WorldTraveler
Corn Field
- Dec 5, 2003
- 21,709
- 10,721
I know it’s hard to speak rationally and without emotion when we discuss issues like aviation about which all of us on this board are passionate, but let’s try.
Reiterating, I have NO interest in seeing United Airlines die. I am simply quoting the statistics regarding the survivability of airlines that have been through bankruptcy during the past 25 years and developing my expectations for the industry based on it. I wrote an extensive piece on the AA board under the earnings topic recently but let me quote a couple of items which I believe are essential if any of the legacy airlines is to survive and thrive.
Profitable operation – You gotta make money, something none of the legacies have done consistently for a number of years.
Strengthened balance sheet – all of the legacies balance sheets are badly damaged and will only be repaired by massive earnings, or more likely an increase in equity (possible if a company starts making money consistently) or selling off assets.
Reasonably amicable employee relations – This is the airline industry which isn’t known for great labor relations but it is also a service business where the employees truly have the ability to make or break the company.
Competitive Product – The product bar has been considerably raised over the past few years, primarily by JetBlue. The product has to be updated and revised which in itself is an expensive proposition. Each carrier will likely take different approaches but two themes are likely to be seen at every carrier: more space and greater access to technology both for entertainment and to do business. The product has to be considered high value when compared with other carriers.
Strong worldwide network – The legacy carrier advantage is that they can carry passengers to hundreds of points around the globe; the increased costs they bear as a result of operating a hub and spoke system should be offset by the brand loyalty they are able to generate as a “one size fits all†provider of transportation.
Not one person so far on that forum disagreed that those are the essential elements necessary for an airline to survive and thrive. Survive and thrive have to be defined in terms of 5 – 10 years from now, just as a human is not considered to have beaten cancer without being cancer free for 5 years. It’s relatively easy to emerge from bankruptcy but a lot harder to compete in the airline business for 5 years since that usually takes one through a down business cycle when it really becomes apparent what a company is made of.
I don’t slight anyone, customer or an employee, for being loyal to a company and I certainly hope that the employees will be above all people. It is not my intention to attack anyone’s loyalty, nor have I. I am here to inject a healthy dose of reality in the hopes of making everyone involved fight hard enough to survive and thrive. You should note by what I write that it is my desire to see the legacy airlines survive rather than be run into the ground and replaced by LCCs – which is exactly what so many people seem to assume will happen.
Looking at the list above, UAL is not consistently profitable – but then neither has any other legacy so far so it is hard to draw a firm conclusion at this point. Barring a major change in UAL’s cost structure which will be apparent in their earnings report next week, UA’s costs are still considerably higher than AA’s or CO’s. In fact, much maligned DL’s mainline, fuel-constant CASM was slightly less than 10 cents, just 5% higher than AA’s- AND DL HASNâ€T EVEN GOT PILOT CONCESSIONS YET! Unless UAL gets costs down quickly, at least three legacy competitors will have a CASM lower than UA’s (and NW is usually pretty competitive on the cost front as well). As for balance sheet strength, that is where most of my predictions as to who will survive originate. I can’t in my widest imagination envision a scenario (nor has anyone shown me a viable scenario) where UAL will emerge from bankruptcy current on all obligations and with a wad of money in the bank that approaches what AMR has in the bank now – and which will likely grow. UAL does not have the inherent wealth that AMR or DAL has in their owned regional carrier operations. The only unlocked source of wealth UAL has short of selling off flight related assets is its maintenance operations – but AA and DL have similar assets which they could unlock as well.
I won’t even discuss employee relations since it’s pretty apparent what UAL's track record in that department is. (and of course, we all read the press releases UA’s unions put out after the ATSB denial telling the company to look for cost cuts elsewhere – to translate to genteel English.) Again, we would all love to see that change but somehow I am doubting the lovefest we’ve seen over the past year will be over as soon as UAL starts talking to permanent lenders who will tell UAL that deeper employee cuts are needed to obtain exit bankruptcy financing. Because, you see, the HUGE DISADVANTAGE UAL faces is that it has to pay off all of the obligations needed to get out of bankruptcy (all of those disputed liabilities on the balance sheet) PLUS have a sum of money in the bank to compete when back in the real world. Airlines not in bankruptcy don’t have to come up with the cash to restructure all of their debts and are thus able to limp along and still be better off than UAL.
Network strength is obviously UAL’s best advantage but that is being eroded. DL has bypassed UA as being the 3rd largest US carrier to S. America and has now announced enough new service to be on par with UAL in deep S. America, the one region where UAL was second only to AA. While UAL has been in bankruptcy, AA has managed to add service from NRT to every UAL gateway (metro area if SJC=SFO) except SEA; AA has already said they are all about getting into China and HKG, the most lucrative parts of UA’s Pacific network. Everybody has invaded the transcon markets. Most of UA’s competitive moves have been to shore up DEN, one of the most expensive hubs to operate and one which some analysts (I’m making no personal prediction) is most disposable in the UA network.
Clearly the reason banks continue to loan money to UAL or any other enterprise is because there is money to be made. DIP financing is fairly safe and there are significant profits for banks who venture into that financing. Creditors rarely pull the plug on airlines because it has always been more profitable for debts to be restructured over and over again over many years instead of pulling the plug on financing and taking that hit. Unless UAL turns around, lenders will line up to keep UAL afloat because they make money to do so and the cost of pulling the plug is higher than the risk of loaning just a little bit more money (or leaving the assets with UAL a little longer).
I’m glad you find my posts thought provoking, UnitedChicago. The goal of a public internet forum is to exchange ideas. Some of them just happen to be contrary to what you or others want to hear but that is the nature of human beings who have the right to think and speak freely. My role is not to make anyone feel good but rather to speak what I believe to be true. So sorry if it makes you or anyone else uncomfortable.
And, UK, some single, solitary voices have changed the course of human existence. Not saying I will be one of them but I think it is far more prudent to listen to another’s ideas than write them off as insignificant.
Reiterating, I have NO interest in seeing United Airlines die. I am simply quoting the statistics regarding the survivability of airlines that have been through bankruptcy during the past 25 years and developing my expectations for the industry based on it. I wrote an extensive piece on the AA board under the earnings topic recently but let me quote a couple of items which I believe are essential if any of the legacy airlines is to survive and thrive.
Profitable operation – You gotta make money, something none of the legacies have done consistently for a number of years.
Strengthened balance sheet – all of the legacies balance sheets are badly damaged and will only be repaired by massive earnings, or more likely an increase in equity (possible if a company starts making money consistently) or selling off assets.
Reasonably amicable employee relations – This is the airline industry which isn’t known for great labor relations but it is also a service business where the employees truly have the ability to make or break the company.
Competitive Product – The product bar has been considerably raised over the past few years, primarily by JetBlue. The product has to be updated and revised which in itself is an expensive proposition. Each carrier will likely take different approaches but two themes are likely to be seen at every carrier: more space and greater access to technology both for entertainment and to do business. The product has to be considered high value when compared with other carriers.
Strong worldwide network – The legacy carrier advantage is that they can carry passengers to hundreds of points around the globe; the increased costs they bear as a result of operating a hub and spoke system should be offset by the brand loyalty they are able to generate as a “one size fits all†provider of transportation.
Not one person so far on that forum disagreed that those are the essential elements necessary for an airline to survive and thrive. Survive and thrive have to be defined in terms of 5 – 10 years from now, just as a human is not considered to have beaten cancer without being cancer free for 5 years. It’s relatively easy to emerge from bankruptcy but a lot harder to compete in the airline business for 5 years since that usually takes one through a down business cycle when it really becomes apparent what a company is made of.
I don’t slight anyone, customer or an employee, for being loyal to a company and I certainly hope that the employees will be above all people. It is not my intention to attack anyone’s loyalty, nor have I. I am here to inject a healthy dose of reality in the hopes of making everyone involved fight hard enough to survive and thrive. You should note by what I write that it is my desire to see the legacy airlines survive rather than be run into the ground and replaced by LCCs – which is exactly what so many people seem to assume will happen.
Looking at the list above, UAL is not consistently profitable – but then neither has any other legacy so far so it is hard to draw a firm conclusion at this point. Barring a major change in UAL’s cost structure which will be apparent in their earnings report next week, UA’s costs are still considerably higher than AA’s or CO’s. In fact, much maligned DL’s mainline, fuel-constant CASM was slightly less than 10 cents, just 5% higher than AA’s- AND DL HASNâ€T EVEN GOT PILOT CONCESSIONS YET! Unless UAL gets costs down quickly, at least three legacy competitors will have a CASM lower than UA’s (and NW is usually pretty competitive on the cost front as well). As for balance sheet strength, that is where most of my predictions as to who will survive originate. I can’t in my widest imagination envision a scenario (nor has anyone shown me a viable scenario) where UAL will emerge from bankruptcy current on all obligations and with a wad of money in the bank that approaches what AMR has in the bank now – and which will likely grow. UAL does not have the inherent wealth that AMR or DAL has in their owned regional carrier operations. The only unlocked source of wealth UAL has short of selling off flight related assets is its maintenance operations – but AA and DL have similar assets which they could unlock as well.
I won’t even discuss employee relations since it’s pretty apparent what UAL's track record in that department is. (and of course, we all read the press releases UA’s unions put out after the ATSB denial telling the company to look for cost cuts elsewhere – to translate to genteel English.) Again, we would all love to see that change but somehow I am doubting the lovefest we’ve seen over the past year will be over as soon as UAL starts talking to permanent lenders who will tell UAL that deeper employee cuts are needed to obtain exit bankruptcy financing. Because, you see, the HUGE DISADVANTAGE UAL faces is that it has to pay off all of the obligations needed to get out of bankruptcy (all of those disputed liabilities on the balance sheet) PLUS have a sum of money in the bank to compete when back in the real world. Airlines not in bankruptcy don’t have to come up with the cash to restructure all of their debts and are thus able to limp along and still be better off than UAL.
Network strength is obviously UAL’s best advantage but that is being eroded. DL has bypassed UA as being the 3rd largest US carrier to S. America and has now announced enough new service to be on par with UAL in deep S. America, the one region where UAL was second only to AA. While UAL has been in bankruptcy, AA has managed to add service from NRT to every UAL gateway (metro area if SJC=SFO) except SEA; AA has already said they are all about getting into China and HKG, the most lucrative parts of UA’s Pacific network. Everybody has invaded the transcon markets. Most of UA’s competitive moves have been to shore up DEN, one of the most expensive hubs to operate and one which some analysts (I’m making no personal prediction) is most disposable in the UA network.
Clearly the reason banks continue to loan money to UAL or any other enterprise is because there is money to be made. DIP financing is fairly safe and there are significant profits for banks who venture into that financing. Creditors rarely pull the plug on airlines because it has always been more profitable for debts to be restructured over and over again over many years instead of pulling the plug on financing and taking that hit. Unless UAL turns around, lenders will line up to keep UAL afloat because they make money to do so and the cost of pulling the plug is higher than the risk of loaning just a little bit more money (or leaving the assets with UAL a little longer).
I’m glad you find my posts thought provoking, UnitedChicago. The goal of a public internet forum is to exchange ideas. Some of them just happen to be contrary to what you or others want to hear but that is the nature of human beings who have the right to think and speak freely. My role is not to make anyone feel good but rather to speak what I believe to be true. So sorry if it makes you or anyone else uncomfortable.
And, UK, some single, solitary voices have changed the course of human existence. Not saying I will be one of them but I think it is far more prudent to listen to another’s ideas than write them off as insignificant.
