Some Interesting Statistics

[mweiss]

I've been doing some statistical analyses of the US airline industry recently, and I thought I'd pass on a few of my findings thus far. Perhaps it will generate some useful discussion.

First off, the only airlines to lose money during the late 90s in any serious way were FL and F9. In F9's case, it seems to be related to startup and getting their company streamlined. FL, naturally, had some difficulties from 1996-1999, stemming from the ValuJet crash and the AirTran merger. They've been profitable ever since, though, while F9 showed a significant loss (6.5%) in 2003.

The legacy carriers had an average margin of 7% from 1994 to 2000. Every other year since 1990 they have shown an average loss of 5.2%. Overall, from 1990 to 2003, the legacy carriers have only managed a 1.25% profit. The airlines I included in this group are AA, CO, DL, UA, and US.

Compare this to the LCCs, who had an average margin of 11% over the same period. The airlines I included in the LCC group are WN, B6, F9, FL, and TZ.

Then there are the hybrids (AS and HP). They're a bit tougher to get good numbers on, since they were in the process of transforming themselves during this period. They've had a spotty record that only now seems to be shaping up for them. Their combined margin since 1990 is 1.6%.

Where things really get interesting is when we look at how individual airlines compared to the industry as a whole and to their class as a whole.

In the LCC class, nobody was able to touch WN overall, but the comparion isn't entirely fair, since three of the five began service during this period. In 2002 and 2003, B6's 16%+ margins were killing WN's 8%. FL has also now overtaken WN's margin by a percentage point. ATA has consistently underperformed in this group, and has pretty much matched the industry average performance, though in 2003 they managed to get a 5% margin.

The legacy story isn't so rosy. While only one airline has had an average loss since 1990 (US, with 2.4%), only one legacy carrier has significantly outperformed the class (CO, with 3.1%), and two significantly underperformed the class (US, as noted above, and UA, which squeaked by on 0.15% margin).

AS barely outperformed HP during the period as a whole.

Some stats on costs:
While US has the highest labor CASM, labor only accounts for 38% of total costs. This is close to the 40% average for legacy carriers, but the LCCs manage to keep their labor costs down to about 30% of total costs. The best-performing legacy carrier (CO), also has the lowest labor percentage (34%) of the legacies. OTOH, the highest labor percentage (45%) belongs to DL, who has the second-worst margin of the legacies. The worst legacy margin? Not US, it's UA, whose labor costs are 41% of total.

OK, I'll start there. Anyone have any thoughts about these numbers?

 

[BoeingBoy]

I'll just give you a few tidbits - call them food for thought.

Stage Length

One obvious factor is stage length/CASM relationships. B6 has a significantly longer stage length which in turn has a significant effect on CASM. Everything else being equal, it's probably worth about 1 cent of the difference.

Aircraft Age

B6's new fleet hasn't started going thru heavy maintenance yet while most of WN's is being cycled through. I can't put a CASM figure on this (0.1-0.2 maybe?) but the more the planes are flown the less the amount.

Finally, US

Using our 737's and little Buses - crews paid the same per hour, same people loading them, fixing them, etc. There may be some differences in fuel cost since the Buses fly places the 737's don't, but ignore that as an unknown. The 737's have a direct operating CASM about 2 cents lower than the 737's. What's the difference? Stage length - the 737's do no far west flying, no Caribbean, no Mexico. Age - all the 737's are cycling thru heavy maintenance while the Buses are just starting (they hadn't with the 2nd quarter BTS numbers I used). Operational differences - the little Buses can fly higher if light enough - altitude = less fuel burn. Utilization - while I don't have firm numbers, the shorter haul flying that the 737's do should equate to less block hours per day/month/year and less ASM's to spread the fixed costs over.

Jim

 

[BoeingBoy]

Almost forgot....

When comparing the network carriers, look at the fleet and route.

DL vs US

Delta has more 767's than we have either little Buses or 737's. Take one of those 767's flying 16+ hours a day international routes vs a 737 flying 9 hours a day (DL's average for the fleet) and there is a tremendous difference in ASM production, and consequently the cost of those ASM's. US, being the smallest of the 6 network carriers with a less extensive international route system and few large planes has a built in CASM disadvantage.

Jim

 

[mweiss]

Jim,

I had a similar thought re: B6 and their low maintenance costs due to brand-new jets. But it's still interesting that F9 was also able to beat WN's margin.

I've also had the same thought as you re: DL and their flying whales. As long as the demand is there, it's a much better deal to fly the bigger planes.

But that doesn't explain why CO is doing so well compared to the other legacies. Yes, they have longer stage lengths than US, but not longer than AA, UA, and DL. And CO has a smaller fleet of smaller planes than the other three. Is it the wages? Are they using their fleet more efficiently? Is it the Europe factor (CO flies to more cities in Europe than the other three). I know they get good margins on those routes.

Here's a few more numbers to toss around:
- The aggregate US airline revenues have nearly doubled since 1990, even after September 11 (before Sept 11, they actually had more than doubled)
- In terms of revenue market share, only three airlines that were around in 1990 have gained: AS, TZ, and WN. AS grew by 28%, TZ by 124%, and WN by a mind-boggling 174%.
- US lost a whopping 43% of their 1990 revenue pie slice, half of it in 1991. In fact, US lost as much of its market in 1991 alone as #2 shrinker DL lost in the entire past fifteen years.
- Even after acquiring TW, AA still couldn't prevent an 18% erosion. CO fared the best of the legacies here, too; they only lost 8% of their revenue share. Only HP lost less (6%).
- Meanwhile, newcomers FL and B6 have each captured 1%, and F9 a half-percent.
- Recognize that even though WN nearly tripled their revenue share, they still only own 7%. AA still has the biggest share at 21%.

Here's the legacy carrier market share comparison:
.. 1990 2003 1990 Rank
AA 25.2 20.5 1
UA 21.1 16.9 2
DL 19.8 15.7 3
NW 13.1 11.2 5
CO 11.4 10.5 6
US 14.1 8.0 4

Only one airline has changed in the ranking order.

 

[BoeingBoy]

The WN/F9 comparison - especially when talking about margins (I'm assuming profit margins) gets even more complex. All the factors affecting CASM + all the factors affecting RASM. I don't really know much about F9's operation except for the obvious advantages of being a pretty young company vs the older WN.

CO - the obvious benefits of bankruptcy + a pilot's strike under Lorenzo, who was replacing the strikers. Presumably labor costs were pretty rock bottom by 1990.

Revenue market share - look at WN's route structure in 1990 vs 2003. Talk about a dramatic difference.

US revenue share drop in 1991 - other than the economic downturn back then, the only thing I can think of is the several fiascos that occured with the merger with Piedmont. Who knows how many loyal PI passengers we drove off during that period. Two examples of many:

1) the planes have to have a "daily check" by maintenance each day. PI did them throughout the day as the planes went through maintenance stations, US did them the first flight into the hub in the morning. PI was told one day that they would start doing it the US way the next day and wouldn't listen when told that there wasn't the mechanics in CLT to do it that way. Result - long delays for the mechanics to get to all the planes in that first push of the day.

2) the genius that allocated maintence parts and materials ordered ALL that stuff removed from CLT. Why - because US didn't have flights to CLT so the computer said it wasn't needed. Result was again massive delays because there wasn't even oil to put in the engines if they needed it.

The market share info (except for US since we downsized so much after 9/11 and haven't added much back) just shows the growth of the "other" carriers. My guess (I'm too lazy to look it up) is that AA and DL carry more passengers than they did in 1990 by a sizable margin, UA by a smaller margin. It's just that they have a smaller percentage of a much bigger pie.

Jim

 

[BoeingBoy]

mweiss,

It just hit me (getting old is hell) - 1991 was the "big furlough". Dismantled PSA's west coast route structure, closed all the PI bases except CLT & BWI, reinvented the PI Florida Shuttle with dismal results, closed the DAY hub (I think that was '91), replacing 727's with 737's on transcon (phasing the 727's out), etc. Basically our first attempt to shrink to profitability - ever notice how history repeats itself.

Jim

 

[mweiss]

It just hit me (getting old is hell) - 1991 was the "big furlough".

Bingo! I was wondering if you were going to pick up on that. That's actually part of my point there, that the "big furlough" was a horrible retreat from which the airline has never recovered.

 

[mweiss]

The WN/F9 comparison ...advantages of being a pretty young company vs the older WN.

Yeah. What's interesting is to consider the long-term ramifications of this. Are we doomed to an industry where the airlines live to a certain age, then die because of seniority wage increases?

CO - the obvious benefits of bankruptcy + a pilot's strike under Lorenzo, who was replacing the strikers. Presumably labor costs were pretty rock bottom by 1990.

I would have thought this as well, but CO underperformed the legacies as well as the industry substantially until Gordon came on board. Then they did a percentage point better than the legacy average, but still underperformed the industry average until 2001. Since 2001, they have outperformed their class better than any airline in any class, and outperformed the industry average as well. From 2001-2003, their margins have averaged a full ten percentage points higher than the legacy class as a whole, and 7.8 points higher than the industry as a whole.

In other words, something else is at work at CO. I'm beginning to think that their strategy of driving their cockroaches away might be working.

Revenue market share - look at WN's route structure in 1990 vs 2003. Talk about a dramatic difference.

Of course. This is exactly what I'm talking about. They've singlehandedly had more impact on the industry in the past 15 years than all of the other airlines combined.

 

[Hope777]

You also need to Look at CO's Fleet. They have many many new Generation Aircraft that have yet to see the inside of a hanger for Heavy Maint. I am thinking the 767-200/400, 777,757-300 and some 200's and the 737-800,900 and some 700's. That keeps costs low. When these birds need their Heavys, expect costs to go up. I might be wrong but a thought.

 

[RowUnderDCA]

Yeah. What's interesting is to consider the long-term ramifications of this. Are we doomed to an industry where the airlines live to a certain age, then die because of seniority wage increases?

I've been suspicious of this for years, and have argued the possibility to those that seem to want to remove 'so-called' barriers to entry to the new breed. I keep talking about the barriers to exit and the cycle of instability in the industry.

 

[balloonguy]

Does anyone know the status of US airways becoming a part of the Star Alliance? Is this a dead issue?

 

[700UW]

According to the Star Alliance web page May 2004.

http://www.star-alliance.com/star_alliance...me/main_10.html

 

[BoeingBoy]

mweiss,

Check my memory, but didn't CO cut capacity little or none after 9/11?

As for the older airlines necessarily failing because of the rising costs associated with being around longer, I don't think so. I just mentioned that in the WN/F9 case because I don't know enough about F9 to make any other guesses. One could look at AMR - their 1st quarter numbers show a fuel excluded CASM of about 7.5 cents - not too bad for an airline that's been around as long as there have been airlines. Instead of "get mature and die", it might be better to think "adapt or die". For the biggest airline in the world, AMR has proven surprisingly adept.

Jim

 

[mweiss]

I keep talking about the barriers to exit and the cycle of instability in the industry.

The solution is not to provide barriers to exit (among many reasons, you can't if the company files 7). Rather, the wages need to be based on experience and wage increases need to match the increased productivity that comes with additional experience. When productivity tops out, so should the wage. To do otherwise is to ensure that employees start out as assets and become liabilities, which is a horrible place to be.

 

[mweiss]

Check my memory, but didn't CO cut capacity little or none after 9/11?

CO, like the other legacies, cut the requisite 20%. 3500 people took voluntary furloughs. Some pilots flowed through to COEX as capacity was partially reduced by shifting from mainline to express. They also hastened their retirement of the DC-10s, and I think the DC-9s were pulled as well at that time, and they deferred about half of their 2002 deliveries.

For the biggest airline in the world, AMR has proven surprisingly adept.

Until 1999, AA was a very consistent performer, always doing better than the legacy carriers as a whole. Then they handed the baton to CO, who in the past three years has far outperformed the legacy class. Interestingly, this seems to coincide well with the transfer from Crandall to Carty, which occurred in mid-1998.

They seem to be getting back on track, however, and they sure know how to hang in there for the long haul.