ALPA International Economic and Financial Analysis Report



ALPA International Economic and Financial Analysis Department
Airline Industry Economic Report - October 2002
US economic forecast
The consumer confidence level continues to drop—October’s level dropped to a 9 year low—indicating the consumer uncertainty about the future.
Economic growth should reaccelerate as shocks fade and an Iraqi war is past; however, the timing for any of this to happen is unknown.
The threat of double-dip recession is still present, with the possible effects that a war on Iraq could have on oil prices and other industries.
The Fed dropped the prime rate by ½ percent to the lowest rate in over 40 years—an indication that they are very concerned about the economy.
Airline industry
Customer behavior changes are affecting the industry. The passenger mix is weak as business passengers seek low fares. There has been an inability to raise fares/aggressive fare discounting. There is no pricing leverage, as all recent attempts to raise fares failed.
Poor industry performance is a factor. Revenue per available seat mile (RASM) has leveled off well below last year’s levels, and additional capacity and labor cuts continue.
There is an increased burden on airlines in the form of taxes, fees, and higher insurance premiums. Higher than Sin Taxes, airline travel is currently the highest taxed good or service available, and pending House legislation does not appear to address these taxes and fees. Instead, legislation appears focused on mail delivery, insurance, and the federal loan guarantee program. As an example, the tax on a $100 domestic airline ticket is nearly 45 percent, while a rail ticket is minimally taxed.
Current environment continues to challenge the industry US Airways’ bankruptcy may be followed by others. The current industry state, coupled with a potential war with Iraq, could result in one or two additional bankruptcies.
Rising fuel prices hover around $30 a barrel, putting more pressure on expenses. OPEC decided to leave production levels unchanged.
Airlines are looking to cost savings to combat losses, with various initiatives underway, including further capacity reductions and more furloughs, pricing changes and small jet growth.
Fuel prices are a significant uncontrollable cost for airlines
Price is projected at almost $3 billion dollars for third quarter 2002 (73.4 cents/ gallon).
A 1¢ change in fuel prices drains an additional $150+ million from the majors on an annualized basis.
Airline industry second quarter 2002 results
The airline industry lost $1.4 billion in the second quarter of 2002 with most airlines posting a second quarter loss.
Compared with the second quarter of 2001, traffic was down 10.5 percent and capacity was down 11 percent.
Revenues dropped 15 percent from last year. Passenger revenue decreased 15.7 percent.
Unit costs were down 2.5 percent.
Yield dropped 7.1 percent compared with 2000, due to industry/economic weakness, a loss of business travelers, and carriers refusing to match fare increases.
The operating margin for first quarter 2002 was -7.3 percent.
2002 second quarter revenues were at 1996 levels.
Third quarter 2002 results and long-term forecasts
The results for the third quarter 2002 earnings season include:
Revenues for major airlines declined 4.3 percent despite huge losses last year. The difference in revenue decline from third quarter 2000 is 18.8 percent.
Losses continue. Although net losses are expected to improve from the prior year, losses for network airlines remain at unsustainable levels.
Net Debt Increases.
Continued operating losses have been the largest contributor to growth in balance sheet burden.
There is pessimism regarding the prospect of recovery. The fourth and first quarters are historically the weakest earnings season.
Planning scenarios are gravitating toward increasingly severe economic and geopolitical circumstances.
Third quarter 2002 results for all majors include:
Net loss of $1.6 billion for major airlines coming in at analyst estimates, which were revised from a loss of $1.0 billion. Forecasts are continuously being revised downward as the industry struggles to recover. The major airlines had a net income of $734 million during third quarter 2000 and a net loss of $2 billion during third quarter 2001.
There is weak business traffic mix and tepid advanced booking trends, which continue to weigh on revenues.
Year-over-year RASM increased 13.8 percent to 9.9 cents per available seat mile.
Major airlines’ operating expenses declined 9.9 percent year-over-year.
Earnings per share estimates continue to be revised downward.
Comparisons to third quarter 2001 are expected to generate disappointing results.
Airline industry outlook
General industry forecasts are becoming less precise due to unprecedented, compounded events. There is uncertainty as to how the combination of the economy, terrorism, possible war and stock market plunge will affect the airline industry. The continuation and growing extremity of events will factor into recovery or erosion of industry income. There is presently a level of taxation and fees the industry has never before experienced, along with mandatory security/safety changes.
Analysts and managements are extremely hesitant in attempting to make long-term forecasts of any precise nature.
The long-term industry outlook, as forecasted by JP Morgan, UBS Warburg, and Merrill Lynch, in 2003 range from a loss of $4.0 to $2.5 billion, as compared to 2002’s forecasts of $6.9 to $7.0 billion. In 2004, analysts are forecasting profits as increasingly improbable with break-even likely as a best-case scenario and with airline industry profitability at the earliest. One company forecasts 2005 as being the first year with a decent return for the airlines.
Chip, I will. I would not invest a single cent in an industry such as this. As a matter of fact, I will run as far away as I can. My question is, why is the Alabama pension fund investing in an airline, especially a bankrupt one? Oh, I forgot. If I invest it is MY MONEY. Bronner can play with other people's money.
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LDKIAM, USAirBoy330, AOG-N-IT, & Black Wind, would you provide an opinion on the facts listed above by ALPA's Financial Advisors?


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RSA has not invested any money in US and will not until the carrier emerges from bankruptcy, if the company can formally restructure. RSA has provided $300 million in DIP financing, but if US liquidates RSA will be at the top of the creditor list and will be fully reimbursed.

At this point, RSA has zero risk.

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[P]***********[BR][BR]NEW YORK (AP) - Investors set aside concerns about a plunge in housing construction Wednesday and sent stocks sharply higher as they focused on a growing sense that the economic recovery is gathering momentum. The Dow Jones industrials rose nearly 150 points, while the Nasdaq composite index climbed more than 40.[b/][/P]
[P]Wall Street was initially concerned that the drop in housing starts indicated that one of the economy's strongest sectors was beginning to falter. But the market recovered from early declines and more than made up for a previous two-day sell-off.[/P]
[P]Analysts say Wall Street is somewhat immune to bad news right now because investors want to buy stocks during what has traditionally been the strongest time of year for the market.[/P]
[P]``We are in the season when stocks do better. The November-December-January period is typically the one when people become more optimistic about the coming year and they become more aggressive in buying stocks,'' said Bill Barker, investment strategy consultant at RBC Dain Rauscher in Dallas.[/P]
[P]The Dow closed up 148.23, or 1.8 percent, at 8,623.01, more than wiping out its previous two-day loss of 104.31.[/P]
[P]The broader market also advanced. The Nasdaq rose 44.84, or 3.3 percent, to 1,419.35. The Standard & Poor's 500 index gained 17.41, or 1.9 percent, to 914.15.[/P]
[P]``We are in a bit of a grace period right now. Clearly, the psychology of the marketplace is positive. And, people are concerned abut getting left behind right now,'' said Brian Bush, director of equity research at Stephens Inc.[/P]
[P]But the concerns weren't enough to derail Wall Street's upward momentum, which analysts attributed to better-than-expected third-quarter earnings and the growing belief that earnings and the economy will be stronger in 2003.[/P]
[P]Mutual fund portfolio managers are among Wall Street's big buyers right now, because they don't want to miss out on a fourth-quarter rally, analysts said. So far this quarter, the Dow has gained nearly 14 percent, the Nasdaq has climbed 21 percent and the S&P has risen 12 percent.[/P]
[P]``They are putting money to work because they have to. They are beginning to feel the pressure of performance on this quarter,'' Barker said.[/P]
[P]On Wednesday, the market was strong across sectors.[/P]
[P]Dow industrial International Paper rose 54 cents to $35.76 on an upgrade from CIBC World Markets.[/P]
[P]Maytag jumped $2.61 to $27.40 after backing its 2002 earnings outlook and setting revenue growth goals of 7 percent to 10 percent for next year.[/P]
[P]Hewlett-Packard advanced 30 cents to $17.01 ahead of its earnings due out later.[/P]
[P]After the market closed, H-P reported fiscal fourth-quarter earnings of 24 cents a share, surpassing analysts' expectations by 2 cents, and reaffirmed Wall Street's first-quarter forecasts. H-P shares rose $1.65 in the extended hours trading session.[/P]
[P]The retailing sector was another winner Wednesday. Saks rose $1.39 to $12.30 on better-than-expected third-quarter profits of 3 cents a share, ahead of forecasts of a 3-cent loss.[/P]
[P]Williams-Sonoma advanced $1.20 to $24.90, having reported Tuesday that third-quarter profits nearly quadrupled due to strong sales. The company also raised its full-year earnings outlook.[/P]
[P]Advancing issues outnumbered decliners 5 to 2 on the New York Stock Exchange. [BR][BR][BR][/P]
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[H6][FONT face=Times New Roman]At the very least one would expect [EM]timely[/EM] information Mr.Munn.You post information that is not current and seem almost puzzled that your credibility on these and other boards is nonexistent.[/FONT][/H6]
[P]NEW YORK (AP) - Crude oil futures leaped above $27 a barrel Wednesday, buoyed by a surge in heating oil.[/P]
[P]On the New York Mercantile Exchange, front-month December jumped as high as $27.25 a barrel before expiring at $26.98 a barrel, up 56 cents. January crude, the new front month contact, rose 59 cents to close at $26.09 a barrel.[/P]
[P]December heating oil climbed 2.34 cents to settle at 74.51 cents a gallon, while December gasoline futures rose 1.13 cents to close at 71.29 cents a gallon.[/P]
[P]On London's International Petroleum Exchange, the gains were somewhat more tempered.[/P]
[P]January North Sea Brent blend futures rose 45 cents to close at $24.53 a barrel, while December gasoil futures ended unchanged at $217 a metric ton.[/P]
[P]Natural gas for December delivery fell .07 cent to settle at $4.254 per 1,000 cubic feet.[/P]
[P]The crude rally was largely a continuation of the recent recovery in the market, said Tom Bentz, an energy analyst at brokerage BNP Paribas Futures in New York.[/P]
[P]``The market was way overdone,'' Bentz said, referring to crude's plunge below $25 a barrel last week. ``It was not going to stay under $25 a barrel. It was too risky to be short under $25 a barrel.''[/P]
[P]The recent rally has been led largely by heating oil futures, which have surged nearly 13 percent in the past week amid cold weather and declining inventories.[/P]
[P]``Inventories are low,'' Bentz said. ``You get cold weather forecasts and all of a sudden the psychology shifts from very bearish to moderately bullish.''[/P]
[P]Data released late Tuesday by the American Petroleum Institute showed that distillate stocks, which include heating oil and diesel fuel, fell by 299,000 barrels to 123.03 million barrels, compared with 129.13 million barrels a year ago. The Department of Energy, however, reported a build of 1.5 million barrels in distillate stocks.[/P]
[P]The government also reported a build of 4.5 million barrels in crude stocks, but the ``market had expected to see a build anyway,'' said Tim Evans, an analyst at IFR Pegasus.[/P]
[P]``The overall inventory picture, with stocks at low enough levels to inhibit free refinery production, remains supportive,'' Evans wrote in a note to clients.[/P]
[P]Meanwhile, officials of the Organization of Petroleum Exporting Countries said that the group is taking steps to rein in overproduction.[/P]
[P]A Gulf source familiar with Saudi policy told Dow Jones Newswires that all OPEC members are in consultations and have started to adhere more closely to output quotas.[/P]
[P]Other OPEC sources say, however, that members won't make significant cuts until they see Saudi Arabia, the group's largest producer, set an example.
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The stock market has recovered nicely recently, and while it remians to be seen if the bears are behind us, October was one of the best months in market history in terms of percentage gain. Most analysts feel we have seen the bottom.

October's consumer confidence reports took a beating, but the reports released in November have seen that trend turn around.

IMO, three things need to happen to see the industry make a solid recovery. One is to get Iraq behind us one way or another (why we haven't paid the Moussad $XXX million to take Saddam out, I have no idea). We have actually been at war with Iraq for the past ten years, at some times it is hotter than others, Two, the government needs to address the tax burden on both the industry, and make the Bush tax cut permanent so corporations can better plan future long term spending. Third and most importantly, airline management needs to fully address and overhaul the fare structure to give people, most importantly business travellers, a reason to fly, instead of a reason to find loopholes in the current fare structure. The whoel use it or lose deal is a poor attempt to fight those using the loopholes. It kind of reminds me of the recording industry chasing people like Napster and internet piracy. It is a futile fight you cannot win, yet they keep trying to fight it.

The signs of a recovery are in place. The economy is not nearly as bad the media would lead us to believe. The biggest issues at hand for the economy as a whole will hopefully be settled by spring with Congress and the White House on the same page. But the biggest issue for the airlines continues to be revenueand the fare structure. When will the powers that be realize that you cannot keep pruning without fertilizing the tree?
On 11/21/2002 12:09:42 AM chipmunn wrote:


RSA has not invested any money in US and will not until the carrier emerges from bankruptcy, if the company can formally restructure. RSA has provided $300 million in DIP financing, but if US liquidates RSA will be at the top of the creditor list and will be fully reimbursed.

At this point, RSA has zero risk.

yeah,this is wonderful...but if we go ch.7...what exactly do we have as sellable assets that would satisfy davey bonner?
Remember this wasnt too huge of a risk for rsa! We owed them money and in many ways a shrewd way for him to protect his investment!
On 11/20/2002 11:41:55 PM chipmunn wrote:

LDKIAM, USAirBoy330, AOG-N-IT, & Black Wind, would you provide an opinion on the facts listed above by ALPA's Financial Advisors?



I'm not one of the people you mentioned but after reading your post, my first reaction is that it is hopeless. U and UAL people would be CRAZY to give up anything at all (or in the case of U, anything more). If things are as bad as all that, our two airlines are doomed anyways so we had just better get what we can for as long as we can and look for other jobs until someone finally turns the lights out. As someone pointed out on another thread, a pay cut now will only decrease our unemployment compensation later.

Chip is that the reaction you wanted? I was speaking tongue-in-cheek (at least partially) but I am sure this is how some people will react to your postings. At some point your never-ending doom-and-gloom drumbeating becomes counterproductive and will make people just throw in the towel.