Strategic Analysis: US Airways Q4 earnings review and TP update
US Airways’ losses widened in the fourth quarter, as cost cuts and traffic gains couldn't make up for higher fuel prices and dwindling revenue.
For the period ended December 31, the carrier posted a loss of $236 million, which included $24 million in reorganization items and a $30 million gain on the sale of the company's stake in Hotwire, compared with loss of $98 million a year-ago, Excluding unusual items, the pre-tax net loss for the 2004 fourth quarter was $214 million compared to $129 million in 2003. For the full year, US Airways reported a loss of $578 million on $7.07 billion in revenue, which is in line with management estimates during bankruptcy court S.1113 proceedings. In the previous fiscal year, it lost $174 million on $5.31 billion in revenue.
The fourth results were slightly better than a consensus of Wall Street airline analysts who predicted the airline would lose about $256 million ($4.68 per share), according to a survey by Thomson First Call.
Here are some key points:
-- Revenue fell nearly 6 percent to $1.66 billion as intense competition and fare wars hurt traffic. US Airways' fourth quarter yield dropped 11.4 percent to 11.90 cents.
-- The Q4 average price of a gallon of jet fuel rose 49 percent to $1.31. Fuel hedging helped results by $47 million or 22 cents per gallon. The company spent $322 million on fuel compared with $205 million in the fourth quarter of 2003, an increase of $117 million year-over-year. The loss of $214 (excluding one-time items) would have been $97 million if fuel prices had been the same as last year, reflecting the industry trend of falling ticket prices on profits.
-- The company cut Q4 mainline costs by 14 percent to 8.79 cents per available seat mile, excluding fuel. That amount is still not low enough to compete with Southwest, AirTran and JetBlue yet, but it’s still a sharp improvement from the airline’s previous industry-high level.
-- Labor cost cuts were not fully realized in the quarter, but fell 22 percent from $662 million to $518 million, which is $144 million lower year-over year. On an annualized basis the reduction would equal about $576 million or about half of the $1.17 billion in annual labor concessions obtained by management. It will take time for the company to implement labor savings negotiated from the different unions such as facility closure, headcount reductions, vendor work, and other planed savings. Meanwhile, it is important to note that if the new labor savings had been in place for the full year, US Airways would have probably broken even for the year and had earnings similar to jetBlue and AirTran Airways.
-- The airline ended the year with total cash of $1.36 billion and $738 million in cash collateral.
-- US Airways plans to take delivery of 12 new regional jets by the end of February. The company has not disclosed the product mix, but 6 RJs including 3 EMB-170s and 3 and CRJ-700s were delivered during the past two weeks. The revised delivery schedule will provide about 2 new aircraft to the fleet per week from January 15 through February 28.
--Transformation Plan schedule changes commence this Sunday, February 6, which will increase aircraft utilization, boost revenue, and average down unit costs by about one cent per ASM. The February schedule will see increased utilization that will create 224 additional departures and 22 new routes. This is the equivalent of adding 25 aircraft to the network without writing a check, with mainline utilization increasing from 10.5 to 11.5 hours per aircraft per day.
2004 Major Airline and Large LCC Fourth quarter Cost Per Available Seat Mile (CASM)
Airline (Mainline only)/CASM (cents)/CASM ex-fuel (cents)
Northwest/11.36/8.87
US Airways/10.96/8.79
Alaska/10.79/7.83
United/10.68/8.34
Delta/10.40/NA
American/10.25/NA
Continental/9.98/7.82
AirTran/8.32/6.00
America West/7.98/6.00
Southwest/7.59/6.22
JetBlue/6.32/4.74
Source: Company reports
US Airways $1.17 billion in total labor cost cuts represents approximately 15 percent of total costs. For discussion purposes and everything else being equal, costs could be cut another 15% as labor cuts begin to more fully take effect. This would reduce the company’s CASM to about 9.31 cents and 7.47cents CASM ex-fuel. The labor cuts alone will make US Airways the lowest cost legacy carrier and within 15 percent of the LCC's (Note - Delta’s pilot cuts and further labor cuts at Continental and United will lower their CASM going forward).
Following release of the company’s fourth quarter report, the company filed its December 2004 monthly operating report with the bankruptcy court. The operating loss was $58.7 million, which included the Christmas holiday “operational meltdownâ€.
See Story
The company endured a public-relations disaster over Christmas after a worker shortage led to the cancellation of hundreds of flights and lost luggage. This obviously cost the company millions of dollars, but the long-term effect is probably negligible. Customer memories seem very short and consumer confidence remains strong at an important time for the company. The recent fare sales generated record revenue both with E-commerce and traditional ticket sales. Executive Vice President of Marketing and Planning Bruce Ashby said in a statement, “we have been pleased with the strong response to the marketing initiatives of the past few weeks and the enthusiasm demonstrated by our customers, corporate accounts and travel partners."
Management business plan changes such as the Fort Lauderdale international gateway, more European flights, increased aircraft utilization, new point-to-point service, money losing Pittsburgh flying pulled down, facility consolidation, and other structural changes will be aggregate to earnings in the first quarter.
The table below illustrates how US Airways performed in the fourth quarter and the full year in relation to the 11 largest U.S. airlines, listed from best to worst.
Airline Industry Fourth Quarter and Full Year Earnings
Airline/Fourth Quarter/Full Year 2004
Southwest/$56.0 million/$313.0 million
jetBlue/$2.4 million/$47.5 million
AirTran/$1.1 million/$12.3 million
Alaska/($44.9) million/($15.9) million
America West/($49.7) million/($89.9) million
Continental/($206) million/($363) million
US Airways/($236) million/($611) million
American/($387) million/($761) million
Northwest/($420) million/($878) million
United/($664) million/($1.6) billion
Delta/($2.2) billion/($5.2) billion
Source: Company reports
The fourth quarter report is proof positive that US Airways’ management is making “meaningful†strides in transforming the airline (especially on the cost side) and the company is coming close to being positioned for long-term success. US Airways chairman David Bronner told the Decatur Daily in a recent interview that with all of the Transformation Plan cost cuts that “we'll have lower costs than Southwest.†There is no question the corporate changes were necessary and Bronner noted, "You have to understand that we're trying to do something that has never been done in the history of airlines, to take a legacy carrier to a low-cost carrier status," Bronner said.
See Bronner interview
According to Aviation Week and Space Technology, “by one analyst’s estimate, US Airways leads the pack in cutting costs.†Mike Lowry of AirWatch Report provided the following analysis that was published in the magazines January 24 edition.
Estimated Cost Savings Required to Compete with LCC’s
Airline/Estimated Cost Savings Required to Compete with LCC’s/Estimated Percent of Savings Identified
US Airways/$1.0 billion/110%
Delta Air Lines/$2.6 billion/104%
United Airlines/$4.1 billion/70%
Continental Airlines/$1.4 billion/60%
American Airlines/$3.7 billion/44%
Northwest Airlines/$2.1 billion/14%
Source: Aviation Week & Space Technology
US Airways Estimated Savings in Fiscal 2005
New labor Contracts - $480 million
Non-Labor Productivity Improvements, which includes more efficient aircraft utilization - $286 million
Pension Plan Terminations - $250 million
Reduced Aircraft Leasing/Maintenance Costs - $80 million
Total - $1.095 billion
Source: Aviation Week & Space Technology
Two key issues remain: record high energy prices and Delta’s Simplifares, which is no doubt designed to “run US Airways out of cash†before the cost cuts can be fully implemented.
According to the Daily Bronner said it is hard to predict when the airline may become profitable again, partly because of fluctuating oil prices. "If oil went down $10 a barrel, we'd be floating in money," he said. "Assuming that it doesn't go down, the whole airline industry will probably show losses for the whole year in '05. It's all relative to the price of oil."
According to a report released by the IATA, air travel rebounded in 2004, but cost efficiency and productivity is the challenge for every airline largely because of high fuel prices and stiff pricing competition.
See Story
In fact, Giovanni Bisignani, IATA's director general said, The challenge for 2005 is to turn traffic growth into profitability with improved cost efficiency."
See Story
Separately, US Airways continues to make progress in aircraft lease restructurings and made a couple of S.1110 filings with the bankruptcy court this week:
US Airways S.1110 EMB-170 bankruptcy court filing – January 31, 2005
See Story
US Airways S.1110 GE agreement update - Snecma Aircraft will "buy out" GE's interest in 5 B737-400s preserving aircraft in US Airways’ fleet
See Story
US Airways S.1110 GE – CRJ agreement
See Story
In addition, US Airways asked the bankruptcy court for approval to sell the 30 Philadelphia jetways on concourses B andC concourses to the city who will then lease them back to the airline. The proceeds will go into a fund to be credited toward the lease payments due the city. The agreement stipulates Philadelphia will pay 50% of the cost of promoting new US Airways service to both Barcelona and Venice in 2005 and 2006 up to an annual cap of $250,000. The city also agreed to seek airline approval for an expansion of the B/C security checkpoint.
See Story
In commenting on US Airways’ progress to AW&ST, US Airways senior vice president of corporate communications Chris Chiames said, There are some pretty disappointed airline executives at our competitors, referring to (previous) widespread media reports predicting the airline’s imminent shutdown. Clearly, management's plans to transform the airline are taking shape and US Airways' future appears much brighter.
The company plans to file its plan of reorganization by February 15 and exit bankruptcy by June 30 to be in compliance with the recent GE agreement. In addition, the airline must still find $250 million in exit financing, which it is expected to obtained in the not-so-distant future.
Finally, there is reason to believe that US Airways will fully integrate MDA into the mainline in 2005 and could be involved in a corporate transaction, possibly with United Airlines, later in the year.
Best regards,
USA320Pilot
US Airways’ losses widened in the fourth quarter, as cost cuts and traffic gains couldn't make up for higher fuel prices and dwindling revenue.
For the period ended December 31, the carrier posted a loss of $236 million, which included $24 million in reorganization items and a $30 million gain on the sale of the company's stake in Hotwire, compared with loss of $98 million a year-ago, Excluding unusual items, the pre-tax net loss for the 2004 fourth quarter was $214 million compared to $129 million in 2003. For the full year, US Airways reported a loss of $578 million on $7.07 billion in revenue, which is in line with management estimates during bankruptcy court S.1113 proceedings. In the previous fiscal year, it lost $174 million on $5.31 billion in revenue.
The fourth results were slightly better than a consensus of Wall Street airline analysts who predicted the airline would lose about $256 million ($4.68 per share), according to a survey by Thomson First Call.
Here are some key points:
-- Revenue fell nearly 6 percent to $1.66 billion as intense competition and fare wars hurt traffic. US Airways' fourth quarter yield dropped 11.4 percent to 11.90 cents.
-- The Q4 average price of a gallon of jet fuel rose 49 percent to $1.31. Fuel hedging helped results by $47 million or 22 cents per gallon. The company spent $322 million on fuel compared with $205 million in the fourth quarter of 2003, an increase of $117 million year-over-year. The loss of $214 (excluding one-time items) would have been $97 million if fuel prices had been the same as last year, reflecting the industry trend of falling ticket prices on profits.
-- The company cut Q4 mainline costs by 14 percent to 8.79 cents per available seat mile, excluding fuel. That amount is still not low enough to compete with Southwest, AirTran and JetBlue yet, but it’s still a sharp improvement from the airline’s previous industry-high level.
-- Labor cost cuts were not fully realized in the quarter, but fell 22 percent from $662 million to $518 million, which is $144 million lower year-over year. On an annualized basis the reduction would equal about $576 million or about half of the $1.17 billion in annual labor concessions obtained by management. It will take time for the company to implement labor savings negotiated from the different unions such as facility closure, headcount reductions, vendor work, and other planed savings. Meanwhile, it is important to note that if the new labor savings had been in place for the full year, US Airways would have probably broken even for the year and had earnings similar to jetBlue and AirTran Airways.
-- The airline ended the year with total cash of $1.36 billion and $738 million in cash collateral.
-- US Airways plans to take delivery of 12 new regional jets by the end of February. The company has not disclosed the product mix, but 6 RJs including 3 EMB-170s and 3 and CRJ-700s were delivered during the past two weeks. The revised delivery schedule will provide about 2 new aircraft to the fleet per week from January 15 through February 28.
--Transformation Plan schedule changes commence this Sunday, February 6, which will increase aircraft utilization, boost revenue, and average down unit costs by about one cent per ASM. The February schedule will see increased utilization that will create 224 additional departures and 22 new routes. This is the equivalent of adding 25 aircraft to the network without writing a check, with mainline utilization increasing from 10.5 to 11.5 hours per aircraft per day.
2004 Major Airline and Large LCC Fourth quarter Cost Per Available Seat Mile (CASM)
Airline (Mainline only)/CASM (cents)/CASM ex-fuel (cents)
Northwest/11.36/8.87
US Airways/10.96/8.79
Alaska/10.79/7.83
United/10.68/8.34
Delta/10.40/NA
American/10.25/NA
Continental/9.98/7.82
AirTran/8.32/6.00
America West/7.98/6.00
Southwest/7.59/6.22
JetBlue/6.32/4.74
Source: Company reports
US Airways $1.17 billion in total labor cost cuts represents approximately 15 percent of total costs. For discussion purposes and everything else being equal, costs could be cut another 15% as labor cuts begin to more fully take effect. This would reduce the company’s CASM to about 9.31 cents and 7.47cents CASM ex-fuel. The labor cuts alone will make US Airways the lowest cost legacy carrier and within 15 percent of the LCC's (Note - Delta’s pilot cuts and further labor cuts at Continental and United will lower their CASM going forward).
Following release of the company’s fourth quarter report, the company filed its December 2004 monthly operating report with the bankruptcy court. The operating loss was $58.7 million, which included the Christmas holiday “operational meltdownâ€.
See Story
The company endured a public-relations disaster over Christmas after a worker shortage led to the cancellation of hundreds of flights and lost luggage. This obviously cost the company millions of dollars, but the long-term effect is probably negligible. Customer memories seem very short and consumer confidence remains strong at an important time for the company. The recent fare sales generated record revenue both with E-commerce and traditional ticket sales. Executive Vice President of Marketing and Planning Bruce Ashby said in a statement, “we have been pleased with the strong response to the marketing initiatives of the past few weeks and the enthusiasm demonstrated by our customers, corporate accounts and travel partners."
Management business plan changes such as the Fort Lauderdale international gateway, more European flights, increased aircraft utilization, new point-to-point service, money losing Pittsburgh flying pulled down, facility consolidation, and other structural changes will be aggregate to earnings in the first quarter.
The table below illustrates how US Airways performed in the fourth quarter and the full year in relation to the 11 largest U.S. airlines, listed from best to worst.
Airline Industry Fourth Quarter and Full Year Earnings
Airline/Fourth Quarter/Full Year 2004
Southwest/$56.0 million/$313.0 million
jetBlue/$2.4 million/$47.5 million
AirTran/$1.1 million/$12.3 million
Alaska/($44.9) million/($15.9) million
America West/($49.7) million/($89.9) million
Continental/($206) million/($363) million
US Airways/($236) million/($611) million
American/($387) million/($761) million
Northwest/($420) million/($878) million
United/($664) million/($1.6) billion
Delta/($2.2) billion/($5.2) billion
Source: Company reports
The fourth quarter report is proof positive that US Airways’ management is making “meaningful†strides in transforming the airline (especially on the cost side) and the company is coming close to being positioned for long-term success. US Airways chairman David Bronner told the Decatur Daily in a recent interview that with all of the Transformation Plan cost cuts that “we'll have lower costs than Southwest.†There is no question the corporate changes were necessary and Bronner noted, "You have to understand that we're trying to do something that has never been done in the history of airlines, to take a legacy carrier to a low-cost carrier status," Bronner said.
See Bronner interview
According to Aviation Week and Space Technology, “by one analyst’s estimate, US Airways leads the pack in cutting costs.†Mike Lowry of AirWatch Report provided the following analysis that was published in the magazines January 24 edition.
Estimated Cost Savings Required to Compete with LCC’s
Airline/Estimated Cost Savings Required to Compete with LCC’s/Estimated Percent of Savings Identified
US Airways/$1.0 billion/110%
Delta Air Lines/$2.6 billion/104%
United Airlines/$4.1 billion/70%
Continental Airlines/$1.4 billion/60%
American Airlines/$3.7 billion/44%
Northwest Airlines/$2.1 billion/14%
Source: Aviation Week & Space Technology
US Airways Estimated Savings in Fiscal 2005
New labor Contracts - $480 million
Non-Labor Productivity Improvements, which includes more efficient aircraft utilization - $286 million
Pension Plan Terminations - $250 million
Reduced Aircraft Leasing/Maintenance Costs - $80 million
Total - $1.095 billion
Source: Aviation Week & Space Technology
Two key issues remain: record high energy prices and Delta’s Simplifares, which is no doubt designed to “run US Airways out of cash†before the cost cuts can be fully implemented.
According to the Daily Bronner said it is hard to predict when the airline may become profitable again, partly because of fluctuating oil prices. "If oil went down $10 a barrel, we'd be floating in money," he said. "Assuming that it doesn't go down, the whole airline industry will probably show losses for the whole year in '05. It's all relative to the price of oil."
According to a report released by the IATA, air travel rebounded in 2004, but cost efficiency and productivity is the challenge for every airline largely because of high fuel prices and stiff pricing competition.
See Story
In fact, Giovanni Bisignani, IATA's director general said, The challenge for 2005 is to turn traffic growth into profitability with improved cost efficiency."
See Story
Separately, US Airways continues to make progress in aircraft lease restructurings and made a couple of S.1110 filings with the bankruptcy court this week:
US Airways S.1110 EMB-170 bankruptcy court filing – January 31, 2005
See Story
US Airways S.1110 GE agreement update - Snecma Aircraft will "buy out" GE's interest in 5 B737-400s preserving aircraft in US Airways’ fleet
See Story
US Airways S.1110 GE – CRJ agreement
See Story
In addition, US Airways asked the bankruptcy court for approval to sell the 30 Philadelphia jetways on concourses B andC concourses to the city who will then lease them back to the airline. The proceeds will go into a fund to be credited toward the lease payments due the city. The agreement stipulates Philadelphia will pay 50% of the cost of promoting new US Airways service to both Barcelona and Venice in 2005 and 2006 up to an annual cap of $250,000. The city also agreed to seek airline approval for an expansion of the B/C security checkpoint.
See Story
In commenting on US Airways’ progress to AW&ST, US Airways senior vice president of corporate communications Chris Chiames said, There are some pretty disappointed airline executives at our competitors, referring to (previous) widespread media reports predicting the airline’s imminent shutdown. Clearly, management's plans to transform the airline are taking shape and US Airways' future appears much brighter.
The company plans to file its plan of reorganization by February 15 and exit bankruptcy by June 30 to be in compliance with the recent GE agreement. In addition, the airline must still find $250 million in exit financing, which it is expected to obtained in the not-so-distant future.
Finally, there is reason to believe that US Airways will fully integrate MDA into the mainline in 2005 and could be involved in a corporate transaction, possibly with United Airlines, later in the year.
Best regards,
USA320Pilot
