The following is from this week's Plane Business Banter by Holly Hegeman.
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Many of you are familiar with Vaughn Cordle. Cordle is not only a 777
Captain with United Airlines, he is also a CFA, and since last year has
done financial analysis work as AirlineForecasts, LLC.
This week Vaughn checked in with us, and I thought he had a couple of
interesting comments to pass along, including the fact that Delta Air
Lines has been paying some bills with credit cards. Hmmmm.
"Over the next several quarters, I would anticipate that several legacy
airlines will be bringing down domestic capacity. The driver to this
action will be the need to maintain a certain level of unrestricted
cash. Profitable pruning is one of the few options available for most
and many will be forced to stem the gushing red ink in the domestic
market. Our recent work suggests that cash-flow for the big six and
seven LCCs will be inadequate by $3 to $5 billion in 2005 based on $35
to $45 oil. Oil could remain in the low to mid $40s in 2005 and may run
up to $60 in the near term. A $10 swing in oil impacts the big six and
seven LCCs by $3.2 billion, and this includes the benefits of the
various fuel hedge programs.
Unrestricted cash will reach bankruptcy levels for NWAC, AWA, ATA, DAL,
FRNT, and CAL if oil stays above $45 over the next 12 months. AMR has
enough cash to last until the 3d or 4th quarter of 2006, but will still
need to bring costs down an additional $500 to $800 million per year if
capacity does not come out of the system. Updated earnings estimates are
for the group to lose $4.8 billion this year and between $1.8 and $2.8b
next.
Delta is on track to lose $1.8b, which excludes nonoperating charges.
Delta is on the edge of bankruptcy, even if they get $1b from the
pilots. ATA, USAir, and United are on the endangered species list and
are at risk in terms of a chapter seven liquidation.
Liquidation is less likely for other airlines because they have - in
relative terms - better balance sheets, smaller pension liabilities, and
better margins. In solvency and liquidity terms, USAir and UAL are dead
last.
Delta and NWAC are next in line, and Delta may file bankruptcy after
November 18th when a debt exchange offer ends.
I'm of the opinion that Southwest will exercise a "leap frog" option and
buy some used 737s to accelerate growth. They are buying market share
with their low fares and are not earning their cost of capital. By
growing much faster than planned, they can lower labor and non-labor
unit costs and preempt the lower-cost competitors like JetBlue. They are
the big winner when big money-losing airlines pull down capacity and
fares firm up after the shakeout.
I spent a day with the National Aerospace Credit Managers Association
this week and the feedback was rather sobering in terms of their
assessment of the airline industry. Delta has been paying some bills
with credit cards and has asked the suppliers to reduce costs by 10%.
Suppliers are not happy and from what we understand, terms are
tightening for most of the airlines.
Labor is in the driver seat in terms of whether or not United and US Air
survives. Without additional concessions - in the 15% to 20% range -
United will be facing liquidation. This is a reality that the unions and
employees have yet to catch up with. Perhaps a deal could be worked out
where labor gets some of the cuts back if oil falls to below $35. It's a
war of attrition and if two big airlines liquidate, the other airlines
will recover because pricing power will allow them to raise fares - at
least in the short and perhaps intermediate term. This is why other
airlines will not liquidate, with the exception of perhaps ATA. Domestic
yields are plunging, fuel costs are spiking, and the economy is not
expanding as fast as originally anticipated.
The magnitude of the structural shift down in average fares and the real
costs of the DB plans has caught everyone by surprise. It's much worse
than most know and the other shoe to drop will be the request for large
additional pay concessions at United and several other airlines.
(Editor's Note: That has now already happened.) United's ALPA has been
telling pilots that exit financing is available...and it's a matter of
whether or not United wanted their terms. This is wishful thinking and
does not reflect reality. As usual, pilots and the unions are the last
to know and tend to lack a balanced understanding of the situation. It
appears that management and the unions are just now catching up with the
real - as opposed to the rosy scenario ATSB loan application reality -
reality of United's situation.
Most believe that we need to lose a carrier or two for the industry to
regain health. United is one that is in serious trouble and the
employees will face a choice between liquidation and lower costs. How
the unions behave and what they say publicly will impact the company's
risk profile and cost of exit financing. The open-ended question is
whether or not current management can persuade the unions to accept the
new reality, which is a function of today's and tomorrow's revenue
environment.
The next question is whether or not current management can survive. Most
would argue that shopping for a CEO that tells the unions what they want
to hear is a bad idea. United is at the mercy of the capital markets and
the next representative of shareholder capital will not be as
labor-friendly as Mr. Tilton. We are in the final stages of a major
industry shakeout. It will be quite traumatic for the employees who lose
their jobs and for those that have to take sizable pay and benefit cuts.
Those that survive will have to adapt to a more modest lifestyle if they
are to continue to work in the airline industry."
-----------------------------------------------------------------
Many of you are familiar with Vaughn Cordle. Cordle is not only a 777
Captain with United Airlines, he is also a CFA, and since last year has
done financial analysis work as AirlineForecasts, LLC.
This week Vaughn checked in with us, and I thought he had a couple of
interesting comments to pass along, including the fact that Delta Air
Lines has been paying some bills with credit cards. Hmmmm.
"Over the next several quarters, I would anticipate that several legacy
airlines will be bringing down domestic capacity. The driver to this
action will be the need to maintain a certain level of unrestricted
cash. Profitable pruning is one of the few options available for most
and many will be forced to stem the gushing red ink in the domestic
market. Our recent work suggests that cash-flow for the big six and
seven LCCs will be inadequate by $3 to $5 billion in 2005 based on $35
to $45 oil. Oil could remain in the low to mid $40s in 2005 and may run
up to $60 in the near term. A $10 swing in oil impacts the big six and
seven LCCs by $3.2 billion, and this includes the benefits of the
various fuel hedge programs.
Unrestricted cash will reach bankruptcy levels for NWAC, AWA, ATA, DAL,
FRNT, and CAL if oil stays above $45 over the next 12 months. AMR has
enough cash to last until the 3d or 4th quarter of 2006, but will still
need to bring costs down an additional $500 to $800 million per year if
capacity does not come out of the system. Updated earnings estimates are
for the group to lose $4.8 billion this year and between $1.8 and $2.8b
next.
Delta is on track to lose $1.8b, which excludes nonoperating charges.
Delta is on the edge of bankruptcy, even if they get $1b from the
pilots. ATA, USAir, and United are on the endangered species list and
are at risk in terms of a chapter seven liquidation.
Liquidation is less likely for other airlines because they have - in
relative terms - better balance sheets, smaller pension liabilities, and
better margins. In solvency and liquidity terms, USAir and UAL are dead
last.
Delta and NWAC are next in line, and Delta may file bankruptcy after
November 18th when a debt exchange offer ends.
I'm of the opinion that Southwest will exercise a "leap frog" option and
buy some used 737s to accelerate growth. They are buying market share
with their low fares and are not earning their cost of capital. By
growing much faster than planned, they can lower labor and non-labor
unit costs and preempt the lower-cost competitors like JetBlue. They are
the big winner when big money-losing airlines pull down capacity and
fares firm up after the shakeout.
I spent a day with the National Aerospace Credit Managers Association
this week and the feedback was rather sobering in terms of their
assessment of the airline industry. Delta has been paying some bills
with credit cards and has asked the suppliers to reduce costs by 10%.
Suppliers are not happy and from what we understand, terms are
tightening for most of the airlines.
Labor is in the driver seat in terms of whether or not United and US Air
survives. Without additional concessions - in the 15% to 20% range -
United will be facing liquidation. This is a reality that the unions and
employees have yet to catch up with. Perhaps a deal could be worked out
where labor gets some of the cuts back if oil falls to below $35. It's a
war of attrition and if two big airlines liquidate, the other airlines
will recover because pricing power will allow them to raise fares - at
least in the short and perhaps intermediate term. This is why other
airlines will not liquidate, with the exception of perhaps ATA. Domestic
yields are plunging, fuel costs are spiking, and the economy is not
expanding as fast as originally anticipated.
The magnitude of the structural shift down in average fares and the real
costs of the DB plans has caught everyone by surprise. It's much worse
than most know and the other shoe to drop will be the request for large
additional pay concessions at United and several other airlines.
(Editor's Note: That has now already happened.) United's ALPA has been
telling pilots that exit financing is available...and it's a matter of
whether or not United wanted their terms. This is wishful thinking and
does not reflect reality. As usual, pilots and the unions are the last
to know and tend to lack a balanced understanding of the situation. It
appears that management and the unions are just now catching up with the
real - as opposed to the rosy scenario ATSB loan application reality -
reality of United's situation.
Most believe that we need to lose a carrier or two for the industry to
regain health. United is one that is in serious trouble and the
employees will face a choice between liquidation and lower costs. How
the unions behave and what they say publicly will impact the company's
risk profile and cost of exit financing. The open-ended question is
whether or not current management can persuade the unions to accept the
new reality, which is a function of today's and tomorrow's revenue
environment.
The next question is whether or not current management can survive. Most
would argue that shopping for a CEO that tells the unions what they want
to hear is a bad idea. United is at the mercy of the capital markets and
the next representative of shareholder capital will not be as
labor-friendly as Mr. Tilton. We are in the final stages of a major
industry shakeout. It will be quite traumatic for the employees who lose
their jobs and for those that have to take sizable pay and benefit cuts.
Those that survive will have to adapt to a more modest lifestyle if they
are to continue to work in the airline industry."
LOL 
