Is his the answeer?

[MCI transplant]

<_< --------- What do you think? http://money.cnn.com/2011/04/04/news/companies/airlines_high_oil.fortune/index.htm

 

[FWAAA]

I don't understand the relevance of your thread title. "Is this the answer?" Is what the answer? What's just a matter of time?

Yes, the article points out the obvious: that high-cost airlines like AMR and lower-cost airlines like DL and UA are finding it difficult to raise fares enough to offset $100/bbl oil, just like the period from three to six years ago, Summer 2005 to late 2008 when oil prices drained the airlines of tens of billions of dollars more than they were used to paying for fuel.

 

[BoeingBoy]

I agree with FWAA although I'd add that you can find analysts predicting about everything from lower profits to losses. The $64 million question is what will oil (and jet fuel) prices do the rest of this year, next year, etc.

Then there's the question of where the tipping point is on fares. With 6 or 7 fare increases in the first 3 months of this year, where's the point that leisure traffic drops off and the airlines are faced with selling seats below cost to fill the seats, flying empty seats, or cutting capacity more. The problem with cutting capacity is that it's a good method of lowering expenses for short-term drops in travel (post 9-11, the recent recession, etc) but to do it in the long term is to take the penalty of shrinking and apply it for the long term. Overall expenses don't go down as much as capacity, hence CASM increases. For the short term that's not a terribly big problem but for the long term it can put airlines in a squeeze.

Besides, the author has no real qualification except being a reporter - from a BA in political philosophy or something like that to internship at the Arizona Republic then jobs at various papers/publications. So I wouldn't be surprised if he took some quotes from a few analysts and created a story out of them.

Jim

 

[WorldTraveler]

First, the idea that WN has better fuel hedges and pays less than the network carriers is not current reality. They had an advantage for several years but they are paying the same for fuel as other carriers and their hedges are not much different from the other carriers.
There is a whole lot of conjecture in the article based on one failed system-wide increase. First, fare increases usually start as systemwide and apply to multiple products. I’m not even sure of the dtails of this fare increase that failed, but many before it were applied to nearly all products with the exception of some sale products. Fare increases by nature become more specific/targeted… the fact that this one might have not been implemented on a systemwide/all product basis says only that there needs to be more specificity. The fact that dominant markets are pulled back also doesn’t mean anything if it is part of a system increase… it is very difficult to pull back an increase that was filed on a systemwide basis in select markets…. Those select markets can be refilled separately (and likely will be) but airlines usually don’t file multiple types of markets and fare types if there is a chance part of it might not go through…. It is too hard to figure out what your competitors are doing and remain competitive yourself. Second, the fact that multiple systemwide increases have gone through says that there is a lot of traction to raising fares to cover cost increases and that historically has not been the norm…. And third, WN doesn’t accept bookings out near as far as other carriers… their tolerance for long-range fare increases is much less esp. since the off-peak winter season is not in range for their bookings right now… they would clearly rather raise fares when they can gauge the impact – such as a falloff in bookings when a fare increase is implemented… other airlines are watching that now and can do so for 11 months worth of bookings…
International markets have long been used to separate fuel surcharges that can be pulled off if fuel goes back down…. Not so w/ domestic.. so when a fare is increased, it is a lot harder to get it back down after a runup in fares that are fuel related….
March traffic reports are coming out and there is clearly softness in bookings although it appears to be driven by Europe and Asia… Europe was soft before March but AA and DL both took pretty big LF hits in Asia in March, likely the most Japan crisis impact.. which does impact domestic because of connecting passengers… still there is a point where domestic as a standalone entity is at risk if the economy is exposed to global downturns.
WN needs to digest FL plus expand network in the coming months and can’t afford to choke off demand… they obviously now are also concerned about potential a/c replacements….it’s not certain what will happen but the cost of maintenance of older aircraft is bound to increase – and if they decide some of the marginal capacity needs to come out at the same time lower value demand is drying up w/ fare increases, it might be cheaper to park some aircraft.. and the whole fare increase equation changes.
It is a given that increased fares will reduce demand – the US autumn months have significantly reduced leisure demand by nature.
AA can’t afford to pull capacity because of its smaller network and the noted fear of an increase in CASM…. Post 9/11 effect for network vs low fare carriers showed that network carriers lost because they had to pull capacity but low fare carriers simply kept adding – and won lots of new market share…. AA realizes it can’t do that again… but the formula is no longer just between low fare and network carriers.. it is between the strongest and weakest carriers now.
If market forces do not allow capacity to be reduced (ie individual airline strategies prevent capacity reductions), industry profits will suffer…. We have seen if before and that is a big part of the theory behind why consolidation makes sense. The fact that AA didn’t consolidate makes it less likely to support the theory that works for DL and UA.
AA is still the weakest carrier in terms of cost and nationwide network perspective. US might be next on list if fuel prices remain high (likely) since US has no hedges….
On the other extreme, WN is in solid financial shape and willing to use downturn in economy to further grow…. As are DL and UA – w/ greatest risk in Japan – both offer enough capacity they could pull some of it down as well as reduce duplicative domestic capacity due to multiple hubs serving same flows…. B6
The principle still remains that the weakest carriers will either be hurt most by higher costs if they pull capacity or will be hurt by the inability to price for the capacity if it is not pulled… either way, an unsupportable amount of capacity in the market and for each carrier’s business model will hurt the weakest carriers first.
Finally, fuel prices are related to value of dollar which continues to trade near record lows…. A weak dollar helps inbound tourism to the US and helps US exports but costs Americans on everything that is imported except for products from China where currency regulating mechanisms are not allowed to work by market forces. It is very likely fuel prices are not going down anytime soon.
US budget battles highlight the need to strengthen US economy which includes job growth and debt reduction…partisan politics aside, the price of oil (which is priced in US dollars) is directly related to the strength of the US economy relative to other global economies…
The developing world is still growing rapidly and the demand for petroleum is growing. Obama’s visit to Brazil highlights need for more oil… US may want a trading partner where politics are less influenced by the Middle East.. but Brazil is not going to sell its oil at below market prices.
For oil prices to go down and for US airlines to feel comfortable about their long-term futures, the US economy has to be fixed… until then US airlines are going to be slapped around more than their overseas peers. When you combine that with the fact that there will always be some US airlines that are stronger than others, there will be the temptation to use fuel cost increases as a tool by some carriers to exert financial pressure on others.

 

[eolesen]

March's traffic does show softness, but also points out that DL is the market leader in irrational capacity... Both Europe and Pacific capacity had >15% ASM increases for DL, compared to low single digits for AA. Sorta underscores the argument Bev Goulet was making a few weeks back at the JP Morgan conference about why AA wasn't pulling back capacity -- she said AA has been more restrained at adding capacity than DL has, therefore why should anyone (except perhaps WT) expect AA be the one who has to pull that capacity out?

I'd love to see a trendline of capacity increases/decreases over the past couple years... maybe culling thru traffic reports can be the next "if I have freetime" project...

 

[WorldTraveler]

March's traffic does show softness, but also points out that DL is the market leader in irrational capacity... Both Europe and Pacific capacity had >15% ASM increases for DL, compared to low single digits for AA. Sorta underscores the argument Bev Goulet was making a few weeks back at the JP Morgan conference about why AA wasn't pulling back capacity -- she said AA has been more restrained at adding capacity than DL has, therefore why should anyone (except perhaps WT) expect AA be the one who has to pull that capacity out?

I'd love to see a trendline of capacity increases/decreases over the past couple years... maybe culling thru traffic reports can be the next "if I have freetime" project...

hate to break it to you but DL has and will act in DL's best interests.. not those of its competitors or the industry. DL racked up industry leading profits during the time that it was expanding... precisely enforcing what I have repeatedly said that being able to grow is what drives the ability to keep costs down - which DL has done better than any other network carrier.
No other carrier including AA is going to do anything that harms itself in order to help the industry - its competitors.
DL simply has been in the best position to add capacity among US network carriers.
We don't at this point know the source of the softness to/from Europe but AA had softness as well..... and we still don't know what kinds of yields AA or any other carrier is getting so LF alone doesn't tell the story. IN a couple weeks, we'll see financial info including RASM and that will give us a much better picture of whether filling seats and raising fares is the right thing to do.
You can find lots of snapshots over the past decade to create a story about capacity but the fact is that the airlines that went through BK cut capacity during that process and so were in a position to rebuild after they obtained lower costs.
AA didn't file for BK but neither did it reduce capacity like the other carriers did early during the decade - beyond the initial post 9/11 reductions that all network carriers did.
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AA is the carrier that said it wouldn't pull capacity out... other carriers including DL already said it would.
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Further, UA and CO are being the most aggressive in reducing domestic capacity over the past year - but that is exactly what was expected as a result of their merger. DL has duplicate connecting capacity in its network which is why they are reducing MEM and CVG... but they are shifting some of that capacity to ATL where they will be even better positioned to compete against WN.
AA, DL, and US are about in the same position with capacity in the CRSs for the fall - down about 1%... but it is also a given that DL is not going to reduce capacity in markets competitive w/ AA if AA doesn't reduce capacity or if DL believes it can sustain the higher levels of capacity.... it is precisely for this reason why consolidation in the industry is needed because capacity rational is only as effective as the dumbest competitor (to use the words of the immortal Bob Crandall).
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BTW, based on capacity that is in CRSs as of right now, DL is poised to overtake the new UA as the largest carrier once again.

 

[FWAAA]

March's traffic does show softness, but also points out that DL is the market leader in irrational capacity... Both Europe and Pacific capacity had >15% ASM increases for DL, compared to low single digits for AA. Sorta underscores the argument Bev Goulet was making a few weeks back at the JP Morgan conference about why AA wasn't pulling back capacity -- she said AA has been more restrained at adding capacity than DL has, therefore why should anyone (except perhaps WT) expect AA be the one who has to pull that capacity out?

I'd love to see a trendline of capacity increases/decreases over the past couple years... maybe culling thru traffic reports can be the next "if I have freetime" project...

True, and on a similar note, AA's excuses for its smaller-than-industry RASM gains the past several quarters has been that its RASM declined less in the slowdown than at its competitors - so it's natural that its recovery-inspired RASM increases will lag those who suffered much larger percentage declines. I haven't checked the match to verify that AA is telling the truth on that one, leaving aside whether it's a valid excuse even if true.

 

[WorldTraveler]

True, and on a similar note, AA's excuses for its smaller-than-industry RASM gains the past several quarters has been that its RASM declined less in the slowdown than at its competitors - so it's natural that its recovery-inspired RASM increases will lag those who suffered much larger percentage declines. I haven't checked the match to verify that AA is telling the truth on that one, leaving aside whether it's a valid excuse even if true.

problem w/ your theory is that AA trailed UA and DL when the latter two were adding capacity... new capacity should be below average RASM unless your network is way screwed up. DL has had the uncanny ability to aggressively add capacity during the good times and then pull it back when things get rough....
The bigger factor seems to be that DL and UA were positioned to add capacity where it could generate money during the good times... both added to the middle East and Africa which have generated above average fares.... China has been red hot... DL added more there, UA already had a solid base; AA is adding more China capacity but is having to do it up against a direct challenge from UA.
The reason why DL and UA have had better RASM growth is because both found the high growth markets and have
CAI and AMM are apparently gone for now but I"m sure DL will be back... UA is pulling back somewhat on ACC for the winter indicating Africa may be "built out" for now.
DL will fight to minimize losses on the new HND and the new LHR routes but they likely will end up w/ those routes long term, just like they have done in other parts of the world.
Finally, even domestically, DL and UA are better positioned to pull back excess capacity both int'l and domestic due to duplication in their networks far better than AA is w/o losing market share- w/ the exception of AA's presence in LHR and Latin America...
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we'll see how RASM growth pans out through the year but I suspect DL and UA will be able to pull the highest risk and greatest loss markets w/ a smaller effect on their costs than AA....and that AA will have to keep less than ideal capacity in place to protect its network....
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it is also possible that AA is not pulling capacity out because it is alot more likely to file for BK in the near term and they want to go into BK w/ the biggest network possible - knowing that it will inevitably be trimmed in BK.
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regardless of the reason, the point still remains that AA's losses are the highest in the industry and AA has the highest costs... in a reduced demand environment which is certain by this summer as leisure demand shrinks from higher fares, AA is more exposed than other carriers.