Round Three

[UAL_TECH]

URL: http://investorsresources.bravehost.com/8-21another9-11.htm

Commentary from Investor’s Economic Resources

In the airline industry, 9-11 is a dividing line as profound as the K-T boundary in paleontology. The asteroid impact 65 million years ago which caused the Cretaceous-Tertiary Mass Extinction event ended the reign of dinosaurs. In the future, 8-21-2005 may be viewed as even more significant for the airline industry, and possibly the entire US economy than 9-11.

August 21, 2005 is likely to be the first day of operation by Northwest Airlines (NWAC) after imposing 26% pay-cuts on its mechanics. Northwest claims that it has enough replacement mechanics lined up so that its’ flight schedule will not be disrupted, if as expected, the AMFA union strikes when the cuts are imposed.

The Northwest – AMFA confrontation is somewhat of a special situation. Negotiations will continue until the expiration of the mandatory 30-day cooling-off period that began on July 20th. Northwest is insisting on cutting the pay by 26% and firing 50% of the mechanics. It has been made fairly obvious that a pay-cut of 25.99% and firing 49% of the mechanics is not acceptable to Northwest.

For their part, the AMFA has replaced other unions by winning representation votes on a platform of “no concessions – EVERâ€. Even if the AMFA leadership was willing to agree to the cuts demanded by Northwest, it is unlikely that the rank and file mechanics would vote to ratify it. Unlike most other airline employees, mechanics have skills that would allow them to find alternative employment outside the airline industry.

Both sides seem to have made a decision that they would rather die on their feet than live on their knees. The union’s struggle is kamikaze-like. They have no hope of maintaining current wage levels. The “best victory†the union can envision would be to drive Northwest into bankruptcy. In that case the bankruptcy court would impose the pay-cuts.

Northwest’s ability to operate smoothly after replacing the AMFA members has yet to be demonstrated. However, they appear to have made extraordinarily thorough preparations. If a legacy airline like Northwest can replace an entire union with much lower paid employees, this will be a milestone event. This is especially true since the mechanics are highly skilled and require extensive federal licenses.

If Northwest succeeds the ramifications are enormous, and not just for the airline industry. The PATCO strike that was crushed by Ronald Reagan was thought by some to usher in the boom of the 1980s by putting labor “in its placeâ€. The air-traffic controllers worked for the federal government and there was never any questions as to whether the government had the power to crush them, only the will.

If a legacy airline can completely replace a unionized workforce and still operate, it is a whole new ball game. Jim Kramer, the CNBC stock market guru who is a latter day version of a cross between Joe Granville and John Maynard Keynes, was asked his opinion of Jet Blue. He quipped: If I had to buy just one airline- - I would quit the business! Kramer explained that unions have the potential to expropriate any and all shareholder wealth from an airline. He is no right-wing ideologue. He simply stated matter-of-factly that such union power is why the steel and auto industries are similarly disadvantaged.

Who are the dinosaurs of today? The answer is not as simple as one might think. Revisiting the K-T extinction event analogy it should be remembered that the dinosaurs were mighty beasts that ruled the planet. They could go anywhere they wished and take food or anything they wanted away from the puny mammals. Today, the mighty beasts who can do whatever they want in the airline business, are the low-cost carriers like Jet Blue and Southwest. If they want to enter a market, the legacy carriers cower like small mammals facing a Tyrannosaurus Rex.

If Northwest beats the union, the shareholders and board of every other legacy airline will ask: Why not us? The environment would instantly change. Just as the asteroid impact turned the dinosaur’s advantages into liabilities, a Northwest victory could take away the labor cost advantage of the low-cost carriers.

We will not know for sure until August 21. However, there are already some clues that suggest some may be anticipating the impact of 8-21. Steve A. Cohen who runs the SAC hedge fund complex has recently taken large positions in the Northwest and Delta (DAL). Delta may be waiting to see what happens on 8-21 before imposing another round of pay-cuts. UAL has delayed exit from bankruptcy at the behest of the unsecured creditors. Maybe they want to see what happens after 8-21. Every legacy airline would be very profitable if it could pay Jet Blue levels of wages and benefits. Ford and GM would make money if they could beat their unions also. Will 8-21 be the milestone?

B) UT

 

[BigRed1]

I can't believe they are still blaming airline losses on labor costs. We spent nearly three hundred million dollars more on fuel in June 2005 alone compared to June 2004. We have cut 7 billion in annual costs.

They have taken half my pilot pay, I am working longer and harder for that pay, after 7 years at this company I am 200 pilots from the bottom of the seniority list, and have a fraction of my retirement left.

The pilots of "low-cost" airlines like Jetblue, Frontier, CAL, and Southwest make more than we do for comparable equipment. I assume their mechanics and other employees are paid at or more than UAL as well. Northwest has the highest paid pilots along with FedEx.

It is not the cost of labor, it is the low cost of tickets. Plane and simple. The price of a gallon of jet fuel is up 300% from historical averages. The cost of an airline ticket is down 30% from historical averages. And they want to blame labor? The demand is there. Raise tickets prices. No one will stop flying Southwest if god forbid they raise their prices from 79 bucks to 109 bucks. It wouldn't even cause a minor blip in traffic demand.

I know I am preaching to the choir. I am off my soapbox. I feel better now. Breath...Breath...Happy thoughts...Hummmmmmmmm.

 

[TechBoy]

It is not the cost of labor, it is the low cost of tickets. Plane and simple. The price of a gallon of jet fuel is up 300% from historical averages. The cost of an airline ticket is down 30% from historical averages. And they want to blame labor? The demand is there. Raise tickets prices. No one will stop flying Southwest if god forbid they raise their prices from 79 bucks to 109 bucks. It wouldn't even cause a minor blip in traffic demand.

[post="286236"][/post]​

Welcome to the world of supply and demand. As long as the LCCs can make money at current prices, they will just take market share from carriers that can't. That's the way it works in the rest of the economy and I see no reason why it should be any different in the airline industry.

BTW, it does appear that Southwest has been raising its average prices lately.

The pilot pay charts are interesting. One thing that I've never seen any concrete data on is how many hours per year a typical pilot gets paid for. Is it just actual hours flown (and therefore an absolute max of 1000)? Or do they get paid a certain number of "hours" for training, vacation etc.? It's hard to figure out what pilots get paid without knowing whether they average 800, 1000 or 1200 hours paid per year. Does anyone know the typical situation?

 

[BigRed1]

Welcome to the world of supply and demand. As long as the LCCs can make money at current prices, they will just take market share from carriers that can't. That's the way it works in the rest of the economy and I see no reason why it should be any different in the airline industry.

BTW, it does appear that Southwest has been raising its average prices lately.

The pilot pay charts are interesting. One thing that I've never seen any concrete data on is how many hours per year a typical pilot gets paid for. Is it just actual hours flown (and therefore an absolute max of 1000)? Or do they get paid a certain number of "hours" for training, vacation etc.? It's hard to figure out what pilots get paid without knowing whether they average 800, 1000 or 1200 hours paid per year. Does anyone know the typical situation?

[post="286252"][/post]​

I agree Techboy that total compensation is hard to figure due to vacation/retirement/per diem/trip rigs/gaurantees/etc etc differences. All 121 operations are capped at 1000 flight hours per year. Pilots are capped at 8 flight hours in a 24 hour period, 30 flight hours in 7 days, 100 flight hours per month, and 1000 hours per year. It is obvious to most, but if those who do not already know, pilots only get paid when the parking break is released at the start of a pushback. All the other pre/post flight duties and layover time away from home is unpaid. That 5 hour ground delay program? Pilots get paid nothing. Get a mechanical delay, nothin'. Cancel a trip at UAL? LOSE THE PAY!!!!!!! Fair? Not even close to fair. But my point of straight compensation for similar duties per hour on a piece of equipment, UAL is way down there now. BK is brutal. This career is brutal. Good thing I love flying airplanes.

 

[Walmartgreeter]

.

Is it just actual hours flown (and therefore an absolute max of 1000)? Or do they get paid a certain number of "hours" for training, vacation etc.?


A good rule of thumb is most pilots fly 85 hours a month. At that rate the yearly rate is for all intents is their hourly rate times a thousand. The vacation and training pay are usually included in the 85, and profit sharing, if anybody still has any, might raise the yearly pay. Reserves may, and often get less, because they may fly less and are promised a certain floor (usually 70-80 hours, whether they work or not). Since givebacks and paycuts at some majors, many pilots now have to fly 95 hours, and still will not make the same as they once did flying 85. But the 85 hour and 1000 times hourly pay thing will still give you an idea of yearly pay. Greeter.

 

[casual rat]

Trouble is the LCCs aren't making a profit either. I believe the only carrier to show a profit was SWA--and it wasn't much. Outside of their Pilot group (due to the equipment they fly), their Labor costs aren't all that much less than the reconfigured Legacies (UA and U). It's a game of Chicken--who goes Chapter 7 first. By then, the Industry's Employees will all undergo some restructuring themselves (painful ain't it?), before fares go up--in order to gain tremendous profits in the long term. JMHO...BTW...

 

[767jetz]

As long as the LCCs can make money at current prices, they will just take market share from carriers that can't.

BTW, it does appear that Southwest has been raising its average prices lately.

One thing that I've never seen any concrete data on is how many hours per year a typical pilot gets paid for. Does anyone know the typical situation?

[post="286252"][/post]​

A few coments:

First, even LCC's are showing signs of pending trouble. Southwest is starting to increase fares because even their fuel hedges are creeping higher and some are starting to run out. It's only a matter of time before their fuel advantage runs out.

Jet Blue is still in the black, but barely. The problem with LCC's is that their costs can only go in one direction... up. The prices in LCC markets will start to go up to offset fuel prices soon. $65/barrel oil is bad for everyone, not just the legacies.

And as for taking market share, I don't buy that one completely. There is still a slight price premium for those who want FF miles, full service, and access to those things in a worldwide network. As long as legacies stay competetive in LCC markets, there will not be any more major errosion of market share. Just look at Denver, where TED is regaining market from Frontier. That being said, it is still the LCC's who set the price point on routes they fly.

As for piot pay, as others have said, it is hard to generalize because there are so many variables. 1000 is pretty hard to hit because of the way vacation and training are paid, as well as delays and cancelations. And reserves on average fly less than line holders. I'd say the 1000 number is a bit optimistic. 900/year x hourly pay rate is probably a better WAG for the average annual pay.

 

[spacewaitress]

More cuts coming
Of course this will be pooh poohed by those with their heads in the sand, but high fuel costs are eating up previous cuts and more cuts will be needed.

It's just a matter of how soon.

 

[767jetz]

More cuts coming
but high fuel costs are eating up previous cuts and more cuts will be needed.

It's just a matter of how soon.

[post="292331"][/post]​

Not really spacewaitress, if you look at the numbers. Try this article , or ths article to see what I mean.

"The company reported an operating profit of $113 million for July 2005. This represents a $62 million improvement in operating profit over the same period last year, despite a 46 percent increase in fuel prices for mainline and express operations, which resulted in a $127 million increase in fuel expenses year-over-year."

"Meanwhile, UAL's monthly operating profit more than doubled to $113 million from $51 million the year before, even as fuel costs increased by $127 million."

"Mainline passenger unit revenue (PRASM) in July increased 9 percent over the same period a year ago, outpacing the industry average."

767jetz note: PRSAM(revenue) increased 9% while CASM(cost, including fuel) rose only 5%. This is an excellent trend, and it means we're going in the right direction.

"Excluding reorganization expenses, the company reported a net profit of $76 million."

""The year-over-year improvement in operating profit despite record fuel prices demonstrates United's significantly improved competitiveness," said Jake Brace, executive vice president and chief financial officer."


Oh.. another 767jetz side note, for those who have claimed there is no exit financing available and that UA is doomed unless we find an equity investor...

"We have received updated proposals for all-debt exit financing from four financial institutions and we expect to file our Plan of Reorganization and Disclosure Statement with the Bankruptcy Court very soon."

 

[TechBoy]

And as for taking market share, I don't buy that one completely. There is still a slight price premium for those who want FF miles, full service, and access to those things in a worldwide network. As long as legacies stay competetive in LCC markets, there will not be any more major errosion of market share. Just look at Denver, where TED is regaining market from Frontier. That being said, it is still the LCC's who set the price point on routes they fly.

[post="292318"][/post]​

I agree that there is a slight price premium for the benefits of riding on a legacy (99% of which is FF miles on a international network or upgrades). I'm willing to do that. My 1K card proves it. However, it is rare that UA's price for my flights is higher than B6. So it is difficult to monetize that customer preference. As you yourself note, the LCCs set the prices these days.

One reason that I'm sure that UA will survive this, is that they face LCC competition across a huge swath of their domestic market, probably more than any other airline. So UA has suffered most of the LCC pain by now. Others still have more to face.

The question that is unanswered is whether UA can make money doing all this. TED is beating back Frontier. But is it profitable? Or even close? We don't know, but I'd bet that it's running a substantial loss. As is most of the domestic system at UA and other legacies. So I still expect that the LCCs will take significant domestic market share going forward.

 

[spacewaitress]

PRSAM(revenue) increased 9% while CASM(cost, including fuel) rose only 5%. This is an excellent trend, and it means we're going in the right direction.

Yes this is good news...let's hope this is indeed a trend. I'll refrain from calling it a trend though until it continues throughout the fall and winter. My point is that the trend seems to be the continuing rise in fuel costs. If UAL can keep it's revenue increases along with that continuing trend then all will be well. If not, the money will have to come from somewhere.

Another wild card is the disappearance of one or two airlines through merger or liquidation. Securing of financing is probably the biggest shot in the arm as it does show the banks have some confidence in the company.

I just don't think it's going to get better for the employees though, at least not in the near future.

 

[767jetz]

I just don't think it's going to get better for the employees though, at least not in the near future.

[post="292790"][/post]​

Agreed. I don't think it will get better for the employees in the near term. Not as far as regaining what was lost.

It will get better with regard to stability and being able to plan for our future once again. It will also get better as we slowly progress in seniority and reap the benefits of that.

At least it will not get worse, as long as lower costs and increased revenue keep pace with fuel prices on an annual basis.

 

[WorldTraveler]

Nothing is assured as long as oil prices continue to soar, as they will do as soon as markets open Monday a.m. - which is about the time Katrina will be tearing the city of New Orleans apart. No one even knows how much Gul production capacity is damaged, but it is certain that some of it is already.
http://money.cnn.com/2005/08/28/news/econo....reut/index.htm

 

[Bulscu]

uals fate is/has been/continues known, not as ual, soon :mf_boff:

 

[767jetz]

uals fate is/has been/continues known, not as ual, soon :mf_boff:

[post="293780"][/post]​

Bulscu, you are obviously a windup artist. No sense debating facts with you since your posts are nothing but hot air. We will see my friend... We will see...

(by the way... you did notice that the biggest financial institutions in the world will back UAL with $3Billion, didn't you?)