Plane Business, Not Looking Good

Borescope

Veteran
Jan 10, 2003
1,130
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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."
 
What on earth is the BIG DEAL???? It's a done deal...period. Some rhetoric and a couple chest thumps and this thing will roll over like a whimper??? The ONLY question is....did management ask for ENOUGH??? Does this person or anyone else REALLY know the deal...f**k if I know. But USAir is a shinning example...and a detriment to all. Just as "WE" (our beloved you know who) broke the industry's back on the way up....USAir has broken everyones back on the way down. Rollercoasters....don't you just love'm...... :lol:
 
The Ronin said:
What on earth is the BIG DEAL???? It's a done deal...period. Some rhetoric and a couple chest thumps and this thing will roll over like a whimper??? The ONLY question is....did management ask for ENOUGH??? Does this person or anyone else REALLY know the deal...f**k if I know. But USAir is a shinning example...and a detriment to all. Just as "WE" (our beloved you know who) broke the industry's back on the way up....USAir has broken everyones back on the way down. Rollercoasters....don't you just love'm...... :lol:
[post="199259"][/post]​

And I suppose UAL Pilot's "Summer of Discontent" and the exorbitant pay raises that followed didn't have a thing to do with where UAL is today?
Right, that was USair's fault too. Give me a break!
 
N924PS said:
And I suppose UAL Pilot's "Summer of Discontent" and the exorbitant pay raises that followed didn't have a thing to do with where UAL is today?
Right, that was USair's fault too. Give me a break!
[post="199314"][/post]​
Is it reading or reading comprehension you have difficulty with????
 
Isn't this Cordle guy a fleet qual scab? That would explain his bashing of the union. If he is who I think he is, he scabbed in '85, and that's the ONLY reason he's a 777 Captain right now. If I'm wrong, please correct me.

The rest of the stuff is really really obvious (UAL needs more cuts? Duh. We've know that for how long now, and I'm not even a CFA). The rest is speculation. I "speculate" that if UAL gets through this latest round of cuts, oil prices and overcapacity will be everyone elses' problem, not ours, until the rest of the industry shakes out.
 
I try to avoid listening to Holly Hegeman as much as possible. Her belief in this guy is testement to her ineptitude. Is there anything here he didn't simply copy from the latest Wall Street Journal edition? After reading his contribution to MSNBC yesterday stating that Yield Management is dead, I'm quite convinced he is brain dead.

United will survive for quite some time. They may be forced to sell some assets, trim a lot of capacity, but they'll be around. FOllowing that, they will muddle along trying to build up, but never have cut enough of the problems and built enough product to truly win customers back. In the end, they die a long death.

Delta is paying bills with credit cards. Interesting...are they at least using a Discover card to get cash back? Let's be serious. Is Delta a little late paying the bills, yes. Are they paying on credit cards...no. Are they going to file...maybe. Most likely yes. Even if they escape this year, next year's obligations will catch them.

It's now a waiting game. There is NO airline, I repeat NO airline with a business plan that is profitable with oil at current levels. If oil continues to hover at these prices, it will begin to hit AirTran, JetBlue, Southwest, etc. The only help they get is if UA & US go down soon...won't happen. US will, not UA.
 
Cordle and Holly are both inept. period. No light whatsoever.

"There is NO airline, I repeat NO airline with a business plan that is profitable with oil at current levels."

And as predicted, oil prices are slowly starting to come back down as Gulf of Mexico capacity SLOWLY comes back online and the Chinese economy slows just a bit. Also, the US elections passed without any terrorist activity.

Oil is far from back to year ago levels but it will be much harder for United and other airlines that are asking for concessions to justify them as oil drops. Ultimately, that could be trouble since the cost cuts that are needed are far more than what is needed to cover high oil prices.
 
Cordle is just one of the "public' scabs at UAL. Good ole, "ask the Capn'" Getline over at USAYesterday is another. Recently she remarked that takeoff's and landing's were the most dangerous part of flying. Having flown with her, and watched her's, I'd have to agree.....
 
WTF? Did I see a scab's name capitalized? The next thing I know, someone will offer them a jumpseat. :down:
 
Flyhigh
You mention that United may never be able to truly win customers back. I can only speak to a very narrow market segment (that being London/Frankfurt/Washington) but I, and the preponderance of my colleagues, have noticed that nearly every flight that we are on is packed check-to-jowl. I think that as many have stated the problem is the yield on the ticket prices and no longer the loyalty - although from what has been mentioned on this board, the international segment for United is doing quite well and is perhaps then an expeption. Even with the exception though, did I not read here that United wishes over 50% of its flights to be outside the borders of the FCs?

World Traveler
You obliquely hinted at the cost problem. I have read in the FT and as well on this board that United’s CEO has stated that if it were not for fuel prices United would be profitable. What are the other costs weighing then so heavily upon the bottom line? Of course it would be beneficial to know what he means by ‘profitable.’ Is this a sustainable profit? One that would attract investors? Is it a foundation for long-term strength? Etc.. Is this what you meant by other cost containment measures?

Cheers
 
Busdrvr said:
Cordle is just one of the "public' scabs at UAL. Good ole, "ask the Capn'" Getline over at USAYesterday is another. Recently she remarked that takeoff's and landing's were the most dangerous part of flying. Having flown with her, and watched her's, I'd have to agree.....
[post="199402"][/post]​

I'm curious if your attitude toward Cordle's statements (not the person) would be any different if she were not a "scab."
 
The overriding question would be would a normal person make such remarks. Kind of like saying 'would you agree with Hitler's views on a master race if somebody else said it'. cordls is a he (although he obviously has no balls), getline in a she (and she has been said to have had her share of balls....)
 
uk,
My reference to overall costs says that even with a billion dollars per year in lower fuel costs, UA still wants another billion and therefore the "ask" remains high despite fuel. Although UA's costs are still not as low as AA (which has had similar costs to UA prior to the latest crisis but which is now quite a bit lower) and CO, which never allowed costs to get out of hand as the biggest boys did. I'm not sure what the make or break costs for UA are aside from fuel. UA's pension liabilities are significant but DL's are just about the same and DL has not chosen to terminate them in bankruptcy - they had a golden opportunity to do so just weeks ago but have obviously passed on that option and apparently plan to maintain their current pension liabilities but convert future benefits to a 401K type plan.

As I have pointed out before, I believe UA has had a worse time with eroding revenue than other carriers except for US. I do think there is something to be said for AA's ability to force costs down through growth, a strategy DL says is in its plan but which neither UA or US have done. I don't know what it is about bankruptcy that prevents airlines from growing but UA is essentially just moving domestic capacity to international markets while US is moving it between hubs and to the Caribbean. It is well established that the only way to reduce costs in a high fixed cost industry like at airlines is to engage in continuous growth.
 
Busdrvr said:
The overriding question would be would a normal person make such remarks. Kind of like saying 'would you agree with Hitler's views on a master race if somebody else said it'. cordls is a he (although he obviously has no balls), getline in a she (and she has been said to have had her share of balls....)
[post="199613"][/post]​

Jawohl, mein Fuhrer!
 

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