What’s the net effect of the industry’s transformation?


May 18, 2003

What’s the net effect of the industry’s transformation from traditional hub-and-spoke commercial aviation to low cost flying and the financial implications?

Prepared by Chip Munn, July 31, 2003

This week AirTran continued to demonstrate progress in developing its franchise and tightly managing expenses. On Tuesday the company reported earnings of $0.28 per share, well ahead of the consensus estimate of $0.19 per share. The airline also reported revenues that beat analyst expectations, with yield and unit revenue growth well ahead of industry averages, despite a 17% increase in ASMs and a 4.5% increase in the length of haul.

In addition, the company kept its costs well under control, which were moderately better than analyst forecasts. In my opinion, this week’s earnings announcement and revenue results validate AirTran's efforts to become a leading low cost airline. If the company continues to execute above and beyond aggressive expectations, the airline will likely build a strong route structure that will require the attention of US Airways’ management.
The low cost airlines recent order for 100 B737s and 10 B717s will permit the company to enter long-haul markets, which like JetBlue and Southwest, will provide the company with new revenue opportunities. The order is expected to permit the Orlando-based carrier to double its fleet size by 2008. However, Stan Gadek, AirTran's chief financial officer, told the news media that growth, however, won't come at any price. We want to be profitable, said Gadek. The key to that is simple: keeping your costs low.

Meanwhile, AirTran, Southwest, and JetBlue all posted stellar earnings and announced significant new aircraft orders earmarked for growth, while the network carriers continued their capacity reductions in May and June, amid the challenging environment. Most analysts suspect this could prove a peak in the trend given the recent influx of non-dinosaur aircraft into the desert as the gradual traffic recovery begins to take hold.
Analyst reports indicate parked planes continued to trend upwards and climbed to 622 airframes in June, up from 612 in May and 603 in April, representing 12.7% of pre-September 11 capacity.
The net 9 aircraft in May flying into the desert was comprised of 32 entering and 23 leaving, while the 10 planes in June consisted of 15 coming and 5 going. In the two months, 9 planes were leased/sold to an operator outside of the U.S., 8 returned to service (4 of which were AMR B717s sub-leased to AirTran), and 11 were scrapped.
The so called Dinosaurs in the Desert declined by a net 7 to 399 from April to June as 8 of these older models exited the fleet and 15 emerged from the desert; only two dinosaurs are back in the U.S. commercial fleet.
This reduction in capacity contributed to an improvement in domestic unit revenue by 4% in June, a trend that could accelerate throughout the summer, however, this performance will be harder to sustain after Labor Day. Seasonally, after the holiday, peak leisure travel draws to a close, traffic falls off, which is expected to depress ATA carriers and hurt United’s efforts to emerge from bankruptcy because the airline must be revenue and cash flow positive in October.

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