Effect of JetBlue's enterence to the PIT market

[trvlr64]

Some times you have to pressure management to get what you want. That is were you come in to play.

HUH?

 

[insp89]

I could look them up in their report, but the point of the numbers is that if everything else stayed the same, taking the hedges away would have resulted in a loss for WN.

As you mentioned, WN is already taking steps to offset the decrease in hedges, so arguing that they should be viewed thru the "everything else remaining the same" lens is somewhat futile.

A more accurate picture of the future can be found by looking at non-fuel CASM, where WN still has a cost advantage over US - 6.57 vs 7.51 cents in 4Q05 (the same applies to B6, at 4.75 cents). Given that, they can still make money at lower fares than US even if we have the same fuel cost net of hedges.

That is the challenge US faces - either find a way to lower non-fuel CASM or achieve a big enough revenue premium to offset the higher costs or some of both. If that can be accomplished, we can compete with WN (or B6).

Jim

Jim,
You mentioned WN is already taking steps to offset the decrease in hedges,

Don't you think other airlines are also "taking steps" to lower their non-fuel CASM ? Like the HUGE pay and benefit cuts that some employees at LCC,NW,DAL were required to take during the bankrupcy process ?

I noticed you gave 4Q05 numbers in your post above,
Don't you think these numbers will narrow this year and next as the merger syngeries at LCC continue to kick in ?

As you stated in your last paragraph, CASM is only ONE side of the coin, RASM is the other.

Fares are going up, even at WN.

 

[sfb]

Don't you think other airlines are also "taking steps" to lower their non-fuel CASM ? Like the HUGE pay and benefit cuts that some employees at LCC,NW,DAL were required to take during the bankrupcy process ?

I'm not Jim, but I'd argue that the 4Q05 numbers, for "LCC" at least, already reflect the impact of the deep concessions made by the employees. Northwest and Delta are still higher for costs, but cost cuts made at those carriers will affect the "new US" just as much as they'd affect Southwest.

I noticed you gave 4Q05 numbers in your post above,
Don't you think these numbers will narrow this year and next as the merger syngeries at LCC continue to kick in ?

Well, I wouldn't expect him to use 1Q06 numbers given that the quarter isn't over -- meaning that the numbers haven't been made public yet. Color me skeptical that the so-called "synergies" will amount to a fraction of what was promised when the merger was being sold.

 

[markkus757]

jetBlue is going into this market because there is money to be made. They can charge reasonable fares and still make enough to cover their costs. The problem with US is that this has been their problem for the past decade. Most of the routes that now have low priced service on was because US gouged the flying traveller. Do some research about it. WN, FL, and others have started up routes in the past few years that they refer to as "no brainers". One of those reasons are the unreasonable fares priced by the incumbents. Just take the routes out of PHL that Southwest now serves. Those differences should open up most people's eyes.

 

[insp89]

I'm not Jim, but I'd argue that the 4Q05 numbers, for "LCC" at least, already reflect the impact of the deep concessions made by the employees. Northwest and Delta are still higher for costs, but cost cuts made at those carriers will affect the "new US" just as much as they'd affect Southwest.
Well, I wouldn't expect him to use 1Q06 numbers given that the quarter isn't over -- meaning that the numbers haven't been made public yet. Color me skeptical that the so-called "synergies" will amount to a fraction of what was promised when the merger was being sold.

sfb,
I am well aware that 1Q06 nunbers are not out yet, :blink:

The point is, that using the latest numbers that ARE out
[4Q06], is still looking in the past.

Time will Tell about the synergies, There is still a lot of redundant jobs in the non-union area that were left untouched by the bankrupcy judge.

The continued erosion of Southwest's fuel hedges is by far the #1 problem that WN will have to address. [It will take more than saving money on paper clips.]

 

[ClueByFour]

The continued erosion of Southwest's fuel hedges is by far the #1 problem that WN will have to address. [It will take more than saving money on paper clips.]

Perhaps you missed the fact that LUV raised it's fares. Proactively. Hedging allows them to predict their future costs with a huge degree of certainty, and price their product accordingly.

 

[SoftLanding]

Your logic is tainted. WN has industry leading wages, can get the passengers to their destinations on the above fare profitable. This competition is what make this country great. WN employees win, stockholders win, and most importantly the customer/citizens win. The problem simply is not the "walmart' issue but the management/unions of your airline

"mrman",

sorry for jumping in here

However,

WN is NOT making money flying passengers, they are making money because of fuel hedging!

Superb...and throw some luck in there for good measure...management, though!

LUV's road ahead is most likely a little rougher, though...

SoftLanding

 

[ClueByFour]

WN is NOT making money flying passengers, they are making money because of fuel hedging!

It's hard to fly anyone anywhere without buying gas. LUV goes about that better than anyone else right now.

 

[insp89]

Perhaps you missed the fact that LUV raised it's fares. Proactively. Hedging allows them to predict their future costs with a huge degree of certainty, and price their product accordingly.

No, I did not miss the fact that LUV raised it's fares, and I agree with you on your other points.
It just looks to me the US airline playing field is leveling.

It's hard to fly anyone anywhere without buying gas. LUV goes about that better than anyone else right now.

The key words in your sentence being [right now].

 

[sfb]

The point is, that using the latest numbers that ARE out [4Q06], is still looking in the past.

Well, the most recent quarterly numbers are probably the best indication that anyone outside the respective companies has of where costs are today, aside from guidance that may be given to analysts for current/upcoming quarters. I doubt very strongly that US will see their CASM drop by 1 cent over a single quarter absent yet another round of unbelievably steep wage reductions. US/HP's labor CASM is already below Southwest's, at 2.67 cents for US/HP vs. 3.23 cents at WN. The big problem for US is that Southwest enjoys such an enormous advantage in the non-labor, non-fuel costs -- 3.34 cents/mile at WN against 4.84 cents/mile at US/HP.

Time will Tell about the synergies, There is still a lot of redundant jobs in the non-union area that were left untouched by the bankrupcy judge.

Even at, say, $100,000/year on average per headcount, you need to have cut 1,000 "redundant" jobs to get $100 million in cost savings. How many were actually cut in the end?

The continued erosion of Southwest's fuel hedges is by far the #1 problem that WN will have to address. [It will take more than saving money on paper clips.]

And, as many have said, they are addressing it. Even without their enviable hedge position, Southwest would have enjoyed industry-leading operating margins for the year.

 

[insp89]

Well, the most recent quarterly numbers are probably the best indication that anyone outside the respective companies has of where costs are today, aside from guidance that may be given to analysts for current/upcoming quarters. I doubt very strongly that US will see their CASM drop by 1 cent over a single quarter absent yet another round of unbelievably steep wage reductions. US/HP's labor CASM is already below Southwest's, at 2.67 cents for US/HP vs. 3.23 cents at WN. The big problem for US is that Southwest enjoys such an enormous advantage in the non-labor, non-fuel costs -- 3.34 cents/mile at WN against 4.84 cents/mile at US/HP.
Even at, say, $100,000/year on average per headcount, you need to have cut 1,000 "redundant" jobs to get $100 million in cost savings. How many were actually cut in the end?
And, as many have said, they are addressing it. Even without their enviable hedge position, Southwest would have enjoyed industry-leading operating margins for the year.

sfb,

I noticed you enjoy talking about CASM, without addressing the other side of the coin, RASM.
While Southwest does indeed enjoy some cost savings due to operating one type of aircraft, It limits what they can do and where they can fly.
There is a lot of money that can be made in the overseas market that require larger aircraft.
As much as one wants to discredit the fuel hedge erosion fact, It is making a big difference to the whole industry, This is why Southwest is forced to raise fares to stay profitable.
This also allows other airlines to match these fares and could mean the difference between profit or loss.

 

[BoeingBoy]

Sorry to come late to the party - been out flying.....

In using the numbers for 4Q05, I actually tilted the comparison in favor of LCC.

- WN's number excludes fuel & hedging gains only, while LCC's excludes not just fuel and hedging gains but also excludes special items (though I'd have to do some digging to see if those special items had a favorable or unfavorable effect on CASM).

- WN's number was for their entire operation, while LCC's was just for mainline - the combined mainline, at that, so it benefitted from HP's lower costs. It did not include the cost of the express operation, which raises CASM significantly. If I'd pegged LCC's ex-fuel CASM at over 11.8 cents would the comparison to WN's 6.57 cents or B6's 4.5 cents look very good?

So one of two things has to happen (or a combination) - we cut 5 cents out of our non-fuel CASM or WN sees an increase in their's of the same amount. I'd just note that to accomplish a 5 cent change in CASM requires almost $1 Billion per quarter, based on 4Q05 ASM's for LCC. Don't forget - that's non-fuel CASM, so as long as WN has better hedge positions that we do, the hill we've gotta climb is even steeper.

Of course, there's always that other side of the equation - RASM. Which is why I cringe every time I see someone tell our high revenue passengers to "go somewhere else" if they don't like something. Every dollar of revenue we keep means a dollar less cutting that needs to be done to truly achieve a "level playing field". If making fares "reasonable" for the high value passenger means losing 25 cents of each dollar, or if adding amenities costs 25 cents of each dollar, we're still ahead 75 cents for each dollar.

Jim

 

[insp89]

I guess the next question is,
Does Usairways have to get their non-labor, non-fuel cost down to Southwest's level to be a profitable airline ?

 

[BoeingBoy]

As always, it depends on the other half of the equation.....RASM.

The whole point of my much earlier discussion of our cost vs WN/B6 was because of the comment someone made about "el cheapo" fares that B6 was offering in PIT, the point being that for them those fares weren't money-losing.

Obviously, all we need is revenue greater than expenses to produce a profit. Obtaining, and keeping, that relationship positive is just harder the more places we have truly low cost competition. And we can call ourself "LCC" all we want to but a CASM north of 15 cents (including fuel) isn't anywhere close.

I guess what I'm really saying is that anyone who thinks this carriers fuel hedges running out or that carriers maintenance honeymoon ending will "level the playing field" is in for a long wait. But the playing field doesn't necessarily have to be level for US (or any other legacy carrier) to be "competitive".

Jim

 

[BoeingBoy]

There's this from Aviation Daily....

JetBlue Moves Into US Airways' Territory With New 190 Markets
By Lori Ranson/Aviation Daily
03/20/2006 0914 AM

JetBlue's new Embraer 190 markets from Pittsburgh unveiled Friday are profit engines for competitor US Airways, generating almost $26 million in operating profits for the Tempe, Ariz.-based airline.

Four daily flights between Pittsburgh and New York Kennedy on JetBlue start June 30, the same day as the airline's two daily flights from Boston to Pittsburgh and three daily trips between Boston and Buffalo.

"Based on our routes analysis, these Pittsburgh markets are strong performers for US Airways," said Lehman Brothers analyst Gary Chase in a research note. He estimates Pittsburgh-New York LaGuardia is the third most profitable domestic market for the airline, generating an operating profit of about $17 million during the third quarter 2005. The airline netted about $9 million in operating profit on its Boston-Pittsburgh service, making that market the sixth most profitable domestic route, Chase said.

US Airways' smaller Pittsburgh hub posts "better-than-average system profitability," Executive VP-Marketing and Sales Scott Kirby said. He recently told reporters in Tempe that the airline has "right-sized" Pittsburgh for current market conditions, and "as long as that works, we don't intend to change anything."

Jacksonville is a strong performer for Continental, coming in as the 13th most profitable domestic route for the carrier in the third quarter with an operating profit of $1.4 million. Schedules show Continental offering about 29 weekly flights from Newark to Jacksonville in July.

JetBlue also has familiar company on its Pittsburgh-JFK flights in Delta, who's slated to offer three daily roundtrip flights in July with 50-seat jets flown by Comair. Delta's yields on that route during the third quarter were 37.93 cents, and unit revenues were 25.43 cents.

There's also company in JetBlue's Boston-Buffalo market. US Airways Express carrier Chautauqua Airlines is scheduled to offer three daily roundtrip flights from Boston to Buffalo in July Monday-Friday, with a single daily flight between Buffalo and Boston on Saturdays and two daily roundtrips in the market on Sundays. Yields for the airline on that route in the third quarter of 2005 reached 44.95 cents, while unit revenues were 25.40 cents. Previously, JetBlue said it plans to add about six to eight more 190 cities this year (DAILY, March 9).