-based carrier. Unfortunately, life got in the way of me writing this entire up, but I’m finally done! Warning: it’s a long one!

I first asked David about the carrier’s upcoming seasonal service from San Francsicso to Palm Springs, and why Virgin was interested in this new short-haul market. David said that “the peak quarter for Palm Springs is the first quarter” which is also “the weakest quarter for about 80% of our network, all of the transcons for example, so it is counter-seasonal to the rest of our system, so it’s a nice place to put an airplane.”

David also noted that “it’s nice for us to have some short-haul routes too for operating flexibility, and when fuel prices are this high short-haul tends to do better than long-haul.”

I was interested in David’s mention of the seasonality of Virgin’s network. A few months ago Virgin added service to Cancun and Cabo, destinations that have stronger first quarters, and will soon be launching Puerto Vallarta flights in addition to the new Palm Springs service. With all of those new routes, I was wondering if David was happy with the seasonal performance of Virgin’s network.

While Virgin has been adding service to some markets that are strong in the winter, it has also been “adding service to Chicago and service to other places that have very weak first quarters, so it’s a bit of a race when we add additional winter destinations,” said David. He added that the airline is “happy with Mexico” and that “Palm Springs started very strong out of the gate, but we’re also going to have to find some additional strong winter destinations.”

With all that talk of destinations, I asked David what might be coming in the near future. He said that Virgin has “a lot of airplanes coming,” and is slated to have 46 aircraft in its fleet at the end of this year, and 52 in the middle of 2012. (Virgin had 38 aircraft flying at the end of June.)

“Our strong sense is we’ll add one major East Coast business market next year, and then we’ll see what else happens,” David continued. “I would guess you may see one or two destinations in addition to a major East Coast business destination.”

I was also interested in the airline’s financial position, especially costs. The airline posted an 8.3% year-over-year in cost per available seat mile(CASM) ex-fuel in the second quarter, outpacing a 5.3% increase in the first quarter.

David said that Virgin’s CASM performance should improve as it gets more aircraft flying. He said it is “extremely expensive” to bring  a new aircraft into service as Virgin starts paying rent immediately, and it takes roughly 45 days for a new Virgin aircraft to go through modification (to install features like the carrier’s Red system). In addition, the airline hires “20 or so crew members per aircraft,” and those new employees need to go through training. (To summarize: Virgin incurs a bunch of expenses that are related to growth are incurred before new aircraft get placed into service and start producing revenue.)

Since David mentioned the amount of time Virgin’s aircraft have to go through modification, I decided to ask about its new Wi-Fi based IFE system that is slated to launch late next year. I was wondering if the system would reduce total time in modification, and David said “our expectation is that could cut anywhere from a few days to a week,” but said a final number is “still to be determined.”

While we were talking about IFE, I was interested if Virgin would be retrofitting its existing aircraft with the brand new system. Virgin has yet to make a decision on that front, and David mentioned that there are “conflicting financial impact items” for such a project. For example, Virgin has to incur the expense of changing the interiors of the aircraft, but the new system “also takes over 1,000 pounds off the airplane, so we save a lot of fuel,” said David.

In addition, David said that Virgin would only do such a modification while the aircraft were undergoing their D-checks, and the potential project would add some time to that process. “If we can make the numbers work, then we’ll start retrofitting,” he concluded.

As I was working on this post, I noticed an interesting notice from the FAA that announced the agency is designating SFO a Level 2 airport under IATA guidelines (the next step, Level 3, entails slot controls.) The agency said the move “is necessary based primarily on runway capacity, existing congestion and delays, and expected increased congestion due to a multi-year airport construction project.” (You can read all of the details about what this means here.)

I asked Virgin about this change, and the airline’s VP of Corporate Communications, Abby Lunardini said that the move “will not impact our broader growth plans at SFO, and we believe the FAA action is a proactive step that will help to address any potential future capacity or congestion issues, as a result of the planned airfield construction starting next year.”

As always, I enjoyed speaking with David about the latest at Virgin, as I’ve really enjoyed following the airline grow and develop over the past years. While I’m excited to see what destination the airline will announce next, I’m most interested in seeing the carrier’s third quarter numbers.

Virgin posted strong 45.6% year-over-year revenue growth in the second quarter, but that was outpaced by a 48.5% rise in operating costs (which includes a notable 61.5% rise in fuel costs). Virgin posted a net profit in the third quarter last year, so it will be interesting to see if we’ll see a repeat performance.

Charts of the Day: Delta’s Debt

Published
by
Dan Webb
on October 26, 2011
in Delta
. 1 Comment

Lately, Delta has made of point of cleaning up its balance sheet by reducing its debt, and the company reported yesterday that as of the end of the third quarter, its “adjusted net debt was $14.0 billion” and that the airline “remains on track to achieve its $10 billion adjusted net debt target in 2013.” Here’s the calculation, if anyone’s interested (a larger version is at the very end of the airline’s earnings release):

Looking at that made me interested in going back through some of Delta’s past earnings releases to find previous adjusted net debt calculations, and the decrease over the past couple of years is pretty significant (numbers are billions):

What’s interesting, however, is how the airline’s adjusted net debt actually went up between the second and third quarter. It appears that after looking at the airline’s second quarter earnings release, it appears that Delta’s adjusted total debt went down from $14.7 billion to $14.5 billion,  but its cash, cash equivalents and short-term investments balance decreased from $3.8 billion to $3.3 billion. That line item is subtracted from adjusted total debt to get adjusted net debt, hence the increase. I’m not saying that cash isn’t important, of course, but I just think it’s worth noting that (at least from the way I see things) that the underlying debt hasn’t increased.

Here’s the airline’s adjusted total debt, according to Delta press releases:

This shouldn’t shock anyone — but obviously I like it when an airline makes an effort to clean up its balance sheet. By doing this now, I think it is fair to say that Delta increases its debt capacity in the future should any major investment opportunities come to light. And, as Delta improves its numbers it should allow the airline to (all other things equal) lower it cost of borrowing over time.

A Quick Look at Alaska’s Latest Investor Update

Published
by
Dan Webb
on October 25, 2011
in Alaska
. 0 Comments

Apologies for the slow rate of posting of late — school has been very busy for the past couple of weeks (and will continue that way for a few more). Anyway, I’m catching up on some of the latest airline financial data, and found a couple of interesting points in Alaska’s latest investor update filed with the SEC.

First, it appears that the airline has slightly adjusted its 737 orderbook (again). Previously, the carrier would be taking 12 737-800s and 13 737-900ERs through 2015. Then Alaska disclosed last month that the breakdown was now 10 -800s and 15 -900ERs. As a result of that change, the first -900ERs are now arriving next year instead of 2013.

The airline’s latest update now says that it will be receiving 9 737-800s and 16 737-900ERs through 2015, as 737-900ER deliveries in 2013 have increased from five to six, while 737-800 deliveries for that year decreased from three to two.

Also interesting is Alaska’s estimate of economic fuel cost, at $3.30/gallon. The company broke down that price as follow:

Our economic fuel cost per gallon estimate for the fourth quarter includes the following per-gallon assumptions:  crude oil cost – $2.09 ($88 per barrel); refining margin – 95 cents; taxes and fees – 17 cents; cost of settled hedges – 9 cents.

That breakdown would indicate that Alaska’s hedging program is negatively impacting its fuel price. Of course, nine cents of $3.30 is a very tiny sliver — but it’s still a negative hedging impact nonetheless.

Southwest Changes 737 Delivery Schedule, Will Now Receive More -800s in 2012

Published
by
Dan Webb
on October 20, 2011
in Southwest
. 0 Comments

Southwest Airlines has once again upped its planned 737-800 deliveries slated for next year, according to the carrier’s third quarter earnings release.

The carrier originally announced in December last year that it would convert 20 orders for 737-700s (to be delivered in 2012) to the 737-800. Then, Southwest noted in it is second quarter earnings the release that it would be receiving five additional -800s in 2012, which would be leased aircraft.

Southwest noted today that it had 28 737-800s on firm order, plus the 5 additional (leased) aircraft. The additional eight firm orders for 737-800s appear to have been offset by changes in the airline’s 737-700 delivery schedule. In the second quarter Southwest said it was expecting six -700s in 2012 followed by 25 in 2013. The company said today that no -700s will arrive in 2012, and only 23 will arrive in 2013.

What’s interesting is that (in my opinion) the changes might be related to Southwest’s acquisition of AirTran’s 737 orderbook. For example, in April Southwest reported that it had no 737-700s on order in 2012 and 19 in 2012. Then, in the second quarter (the first quarter where AirTran’s orders were included) the number of -700 deliveries in both year increased by six, the same number AirTran had on order for those years (as of March 31).

Southwest will be starting its earnings call in a bit later today — and will likely provide some additional detail on its delivery schedule.

The airline has said previously that it could have over 100 737-800s eventually, and noted in its earnings release today (as it has in the past couple of quarters) that it “is evaluating substituting 737-800s in lieu of 737-700 firm orders currently scheduled for 2013 through 2017.”

2015: A (Potentially) Interesting Year for US Airways and the Regionals

Published
by
Dan Webb
on October 17, 2011
in US Airways
. 8 Comments

The regional airline industry, much like the airline industry as a whole, is constantly changing. I think it is fair to say that regional carriers are just beginning to stabilize from rapid capacity expansion (driven by mainline pilot contract scope relief) and a recent wave of consolidation.

Regional carriers will be fascinating to watch in the upcoming years. Profit margin targets in capacity purchase agreements have shrunk, and it’s likely that mainline carriers will continue to be tough with the regional carriers in terms of cost control.

This story has been dragging on for years. In 2004, Atlantic Coast Airlines, unhappy with the rates it would be receiving from United for regional service, decided to completely change its business model, branding itself Independence Air. The project failed, of course, but signaled that the era of high operating margins for regional carriers was coming to an end.

It’s fair to say, in my opinion, that Republic decided to try its Frontier experiment due to the dimmer prospects of contract business.

We’ll have to wait for a couple of years, of course, before we begin to see some more clarity on the future of the regional industry. But 2015 will be a big year for US Airways. And Air Wisconsin. And Republic. And Mesa.

In 2015, Air Wisconsin’s contract with US Airways will expire, according to an Air Wisconsin negotiations website. The carrier currently operates 70 CRJ-200s for US Airways Express. In addition, Republic explained in its latest annual report that in the same year its agreement with US Airways to operate 20 E170s and 8 E175s expires. Finally, Mesa, which operates 38 CRJ-900s, will have its contract expire in 2015, after its contract with US Airways was recently extended for 39 months as the regional carrier emerged from bankruptcy.

All of these contracts represent a significant amount of flying for the US Airways Express operation. The big question, of course, is how the Phoenix-based mainline carrier deals with these expiring contracts. The simplest option is to simply extend them, at possibly lower rates (which seems like a very possible scenario, especially for the E-Jet and CRJ-900 flying.)

But what happens to the CRJ-200 flying? The 50-seat jet, once the darling of the industry, has started to fall from favor, especially as new industry economics (driven by oil prices) have come into play. What does US Airways do with that Air Wisconsin flying?

This becomes a bigger issue, of course, as there are no new 50-seat aircraft in production. Bombardier has ceased production of the CRJ-200 and Dash-8-200 (Q200), while Embraer no longer produces the ERJ-135/140/145 family of aircraft.

Only adding to this issue is mainline pilot contracts, which contain scope provisions that outline what flying can actually be done by regional carriers. Pilot contracts are American, United, and US Airways are already amendable, and Delta’s contract runs through the end of next year.

In short…it’s going to be an interesting few years. Regional contracts set years ago will be expiring in a new, post-consolidation era with years of lost growth due to the recession. Airframers aren’t making 50-seaters anymore, and pilot contracts that restrict large regional jet flying are under negotiation.

 

United Expects Five 787s in 2012

Published
by
Dan Webb
on October 12, 2011
in Uncategorized
. 1 Comment

In an investor presentation filed with the Securities and Exchange Comission today, United noted that “based on the latest delivery schedule, the company expects delivery of 5 B787 Dreamliner aircraft in 2012.” Last month, United said six of the new aircraft would be arriving next year.

The airline also plans to receive 19 737-900ERs, next year…the same number it reported last month.

(Update: Flightblogger is reporting that United’s first 787 will now come in the second half of next year.)

Based on plans unveiled last year, Continental/United was supposed to begin revenue service of the 787 in November this year, but delays in the 787 program got in the way.

Today’s slide:

Last month’s slide:

Delta Adds Denver-Los Angeles

Published
by
Dan Webb
on October 12, 2011
in Delta
. 2 Comments

Delta is adding regional service between Los Angeles and Denver (again), according to the always-informative Airline Route blog, with four daily CRJ-700 flights launching on June 7.  The service will be operated by SkyWest, according to Delta.com.

If this route sounds familiar, it should! It was added by Delta back in 2007 back when ExpressJet was a Delta Connection airline. (The partnership didn’t last.) Northwest even gave this route a try back in 2004, but I believe that was a move against Frontier, especially as Frontier decided to experiment on the Los Angeles – Minneapolis route.

So, why is Delta giving the route another try? It’s quite competitive already, with multiple daily flights from American Eagle, Frontier, Southwest, and United (including a 777 flight!).

Back in March 2010 when the carrier announced some new Los Angeles service (including regional service to San Francisco), it included this interesting blurb from Glen Hauenstein EVP of Network Planning and Revenue Management:

Los Angeles’ strategic position in the Delta network continues to gain importance as we expand opportunities for customers to connect to our trans-Pacific services from this growing, thriving gateway. We are pleased not only to continue to expand service for Delta customers via L.A. but also to offer the convenience of L.A. connections to customers flying our alliance partners.

That quote, of course, is now over a year old, but I think it’s still valid. Delta has its own trans-Pacific service from Los Angeles (Sydney and Tokyo), and many of its partners fly there as well, including joint venture partner Virgin Australia.

Nevertheless, it’s been interesting to see Delta build up some regional flying out of Los Angeles, including Oakland and Sacramento service that began earlier this year. We’ll just have to see how it develops.

Slightly-Related Side Note!

New routes like this one is why I’m sometimes a bit skeptical about American’s cornerstone strategy. I think it’s fair to say that American is just one (albeit large) player in a crowded market, as Delta, United, and Virgin America all put some kind of focus on Los Angeles. In New York, meanwhile, American faces a strong competitor in United, and Delta’s position in New York will only be bolstered if the slot swap is implemented (it was approved yesterday, but DOJ is concerned about DCA). Lastly, American already has to co-exist with United at O’Hare, and Southwest  has a substantial operation at Midway.

So the only two cornerstones where American is dominant, really, is Dallas and Miami. In the case of the former, American will start facing stronger competition from Southwest once the Wright Amendment restrictions are fully removed in 2014.

American Makes Further Schedule Tweaks

Published
by
Dan Webb
on October 11, 2011
in American
. 0 Comments

American Airlines announced yesterday that it was further tweaking its fall and winter schedule, adding that that fourth quarter mainline capacity will be 3% lower year-over-year. The Dallas-based carrier will also retire as many as 11 Boeing 757-200s next year. American had 124 757-200s in its fleet as of June 30, according to parent company AMR’s second quarter 10-Q.

American CCO Virasb Vahidi that even though “our advance bookings are generally in line with last year, we are taking these additional steps in light of the uncertain economic environment, ongoing high fuel costs and to ensure we run a reliable schedule for our customers given additional pilot retirements we anticipate throughout the fourth quarter.”

The airline has seen a high number of pilots - 129 in September and 111 in August – retire of late, perhaps a strategic move to take advantage of a retirement plan feature thatallows some pilots to lock-in higher stock prices. American is seeking relief from its pilots union to help counter the high number of retirements.

American also said that the 757 retirements are being made “in anticipation of the new Airbus and Boeing deliveries that start in 2013.” In a recent SEC filing, American parent AMR Corporation outlined deliveries from its (very large) July aircraft order, saying “twenty of the firm [Boeing] NG Aircraft are scheduled to be delivered in each of the years 2013 to 2017″ and “between 20 to 35 of the firm Current Generation Airbus Aircraft are scheduled to be delivered in each of the years 2013 to 2017.”

The company also outlines some other interesting developments, saying that “third quarter unit costs will be adversely impacted by quarter-end volatility in WTI crude oil prices and foreign exchange rates.” American noted that while “WTI [West Texas Intermediate] prices decreased, while jet fuel prices remained high, which will result in a $29 million non-cash fuel hedging ineffectiveness charge.” In a September 21 SEC filing, AMR estimated third quarter fuel expense at $3.10/gallon – it will be interesting to see what the actual number is.

American also noted that “the U.S. dollar strengthened, which will drive a $22 million incremental charge as a result of foreign exchange volatility.”

JetBlue to Launch BDL-PBI in January

Published
by
Dan Webb
on October 3, 2011
in JetBlue
. 1 Comment

JetBlue announced earlier this today that it will launch service from Hartford to West Palm Beach starting January 12, a news item that brought about a few random thoughts:

  • JetBlue seems to be doing well it Hartford after the airline launched service last November. In addition to the Palm Beach flgihts, the carrier will launch service to San Juan in January.
  • Interestingly, Delta seems to be pulling back on its nonstop flights from Hartford to Florida, which was very unique for a Delta city. The airline flies to Orlando, and also flew to Ft. Myers, Ft. Lauderdale, Tampa, and West Palm this past winter.
  • I can’t find any Delta service to Tampa, Ft. Lauderdale, Ft. Myers, and West Palm for this winter, and I don’t see Orlando past the beginning of January (someone correct me if I’m wrong).
  • A lot of that Delta Florida flying was previously done by Delta Express/Song, by the way.
  • Hartford has this strange ability to hold on to non-hub legacy routes. It’s the only non-cornerstone city in the US to still have American Service to San Juan, and it’s one of the few cities left to have US Airways (albeit Express) flights to Pittsburgh.

On a slightly related note – can JetBlue please come to Providence? Pretty please?

E-Mail Subscriptions Now Available

Published
by
Dan Webb
on October 3, 2011
in Uncategorized
. 0 Comments

I’m always looking for reader feedback, and one suggestion that kept popping up was e-mail subscriptions. Well, the kind people at BoardingArea have now set that up for me. Just enter your e-mail address on the sidebar, complete the form that comes up, and then click the link in the confirmation e-mail you will receive. Pretty easy stuff.