Monthly Archive for November, 2011

US Airways On Capacity Flexibility

Published
by
Dan Webb
on November 30, 2011
in US Airways
. 0 Comments

US Airways has limited flexibility when it comes to cutting capacity further should conditions warrant, according to a presentation by CFO Derek Kerr.

“We don’t have a lot of flexibility to pull out capacity because we have fleet minimums in our pilot contract,” said Kerr at the City 2011 North American Credit Conference on November 16, noting there was a US Airways (East) and an America West (West) minimum.

“We’re pretty close to that number today,” Kerr added.

But US Airways does have some options on the table if economic conditions warranted further capacity reductions. “We do have 15 Embraer 190s that are not part of that fleet minimum that we could reduce if we needed to,” which would represent roughly 1-1.5% of capacity, Kerr said.

The airline has already shrunk its E190 fleet from 25 aircraft after selling 10 to Republic Airways Holdings just over two years ago.

In addition, the carrier “can always pull back some utilization,” Kerr added, but also noted that “we do have a utilization minimum.”

“So we could pull back capacity…maybe 2% to 3%, but we don’t have a lot of flexibility to pull back due to our pilot scope clause,” Kerr concluded.

American: Scope, Codesharing, and Cornerstone All Work Together

Published
by
Dan Webb
on November 29, 2011
in Uncategorized
. 1 Comment

(Editor’s Note – Most of this post was written over this weekend, but I’ve made a few minor changes to reflect AA’s major announcement today.)

In September 2009, American Airlines parent AMR Corporate announced that it was taking “significant steps to face near-term challenges,” including changes in the airline’s route network. American would “eliminate unprofitable flying and reallocate resources” to Chicago, Dallas, Los Angeles, Miami, and New York – the “cornerstones” of American’s network that were “critical markets.”

But despite these network and other changes, American’s financial performance continues to lag its peers. AMR’s operating margin in the third quarter was a mere 0.6%, far lower than Delta’s 8.8% margin.  Meanwhile, American’s operating margin in the third quarter was 440 basis points better than the third quarter of 2009, while Delta’s operating margin rose 607 basis points.

American has lagged Delta in revenue production as well. Its consolidated passenger revenue per available seat was 12.78 cents in the third quarter, a 20.4% increase from the same period in 2009. While a double-digit unit revenue increase is certainly strong, it is less than a 29.2% increase in consolidated PRASM for Delta over the same period.

So far, the airline’s bankruptcy filing does not appear to have a large effect on American’s network strategy, as it said today on its website that it plans “to maintain a strong presence in domestic and international markets, including our cornerstones in Dallas/Fort Worth, Chicago, New York, Miami, and Los Angeles.”

While the idea of an airline cutting back on loss-making routes and focusing on core markets is certainly a valid strategy, it appears that American’s cornerstone strategy had not provided enough benefits to allow the Dallas-based carrier to keep up with its peers. Two cornerstone markets worthy of extra review, in my opinion, are Los Angeles and New York.

Los Angeles

American might be putting more emphasis on Los Angeles, most notably launching a slew of regional routes in recent months, but other carriers view the city as important. United has historically viewed the city as a hub, Delta has been building up there, and Virgin America has added service on key American routes, like New York or, more recently, Chicago and Dallas. What remains unclear is how American expects to become a dominant player in this market.

Two New York Strategies

In late 2009 US Airways announced a similar plan to American’s cornerstone strategy, saying that it would focus on Charlotte, Philadelphia, Phoenix, and Washington, DC. The carrier announced at the same time that its Boston, Las Vegas, and New York-LaGuardia crew bases would be closed. The news came after the carrier had made the initial announcement about its slot swap with Delta, which entailed a large shrink of US Airways’ LaGuardia operation.

“The problem in New York is the fragmentation in New York. We weren’t big enough in New York,” said US Airways CFO Derek Kerr at a recent investor conference when asked about its slot swap deal with Delta. He continued: “as we look at it, if you’re not number one in your market or a strong number two in your market, you’re going to lose money in those markets.”

While that “problem” in New York is being solved with the slot swap, it isn’t necessarily in American’s favor. After the transaction closes and the divesture of 32 slots is completed, Delta’s share of LaGuardia slots will increase from 24.2% to 44.7%, according to the government’s tentative approval of the deal, released earlier this year. American’s share would remain constant at 20.6%, the second-largest position at the airport.

And while American’s competitive position at LaGuardia will continue to be squeezed, the carrier faces stiff competition at other New York airports. According to DOT DB1B market data for the first quarter, American trails behind Delta, Continental/United, and JetBlue in terms of its share of originating domestic passengers from the total number of passengers leaving from JFK, LaGuardia, and Newark.

Where Scope Falls Into All of This

Scope relief from American’s pilots, represented by the Allied Pilots Association, might be a necessary factor for the airline’s cornerstone strategy to succeed. The scope clause, which covers important topics like regional flying  and domestic codehsaring can have significant implications for American’s future.

American’s existing scope clause is one of the most restrictive in the industry, allowing only a very limited number of large regional jets and turboprops and its network. As a result, American has less flexibility than other carriers when it comes to matching aircraft size with demand. The airline has proposed a solution where larger regional jets would be operated by mainline pilots with special pay rates and work rules, but it remains unclear if this idea will move past the proposal stage.

Another very important part of scope, domestic codesharing, also plays a large role in the success of the cornerstone strategy. The carrier specifically mentions in a summary of its proposal to the APA why this is important:

We would like to expand our network in the northeast. However, we face slot constraints, so we cannot add flying in peak demand times without cutting flying in the same time window. As a result, we cannot grow our northeast operations without domestic codesharing.

American notes in its scope proposal that it seeks to place the AA code “on a Shuttle between BOS, LGA, and DCA.”

Under the proposed scope clause the carrier would also be allowed to “place the Company code on a domestic airline based at JFK” (JetBlue?), and this would be implemented “for the purposes of feeding AA international growth at JFK.” Outlining the proposal further, American said that before codesharing begins, it must launch six new mainline JFK departures, half of which must be international or transcontinental flying.

In terms of West Coast flying, American is also seeking an expansion of its relationship with Alaska, saying in its summary:

Today, Alaska puts more passengers onto our network than we put onto theirs. This enables us to serve many markets more successfully than we could without this codeshare. An expansion of the Alaska Codeshare Agreement would allow us to maintain a significant network presence in the northwest and along the West Coast, while fully utilizing our aircraft in the most productive manner across our domestic network.

According to the carrier’s scope proposal, the number of markets that can be added to the codeshare would be calculated off a baseline of “mainline block hours in the LA Basin and Bay Area.”

Concluding Thoughts

Two of American’s cornerstone markets – Los Angeles and New York – are highly competitive, and in the case of the latter, slot-controlled to restrict growth. A revised scope clause with the APA would enable American to become a stronger competitor in these markets by operating larger regional jets, and also enabling the expansion of codeshare agreements.

Whether American’s pilots think that these moves are in their best interest is another story. It would indicate that they do not, as American’s contract proposal was quickly rejected, but the carrier’s bankruptcy filing certainly can change the tone of negotiations.

American Eagle Spin-Off Delayed

Published
by
Dan Webb
on November 29, 2011
in American
. 0 Comments

AMR’s planned spin-off of of its American Eagle regional subsidiary is being delayed due to AMR’s Chapter 11 bankruptcy proceedings.

“AMR and Eagle Holding have decided that the previously announced spin-off of Eagle Holding will be placed on hold pending the outcome of the Chapter 11 cases,” the company said in an SEC filing made earlier this morning.

The spinoff of American Eagle was originally announced back in July, the same day American announced its massive order for new narrowbodies from Boeing and Airbus.

According to AMR’s latest 10-Q, there were 299 aircraft in the American Eagle fleet, though the company noted that included in “the operating aircraft listed” there were “18 owned Embraer RJ-135 aircraft…in temporary storage as of September 30, 2011.” The company separately listed 41 Saab 340s and 3 Super ATRs that were not operating.

This latest development follows reports earlier this month that the spin-off was being delayed until 2012 until Eagle pilots voted on a tentative agreement.

American Seeks to “Accelerate…Fleet Renewal Strategy”

Published
by
Dan Webb
on November 29, 2011
in American
. 1 Comment

As everyone has undoubtedly heard by now, American announced today that it was going down the route of Chapter 11 bankruptcy. This decision has numerous implications that will be fascinating to investigate and discuss over the coming months, and one of those is the carrier’s fleet. Today the airline posted a letter to aircraft lessors, lendors and trustees – the most interesting bits are below (emphasis mine):

We cannot afford to retain all the aircraft currently in the American and American Eagle fleets at their current rates, and so we have no choice but to make substantial reductions in the cost of the aircraft which we retain. Moreover, in view of the large number of aircraft we have on order from Airbus and Boeing, we also seek to accelerate our fleet renewal strategy and, as a result, we do not require the use of all aircraft currently in our fleets. Additionally, to conserve our liquidity, subject to the requirements of the U.S. Bankruptcy Code, during the 60-day Section 1110 period, we plan to make payments when due of aircraft rent and mortgage principal and interest payments only on certain aircraft in our fleets.

We have been developing a comprehensive plan which re-values aircraft based on current values, taking into account required maintenance, the need to phase out older types and desired fleet efficiencies. We will be sending proposals to many of our aircraft lessors, lenders and trustees soon.

Exactly how American’s fleet changes will be very interesting to watch.

One Other Bit on the Slot Swap

Published
by
Dan Webb
on November 28, 2011
in Uncategorized
. 0 Comments

Last week, I summarized some slot swap comments that WestJet made earlier this year. Just in case you missed them, here they are again:

…the current proposal to (1) require bidders to bid on a minimum of eight slot pairs and (2) prohibit successful bidders from selling or leasing excess slots to other carriers during the twelve months following purchase would make it difficult if not impossible for many proven competitors, including WestJet, to participate in the bidding process.

That line (paired with an interesting comment on the post) interested me in finding out what the government’s restrictions are. Here are the two key bits from the final ruling:

As proposed, however, slots may not be sold or leased to other carriers during the 12 months following purchase, because the purchaser must hold and use the acquired slots.

After the initial 12 months, and for four years thereafter, the slots may be sold, traded, or leased (as authorized by the HDR at DCA and as otherwise authorized at LGA) to any carrier that at the time of the sale, trade, or lease would have met the eligibility requirements to make an offer for the divested slots under this waiver. These alienation restrictions will increase the likelihood that the divested slots are used and operated by carriers that will enhance competition at LGA and DCA, lower fares, and benefit the traveling public.

So what does this all mean? The new entrant/limited incumbent carriers that lost out have another shot in a year to build up their slot portfolios. Of course, the winners of the auction need to be interested as well, but it’s at least an interesting possibility to consider.

Anyway – there’s still a few more slot swap details left to emerge. JetBlue hasn’t put out a press release confirming they are indeed the other winner of the auction, and the FAA has yet to reveal the identity of all the bids.

WestJet Wins Bundle of LaGuardia Slots

Published
by
Dan Webb
on November 23, 2011
in WestJet
. 3 Comments

WestJet announced earlier today that it was one of the winners of the recently-concluded slot swap auction, and successfully bid for a bundle of eight slot pairs at New York-LaGuarida. Calling the situation “a once-in-a-lifetime opportunity,” WestJet President and CEO Gregg Saretsky said, “our growth plans, in which increased business travel in the East figures prominently, includes New York City, Canada’s largest international business market.”

The airline’s bid marks the second time it has attempted to take advantage of the Delta-US Airways slot swap. Last year, WestJet was one of a few airlines that would receive slots at LaGuardia as part of a proposed compromise by Delta and US Airways to address competitive concerns about the deal that were raised by the government. That compromise ended up falling through.

WestJet’s win of the slot bundle also means that the airline will be able to return to LaGuardia after leaving over six years ago. In September 2004 the airline launched service between Toronto and LaGuarida, but ended the service less than a year later “due in large part to its inability to
obtain additional and better timed slots,” the carrier explained earlier this year in a DOT filing. At that time, WestJet only had two slot pairs at LaGuardia.

WestJet’s new LaGuardia service will dramatically expand its presence in New York, as its only route in the market is seasonal service between Calgary and Newark. WestJet said “details on schedule information will be announced at a later date” today, though earlier this year the Calgary-based airline noted in the aforementioned DOT filing that it would use LaGuardia slots “to introduce new competitive service into the Toronto-New York market.”

The airline’s successful bid for the slot bundle is quite interesting, especially when one reviews the rest of that WestJet filing from earlier this year, in which the carrier commented on the slot swap. At the time, WestJet didn’t seem all that excited about a bundle of eight slots (emphasis mine):

…the current proposal to (1) require bidders to bid on a minimum of eight slot pairs and (2) prohibit successful bidders from selling or leasing excess slots to other carriers during the twelve months following purchase would make it difficult if not impossible for many proven competitors, including WestJet, to participate in the bidding process.

The airline continued:

…if WestJet were required to obtain eight slot pairs and if it used all of those slots for Toronto-LGA service using its existing B737 equipment, that new service would increase market capacity by 62 percent. Although WestJet is confident that its new service will stimulate market demand, an immediate 62 percent increase in market capacity would not be sustainable.

The proposed divestiture of two bundles of eight slot pairs each most likely will result in increased competition in two city pair markets. By contrast, creating two bundles of five slot pairs and one bundle of six would ensure increased competition in at least three city pairs and maximize competition benefits. Decreasing the size of the slot bundle could also increase the participation of smaller low cost carriers such as WestJet. Alternatively, the proposed prohibition on successful bidders selling or leasing slots to other carriers should be modified to allow carriers such as WestJet to mitigate the costs of acquiring excess slots that they are unable to use immediately.

The FAA did not appear convinced, however, saying last month that “a restructured remedy consisting of smaller bundles of slots to more carriers, as proposed by Spirit, JetBlue, Allegiant, WestJet and Virgin America could make certain new entrants highly vulnerable to such scheduling changes and frustrate the competitive responsiveness we are seeking.”

Anyway — that was a very long-winded way of me wondering how WestJet will use its LaGuardia slots.

Brief programming note: Unless any really exciting news pops up over the next couple of days, this is it for me posting-wise this week. Happy Thanksgiving to everyone here in the US!

Slot Swap Bidding Completed

Published
by
Dan Webb
on November 23, 2011
in Uncategorized
. 7 Comments

UPDATE: WestJet has announced they have won eight LGA slot pairs. Still no other details on the other winners.

UPDATE 2: JetBlue is said to be the winner of the remaining to slot bundles (one DCA, one LGA).

After opening up last week, the auction for New York-LaGuardia and Washington-National slots to be divested as part of the Delta-US Airways slot swap completed yesterday…and some airlines were willing to part with some serious cash to obtain them.

The identities of the bidders have yet to be revealed, as the FAA assigned each airline a “bidder identification number for each slot bundle,” and that’s all we can see at this point. But the government has disclosed the amounts of each bid: one carrier was willing to part with just over $40 million for a bundle of slots at National, while the highest bid for each bundle at LaGuardia was slightly over $32 million ($32,000,050.01 to be exact).

In order to address competitive concerns raised by the Delta-US Airways deal, the government required that eight slot pairs be divested at National, and sixteen be divested at LaGuardia (those sixteen pairs were split into two bundles of eight). Then, carriers with limited or no presence at these airports were allowed to bid on the bundles.

We should hopefully know details of the entire bidding process in the next few days. In a document outlining the bidding procedures, the FAA said it “expects the carriers will notify the FAA that they have entered into binding agreements with respect to the sale of the divested slots..no later than December 1.” Once the FAA is notified, it will reveal the “winning bid and identity of the winning bidder” and “also will post all other bid information with the name of the respective bidders.”

But one can still speculate on some of the bidding with the data the FAA has already released, which I’ve compiled at the end of this post. For example, the highest bids ($40 million at DCA and $32 million at LGA) all end in $50.01, and were all made at the same time, suggesting that all three bids were made by the same carrier.

If that is indeed the case, and one carrier had the highest bid on both LGA bundles, they will only receive one. The FAA noted last month that if “one eligible carrier had made the highest purchase offer on multiple bundles at LGA, the FAA will determine which offer is valid based on preference ranking. The successful bid for the other LGA bundle will be the next-highest offer from a carrier that remains eligible to purchase the slots. ”

Looking at the Recently-Announced AirTran Transcons

Published
by
Dan Webb
on November 22, 2011
in AirTran and Southwest
. 3 Comments

Last week, Southwest and AirTran announced a few new routes for this summer, including AirTran service from Baltimore to Los Angeles, San Francisco, and Seattle. I decided to do a little more digging on these, and found some interesting results.

First, I’m not sure if I would classify these AirTran flights as “new.” A quick check of DOT data would indicate that AirTran has flown all of these transcons at some point this year. (The same goes for the New Orleans service announced last week.)

That said, I wanted to do some more digging into the transcon schedules, especially since Southwest already flies from Baltimore to Los Angeles and Seattle:

First, I’m very interested in seeing the two redeye flights (one from Seattle, one from San Francisco). AirTran, of course, is no stranger to redeyes, but it’s something that Southwest hasn’t done before. I wonder if we’ll see more of this type of flying in the future.

I’m also interested in the timing of the AirTran flights. In some cases (like the two SEA-BWI departures), the AirTran flights seem to complement and round out Southwest’s schedule quite nicely. In other cases – like the dual 8:45am BWI-SEA departures – I’m scratching my head a bit. Of course, I realize that the networks still aren’t really integrated and Southwest and AirTran still have their own websites for booking, but it still confused me a bit.

US Airways Looking at Expanded Wi-Fi

Published
by
Dan Webb
on November 22, 2011
in US Airways
. 1 Comment

So far, US Airways has taken a more conservative approach to inflight Wi-Fi than some of its competitors. The carrier currently has all of its A321 aircraft equipped with Gogo’s air-to-ground Wi-Fi solution, though this pales in comparison to an airline like Delta, which has Gogo on its entire domestic mainline fleet and is now expanding the service to larger Delta Connection aircraft.

But US Airways is looking at expanding its Wi-Fi presence. “We will announce, probably by the end of the year, [if we are] either going with Gogo or Row 44 to expand our in-flight entertainment and have Wi-Fi on all of our aircraft,” said CFO Derek Kerr at the Citi North American Credit Conference last week.

Kerr added that “the entire industry is going in that direction. If you do not have that product on your planes, I think you’ll be left behind.”  The airline plans to bring Wi-Fi to its “entire domestic fleet within the next couple of years,” he said.

Earlier this year US Airways reported that it was experiencing low Wi-Fi usage – it would be interesting to see where usage rates are now.

A Quick Note on Spirit’s neo Order

Published
by
Dan Webb
on November 18, 2011
in Uncategorized
. 1 Comment

Spirit Airlines has become the latest US-based carrier to become an Airbus A320neo customer, joining other airlines like Virgin America, JetBlue, American, and Republic/Frontier. The Florida-based airline announced this week that it signed an MOU with Airbus for 75 A320-family aircraft, 45 of which will be neos. An SEC filing about the order had an interesting detail about the leases on a large part of Spirit’s fleet that I thought was worth noting (bolded):

On November 15, 2011, Spirit Airlines, Inc. (the “Company”) jointly announced with Airbus that it had entered into a Memorandum of Understanding (“MOU”) for a significant addition to the Company’s existing aircraft purchase order with Airbus. The MOU, which is non-binding, contemplates an order of 75 A320 family aircraft, consisting of 30 of the existing aircraft model and 45 A320 NEO (New Engine Option) aircraft. These aircraft are in addition to the 33 aircraft not yet delivered under the Company’s existing order and would be scheduled for delivery from 2016 through 2021. The new aircraft would provide for growth capacity as well as capacity to replace the 28 aircraft in the Company’s present fleet with lease expirations between 2017 and 2020. The order outlined in the MOU is subject to a number of conditions, including the negotiation of definitive documentation and corporate approvals by both the Company and Airbus.

American’s Scope Proposal to the APA is, Well…Fascinating

Published
by
Dan Webb
on November 17, 2011
in American
. 7 Comments

During the past 15 years, the regional airline industry has changed dramatically, experiencing huge growth and size and fleet expansion into the 70/80-seat market. Much of this change can be attributed to relaxation of scope clauses in mainline pilot contracts, which specify how much and what kind of flying can be outsourced to other carriers.  The large number of CRJ-700/900 and E-170/175 buzzing around the US skies today can mainly attributed to contract negotiations last decade, when the industry was in a much more fragile state.

An important question that has arisen is the future development of scope in the coming years: will the trend of more and more scope relief continue? The negotiations between American Airlines and its pilots, represented by the Allied Pilots Association, is bringing the question to the forefront once again. The airline’s scope clause is fairly restrictive, at least compared to network carrier peers. The airline only has 47 large regional jets (CRJ-700s) operating in its regional fleet, which pales in comparison to the well over 200 flying in the Delta Connection system, for example.

American recently posted a summary of its latest proposal to APA on its negotiations website, and its thoughts on scope and regional flying are simply fascinating:

We need to be able to compete with network carriers who rely heavily on regional operators, as well as low-cost carriers. And to do that, we need to be able to economically operate smaller airplanes. But unlike our competitors, we propose solving this in a very different way. Rather than sourcing large regional jets, we propose that any incremental jet aircraft larger than 50 seats will be flown by AA pilots. To compete effectively, aircraft under 125 seats would also have special rates and work rules.

This is a radically different approach than any of our legacy competitors are taking. It enables us to take advantage of our recent aircraft order, which allows us to source small narrowbodies (like the A319 and B737-700) at advantageous prices. It also helps us compete with the low-cost carriers and regional airlines whose low costs have driven us out of many markets over the last several years. Most importantly, it helps us create more jobs and more opportunity for pilots at our airline, while not displacing any of our current pilots under this new paradigm.

The suggestion of having new flying over 50 seats* to be flown only by American pilots is a dramatic reversal of what has been happening in the industry in recent history. Such an idea also appears to differ significantly from major competitor United: an October 2010 proposal to United pilots envisioned regional jets with over 90 seats flown by regional carriers.

The big question now, of course, is what the pilots think of the concept. While the idea itself of having smaller jets come back to the mainline is probably appealing, the corresponding plan to have “special rates and work rules” for aircraft less than 125 is likely a concerning feature. In my opinion, some American pilots might find the idea to be a bit too similar to American’s B-Scale from many years ago.

While this idea is only in the proposal stage, it is fascinating to think of the possibilities here. Such a move, especially if it is ever mimicked by other mainline carriers, could have a large impact on regional carriers. In addition, a different pay scale and work rules for small narrowbodies can impact the airframers as well, as the potential mainline costs of aircraft like the E-195, CS100, or CRJ-1000 will have been lowered. (And such aircraft, generally speaking, aren’t exactly viable at regional carriers with today’s scope clauses.)

But we’ll just have to sit and wait to see if this scope proposal moves past this stage. In the meantime, however, it’s fun to speculate!

*It’s also worth noting that the proposal affects American’s current large regional aircraft. American noted that the proposed deal would “permit fleet modernization within existing constraints (existing large RJ flying capped at 47 jets; existing large turbo props capped at 43 aircraft).”