Dal V Us Rj Position

Rico

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Jun 8, 2004
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June 10 (Bloomberg) -- Delta Air Lines Inc. may change the way it uses small jets under Chief Executive Officer Gerald Grinstein, who in the past said he doesn't like the planes for longer flights and is reviewing all operations to stem losses.

Grinstein, 71, who took over at Atlanta-based Delta this year and said the airline may seek bankruptcy protection, expects to finish a review of operations in the third quarter. He is seeking to cut costs after $3.6 billion in losses since 2000 at Delta, the biggest user of the smaller jets.

The 50-seat jets, which have higher unit costs than larger planes, have become less economical to operate amid competition in more markets from carriers with lower costs. Delta, the third- biggest U.S. airline, is likely to follow rivals in curtailing use of the jets, JP Morgan analyst Jamie Baker said.

``Delta is revisiting its commitment to 50-seaters and in our opinion would probably like fewer than are currently on order,'' said Baker, who met with company officials in the past month.

Delta owns or leases 264 so-called regional jets, or RJs, including 49 with 40 seats, 180 with 50 seats and 35 with 70 seats, all made by Montreal-based Bombardier Inc. The airline's jets, along with 136 flown by Delta's partners, operate as Delta Connection. Delta is receiving 23 of the 70-seat jets this year and placed an order in February for 32 of the 50-seat jets to be delivered next year.

``Our plans, currently, are unchanged as it applies to `04 and `05 growth,'' Fred Buttrell, chief executive of the Delta Connection unit, said in an interview. ``Beyond that, we will be subject to some degree to the strategic review.''

`Largest Operator'

Former Delta President Frederick Reid helped expand Delta's fleet of small jets, saying last August that the company was ``the largest operator of regional jets in the world.'' Reid resigned in March after CEO Leo Mullin quit.

Grinstein ``hinted at what would be a more comprehensive review of the RJs in the network,'' said Chris Renkel, a spokesman for the Delta Air Line Pilots Association in Atlanta. Grinstein got ``rousing applause'' from pilots at meetings in April when he criticized previous management's use of the regional jet, saying it was an inferior product on longer routes, Renkel said.

``From Jerry's perspective, you fly more than 2.5 hours on an RJ and it's a cramped ride,'' Buttrell said. About 210, or 7 percent, of Delta Connection flights exceed 2 1/2 hours, he said.

Delta may also scale back flights from its Salt Lake City hub, reducing the need to use 50-seat jets, Baker said. The Utah city is a Delta hub for funneling flights in the western U.S. The smaller Delta Connection jets provide similar service at Delta hubs in Atlanta and Dallas.

Higher Costs

``The industry is migrating toward bigger planes and fewer hubs,'' Baker said.

With business travelers reluctant to pay higher fares, the higher unit cost of flying the 50-seat jets is a less profitable proposition, said Mike Boyd, a consultant with the Evergreen, Colorado-based Boyd Group.

The cost for flying each seat a mile is between 25 cents and 30 cents on routes 200 miles or less and falls to 12 cents on routes longer 900 miles, where comfort becomes an issue, Boyd said. By comparison, East Coast rival JetBlue's unit cost was 6 cents for the first quarter.

Delta's contract with the pilots has limited the use of small jets to prevent the airline from moving pilots from higher- paying jobs at the main airline to lower-paid work at the Delta Connection carriers. For example, Delta can only fly 57 of its 70- seat jets.

Bargaining Chip

Additional restrictions on regional jets at Delta Connection may become an issue with pilots as the airline seeks concessions of $800 million, Baker said.

In 1992, 20 small jets operated in the U.S. and most carriers used turboprop planes on shorter routes, according to the Regional Air Service Initiative. Now, U.S. airlines fly 1,368 regional jets, the manufacturers' group said.

Passengers initially welcomed the new small jets because they offered more comfort, speed and perceived safety than the turboprop planes they were replacing on shorter routes. After the Sept. 11 attacks reduced demand, airlines introduced the smaller jets on longer routes, replacing larger planes.

America West Holdings Corp., parent of America West Airlines, phased out 12 regional jets last year as it cut flights at its Columbus, Ohio, airport hub. US Airways Group Inc. said in May that it would reduce flights at Pittsburgh, the base for its MidAtlantic Airways regional-jet operation.
 
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US might have found itsewlf in a stronger copmpetitive situation than our legacy competiton having arrived late to the party.

US owns, nor contracts out the unprofitable 32-44 seat RJ's...

US Owns a limited number of the 50 and 70 seat CRJ's and 50 seat EMB-145's, yet these types have a given market niche that they work well in, and the numbers are sufficent to match demand.

Yet With MDA already flying the EMB-170, it gives US a real advantage over our competition. This is what I was talking about people, where the EMB-170 can make a real difference if we are able to feild enough of them and restructure the route system US has. The EMB-170 works perfectly alongside the other narrowbody aircraft in future point to point flying. While our competition is becomg aware of passenger resistance to the smaller cabins on long stage lengths...

Delta is more or less "stuck" with a glut of CRJ's, unable to find enough viable routes at a proper stage length of an hour to hour and a half flying time.

The future could be bright if we are able to make it that far...
 
This is why I have always said that small jets should be on the mainline senioriity list only. If they are so economical, why are they not good enough for mainline? Or is it that they were to be used as a career busters all along--and UALPA has held out for years and has been criticized often, even on these boards? It is obvious, at least to me, that this is what the industry leadership has wanted all along, to trivialize airline jobs to something less than what they used to be. Since our highly compensated MBAs cannot figure how to increase revenue (Even though the answer is stareing them in the face, a la SWA's revenue model.), they have focused narrowly on costs alone. Now, through intense pressure, the camel has its nose in the tent flap. The door is now wide open to outsourcing of the E190s. There costs are low and they are by no means an RJ. If small jets had been on the mainline list, this would not be an issue and UAIR could be taking orders for a combination of e170s and 190s now. But it is more important for airline managements to sieze this opportunity to destroy the status quo, than to look out for the best intrests of their companies. Now, each and every non-Alpa group will suffer what they have helped to sow. Watch out what you wish for, you just might get it!

Enough of my rant, I must go off and run my business.
 
autofixer said:
Since our highly compensated MBAs cannot figure how to increase revenue (Even though the answer is stareing them in the face, a la SWA's revenue model.), they have focused narrowly on costs alone.
Perhaps it's because the less-well-compensated non-MBAs who post here don't read the financials enough to notice that WN's revenue model generates less revenue than US's.

For Q1 2004, as reported by BTS
RASM: US 14.44, WN 8.06
Yield: US 14.43, WN 11.76

This means that not only is WN getting fewer dollars per flight (RASM), they're even getting fewer dollars per paid ticket (yield).

Perhaps that is why the focus is on cost?
 
mweiss said:
Perhaps it's because the less-well-compensated non-MBAs who post here don't read the financials enough to notice that WN's revenue model generates less revenue than US's.

For Q1 2004, as reported by BTS
RASM: US 14.44, WN 8.06
Yield: US 14.43, WN 11.76

This means that not only is WN getting fewer dollars per flight (RASM), they're even getting fewer dollars per paid ticket (yield).

Perhaps that is why the focus is on cost?
you beat me to that post, too, but then I never do the work to look up the data.

This is also why I think that Seigel's original plan did not include value-pricing. I think he was originally planning in bankruptcy to tweek the system a bit but to remain a hub and spoke high RASM airline, precisely because, at the time, getting the high RASM monkey off U's back seemed impossible.
 
mweiss said:
Perhaps it's because the less-well-compensated non-MBAs who post here don't read the financials enough to notice that WN's revenue model generates less revenue than US's.

For Q1 2004, as reported by BTS
RASM: US 14.44, WN 8.06
Yield: US 14.43, WN 11.76

This means that not only is WN getting fewer dollars per flight (RASM), they're even getting fewer dollars per paid ticket (yield).

Perhaps that is why the focus is on cost?
RJs, even with the artificially low labor costs, STILL have a CASM in the 16-17 cents per mile area. When you look at what percentage of our company (including the contract carriers) flies them, there's ABSOLUTELY NO WAY UAIR can match the costs of LUV or JBLU. NOT EVEN POSSIBLE! so, what they need to do is what DAL is doing and look at what makes folks want to fly on UAIR and make those points better. I think that even Dave S. said "you can't out southwest Southwest." I don't see this happening.
 
Interesting read as apparently according to the BTS Comair's CASM is lower than DAL's, it's RASM is higher and it's yields are higher.


http://www.bts.gov/press_releases/2004/bts.../bts012_04.html


By comparison USAirways CASM is higher than 6 of the 7 listed RJ operators, it's RASM is tied with or lower than 4 of the 7 listed operators, and it's yield is lower than all 7 listed RJ operators.


Overall, on average the "Network" type carriers CASM is 12.4 cents/mile while the regionals are 13.0 cents/mile. To me,that is a surprisingly small difference given the often repeated mantra that RJ CASM is so high.
 
Let's dwell on that point a few minutes more. US's Q1 2004 CASM was 16.04. Now I'll show the list of all of the regionals reported by BTS to have a higher CASM than that:

Atlantic Coast 17.3

Want to see that list again? Yep, only one airline. One.

Air Wisconsin 15.66
American Eagle 14.76
Express Jet 13.39
SkyWest 13.19
Atlantic Southeast 12.15
Comair 11.58

To put this in perspective, if you included the regionals in the stack ranking of cost, the top ten would be:
1 Atlantic Coast
2 US Airways
3 Air Wisconsin
4 American Eagle
5 Delta
6 Express Jet
7 SkyWest
8 Northwest
9 United
10 Atlantic Southeast
 
Is there a stat that is equivalent to cost per revenue passenger mile? Everybody like to throw around CASM as the end all stat, but obviously it does not tell the whole story, i.e., the scenario with a low CASM 747 with only 50 pax on it vs. a high CASM emb145 with 50 pax on it. Which one is going to make money?

Would airline operating cost/RPM's come up with a suitable figure?
 
Yes, that would give you CRPM. You could also divide the CASM by the LF to get the same result.

FWIW, the last couple of times I calculated CRPM for US, it was still much higher than the other airlines. But WN's CRPM goes up by more than the legacies', so that differential narrows relative to CASM.
 
One thing that is impossible for the BTS to pick up from their info is the cost transfer from regional affiliate to the mainline partner. After all, the entire BTS regional list operate as express partners for a mainline carrier

Of all the regionals mentioned above as having a lower CASM than U, how many expenseses were paid by the mainline affiliate? I personally haven't bothered to go thru annual reports except for Mesa's, but a list would start with reservations, marketing, frequent flier program, and the like. Potential candidates to add are gate leases, landing fees, fuel, insurance, etc.

Jim
 
The much discussed CASM is only part of the story in airline cost accounting. The reason that Southwest is making a profit (and to a lesser extent the regionals) is that their PLANE MILE costs are significantly lower than their larger aircraft compatriots.
For example, when the 747 first debut, Pan Am crowed about how efficient the plane was on a per seat mile basis (CASM). They couldn't wait to get as many of the tubs as they could. What Pan Am and many current airline executives fail to take notice of was the cost of moving that plane from point A to point B. At the time (1970), the per hour cost of flying a 747 was $5,890 p/h. The 707 was $2,516 p/h. the 747 works out to $15.50 dollars per seat/per hour vs. the 707's $17.35 per seat/per hour cost.
Assume the same number of hours were flown (one-to-one substitution), you just doubled the cost of operating your airline.
Everyone pointed out how much more the 747 could carry versus the 707, but this assumed that all this additional capacity would be absorbed at then current average fare levels. The fact of the matter was...the pax capacity was not absorbed because all their competition were buying 747s as well -- excess capacity. As the 747/DC10/L1011's proliferated, the situation only got worse. deep discounting took place to fill unused capacity -- revenue deterioration.

The same thing is happening on a smaller scale with the RJs and WN. The smaller aircraft, though more expensive on a Per Seat Mile basis....is significantly lower in Plane Mile Cost basis. In an unstable market place, where you are not guarenteed "X" amount of sells (does this describe the airline market today?)...you are better off commiting the lowest cost option instead of trying to grab the maximum amount of revenue(and associated higher cost) in a highly competitive maket place.

Pan Am flew itself into the ground with the worlds most efficient jet (among other reasons)...and the legacy carriers are doing the same now with the WN/JB/AT's.
 
electradude,

You are correct that one number, be it CASM, RASM, hourly cost, trip cost, etc, does not tell the whole story. They're all parts of the puzzle.

Obviously the 747 developed a market niche or Boeing wouldn't have sold as many as they have. Airbus (and some airlines) believe that an even bigger plane has a place in the industry. Likewise at the other end of the spectrum with the RJ's.

The advantage that CASM has as a measure of cost is that it is available publicly. I know of no one that regularily publishes hourly or trip costs for various airplane/airline combinations. Those numbers that are available come from consulting firms that have taken the BTS data and done the number crunching.

Jim
 

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