Doug dispells a popular US Aviation myth

[Pi brat]

The same thing that made the cost of flying a MD-80 from LAX-SFO or a 727 from DAY-CLT go up?

Not at all, and if you are who I think you are you know that is not true, or should. During the PI/US merger US raised the cost of running the PI side by a HUGE amount. Remember the hiring of hundreds maint/utility? Using your DAY-CLT example Day hired over 100 folks to replace the contract cleaners and have mech push back aircraft instead of agents. I believe everyone was brought up to the higher pay scale. Those type of things didn't happen with this merger.

Of course the average cost have gone, that's what happens in math when you average a higher and lower number. Many of US cost came from where and how the operated, those costs didn't migrate to the PHX and LAS hubs.

 

[Pi brat]

As they say - it's all in how you spin the numbers, so you decide. Here's the CASM figures for each airline each quarter starting before BK2 for US through the first year after a single certificate was issued and only combined numbers were reported to the BTS. These are system numbers which includes Express which is why they don't agree with what's reported in the quarterly reports for mainline.

2Q04 US = 16.8 cents, HP = 08.3 cents
3Q04 US = 16.1 cents, HP = 08.5 cents
4Q04 US = 15.0 cents, HP = 08.6 cents
1Q05 US = 14.8 cents, HP = 09.7 cents
2Q05 US = 15.3 cents, HP = 11.4 cents
3Q05 US = 16.3 cents, HP = 12.2 cents
4Q05 US = 17.8 cents, HP = 13.4 cents
1Q06 US = 18.8 cents, HP = 11.3 cents
2Q06 US = 17.0 cents, HP = 12.7 cents
3Q06 US = 15.7 cents, HP = 14.1 cents
4Q06 US = 15.4 cents, HP = 13.6 cents
1Q07 US = 15.9 cents, HP = 12.1 cents
2Q07 US = 16.3 cents, HP = 13.1 cents
3Q07 US = 15.8 cents
4Q07 US = 16.4 cents
1Q08 US = 17.0 cents
2Q08 US = 20.1 cents

As you can see, HP consistly had lower CASM and some quarters substantially lower CASM pre-merger agreement. So if you can explain how you can buy two shirts at different stores, one costing $25 and the other costing $35, and have the average price of the two end up being $25 you'll have your explaination of how Doug was right. Otherwise he was spinning like a top.



Assuming it's flown with west metal and crews, and omitting outside factors that have affected cost (like fuel, parts, rent, landing fees, etc) the cost wouldn't increase (omitting any affect from other workgroups since I have no idea what affect combined contracts had on their compensation). What has happened is that the CASM of the airline increased (that averaging a low number with a higher number thingy) so revenue has to increase to cover those higher costs which means RASM must increase which means yield must increase. The NE is more of a business market (plus some other routes) which means that yields tend to be higher there while many of the lower yield routes (like to/from LAS) don't produce enough yield to support the higher than HP alone CASM. In other words, parts of the HP system dodn't produce a high enough RASM to support the combined US CASM even though it supported the HP CASM.

Jim

Jim,

So every route has to have the same RASM to cover the average CASM? I don't really think that's what you mean, but seems to be what you are implying. Let's look at just the east. Does CLT-PHL have the same CASM and RASM as CLT-MCO? Of course not, CASM is probably a little lower to MCO and RASM a lot lower, but if the average revenue is higher than the average cost is higher you make money. PHL's lousy airport doesn't raise the cost of flying to MCO.

Your shirt example is perfect. If those two stores merge the cost of the individual shirts don't change but the average does. If nothing changes in the cost of running the stores, or the pricing of the shirts, the profit margin/loss will be the same. Doug didn't say the average didn't go up, just that the east high cots of operating where/how they do on the east didn't spill west. As I told pacemaker this merger hasn't been like US/PI when the cost of merging spilled to the other, at least to the degree, as I'm sure some higher cost items have migrated from both sides. They tend to do that, just like with my household budget!

Looking at your numbers what strikes me the most is how much HP's went up from 2nd q '04 to 3rd q or even 2q '05. What happened there? It wasn't the US Titanic. It's hard for us to know why these numbers have changed. We know some reasons as we can see the US numbers trending down during our cut backs and both numbers trending up with the fuel spikes. The other thing that's missing is the RASM side by side, but even with that there are other reasons for it going up and down. One reason I think we an agree on is Tempe's treatment of our best customers, but we can't lay that on the east system.

 

[a320av8r]

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[Pacemaker]

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Well something is fishy because if one third of your operation is blessed with some of the lowest costs in the industry then the cost figures for the whole should reflect that and they never have. On the bright side the latest figures show US no longer has the highest CASM the "new" Delta now has that honor so maybe mergers are inherently much more costly than realized.

 

[BoeingBoy]

Jim,

So every route has to have the same RASM to cover the average CASM?

You're right - that certainly wasn't what I meant to imply, but to be profitable the average RASM has to more than cover the average CASM. So if the average CASM goes up (maybe due to a merger) and then RASM drops (maybe due to the economy tanking) loses are incurred. How to get the average RASM up? You could drop some of the higher cost pre-merger carriers lower RASM producing flights since the higher cost originated on that side, but wouldn't it be better to drop the lowest RASM producing flights of the merged carrier even though those flights may be profitable or slightly unprofitable for the pre-merger side operating them.

Obviously that is something of a simplification - it doesn't consider the effects of connecting traffic which may make it worthwhile to operate a segment at a loss to feed a better yielding segment.

Looking at your numbers what strikes me the most is how much HP's went up from 2nd q '04 to 3rd q or even 2q '05.

Presumably that was primarily two things - external factors (like fuel) and growth. Of course, the external factors affected both carriers but not necessarily to the same degree (using fuel again, HP hedged and US didn't at that time). Growth long term helps hold costs down, as we saw at PI and WN is a good example of, but short term there is a cost in airplane acquisition, training, hiring, etc that the lower salaries of new-hires don't offset immediately.

Then there's the quarter to quarter fluctuations, where heavy maintenance and airplane leasing/EETC costs play a big role since those costs aren't spread evenly throughout the year.

As for spillover, look at the 1 year periods before/after the merger announcement in 2Q05:

Pre-announcement 3Q04-2Q05: US = 17.3 cents, HP = 9.5 cents
1st year post announcement 3Q05-2Q06: US = 17.5 cents, HP = 12.4 cents
2nd year post announcement 3Q06-2Q07: US = 16.9 cents, HP = 13.2 cents

There's your spillover - US' CASM remained in a pretty narrow range while HP's CASM went up nearly 40% during the 2 years after the merger was announced.

I didn't mention RASM since your post discussed costs, but the info is available from the BTS also.

Jim

 

[Pi brat]

Well something is fishy because if one third of your operation is blessed with some of the lowest costs in the industry then the cost figures for the whole should reflect that and they never have. On the bright side the latest figures show US no longer has the highest CASM the "new" Delta now has that honor so maybe mergers are inherently much more costly than realized.

Is it fishy? Were those number ex fuel? If not that explains a lot. Also, Doug has fallen in love with Wolf's shrink to profitability mantra and we know what that does to CASM. My point is that the merger didn't raise all costs like the others did, especially my pay. We don't have the inside picture like Doug does. During the US/PI I got a few peeks at that picture and it wasn't pretty.

 

[BoeingBoy]

Is it fishy? Were those number ex fuel?

Fuel was included, but "fishy" is in the eye of the beholder. There was a pretty large swing in fuel hedging - those writeoffs in late 2008/early 2009 had to be accounted for as fuel went back up, so they showed up as artifically depressed fuel prices. That almost canceled out the increase in fuel prices from the 1st quarter. Couple relatively constant expenses with the annual increase in TA flying providing more ASM's and you have a recipe for lower CASM. Call it a confluence of favorable events.

Of course, that "as low as DL" published CASM doesn't include Express. Part of the problem with having the highest percentage of ASM's in the industry provided by express type operations is that a higher percentage of ASM's have a higher CASM (sorta like the merger - the bigger the higher CASM portion is the more it raises overall CASM). Ironically, Express generated a profit of $17 million in the 2nd quarter vs a loss of $53 million in the 1st quarter.

Jim