US Airways Revenue Generation Analysis
Prepared by Chip Munn
Cost reduction is only one area that US is focusing on to return the company to profitability. Another key element in the on-going restructuring is for the airline to improve upon its industry-leading Yield RPM. According to a recent report released by AVMARK analyst Barbara Beyer, US has the highest Big 7 Yield. Specifically, the 7 top airlines Yield RPM is:
Airline – Yield RPM
US – 13.05
AA – 11.86
CO – 11.57
WN – 11.54
DL – 11.33
NW – 10.76
UA – 10.54
Source: AVMARK Consulting
In March 2002 US had slipped from its traditional top spot to about a 93 to 94% revenue disadvantage, but now has a revenue premium. This revenue improvement that leads the industry was accomplished by reducing the fleet size to 279 mainline aircraft, which was a 32-unit reduction and with the October 2002 schedule change restructuring the hubs. The Pittsburgh hub became directionalized with an East-West focus similar in scope to Delta Air Lines in Cincinnati, the Charlotte hub became omni-directional with larger, higher frequency banks due to its geographic position, similar to Delta in Atlanta, and Philadelphia focuses on O&D traffic, versus connecting flights, and is the company’s principle international gateway.
According to vice president of planning and scheduling Andrew Nocella, the changes, which reflect the 13 percent reduction in capacity, will result in an annual improvement of an estimated $400 million in additional revenue and cost reductions.
Furthermore, the company is now focusing on major initiatives to boost its revenue advantage (which is necessary to cover its higher than average unit costs) by focusing on big airline revenues, with a more modest route network. This will be accomplished with code sharing, Caribbean expansion, route reallocation, RJ deployment, East Coast focus city/airport dominance (BOS, LGA, & DCA), and its Corporate Travel Department --which is focusing its sales staff to educate key clients in the network expansion/benefits.
For example, US Airways recently pulled out of the PHL-SNA market (where the airline had just two round trips per day), due to lower than expected yield and is redeploying these assets to markets that have a higher profit potential. For example, the airline has begun flying long range, high yield flights between PHL-AUA, PHL-BGI, CLT-MEX, and yesterday announced increased service to SJO, MBJ, and PUJ.
Meanwhile, the UA alliance is exceeding expectations and US has gained over 10,000 passengers per day with 1,100 code share flight segments from this new business relationship. Later this year the LH alliance will begin, which is expected to add $50 million per year to the bottom line and then in Q1 2004 the Star Alliance will commence that will provide another $25 million per year in bottom line profits. In addition, the GoCaribbean network is growing and today the DOT approved US Airways’ alliance with Caribbean Sun Airlines (sister of Caribbean Star) that will add additional incremental revenue.
In regard to RJs, US will begin receiving revenue from its EMB-170 product in January 2004, which will be a 70-seat, two-class cabin, mainline type aircraft, operated at the lowest industry RJ CASM. Not that this is good for employee pay and benefits, but these mainline like narrowbody aircraft will have the lowest industry RJ labor expense. When you combine this product with worldwide airline passenger amenities (FFP, Clubs, interline baggage check in, etc.), I agree with Siegel that this product will change the game and be revolutionary.
Meanwhile, for the U.S. airline industry May pricing data showed improvement, but was behind expectations, especially on the domestic front.
Most observers expected the combination of pent up demand, capacity reductions and a peak leisure period would drive larger improvements; however, this was not the case.
However, ATA reports show unit revenue improved in May as traffic rebounded (slightly) and incremental capacity cuts remained intact.
According to an analyst report, domestic RASM improved by 1.0%, the first positive comparison since December, while System RASM improved by 1.6% following 3 months of negative comparisons. Atlantic RASM was surprisingly strong while Domestic data was a bit disappointing up 1%). The Pacific was expectedly atrocious and Latin America was relatively flat. The measured Domestic demand shortfall at 24.4%, an improvement from April, but still well off of pre-war levels.
29 AM Ch. 12 wrote:
