October 31, 2009

The Pilot Story You Won’t See on TV Tonight-

 

Today, like most every day, just over 44,000 of the world's most experienced airline pilots employed by the 9 largest airlines in the United States will accept full responsibility for over 1.5 million lives sitting behind their locked cockpit doors. Over the next 24 hours, these unnoticed pilots will make over 13,500 take-offs literally around the world. Through every imaginable type of weather, they will be in command of over 36,000 hours of flight time. And, if today is like most days, you will never hear or read about even one of those flights.

 

There is nothing simple about putting hundreds of lives into an aluminum tube using jet engines to propel it 35,000 feet above the ground traveling close to the speed of sound to eventually land safely on a stretch of concrete most anywhere in the World. Make no mistake about it, flying is dangerous. It is only made less dangerous by the dedicated men and women who work in the industry putting the safety of their passengers as their number one priority.

 

When an unexpected in-flight emergency occurs, there is no shoulder on the road to pull over, call 911, and wait for help. It won’t make media headlines today, but like every day when something breaks on an aircraft or someone makes an unintentional mistake, some pilot will use his/her training, knowledge and experience turning an in-flight emergency into a routine landing that will save hundreds of lives.

 

Every day some licensed mechanic uses his/her experience to repair some part of an aircraft to prevent a future tragedy. Many times every day, flight attendants use their training, experience and on board medical safety equipment to keep passengers alive after a heart attack and deal with a multitude of other in-flight issues.

 

This year we witnessed how decades of knowledge, experience and training gave two previously unheard of pilots the ability to land a commercial jet with no engine power on a river and not lose a single life. Unfortunately, we also learned how mistakes from the cockpit cost the lives of so many in the Buffalo crash. And just this past week, pilots were reminded of the consequences of not doing their job in a responsible way.

 

Contrary to what many have been led to believe, commercial jets do not just fly themselves. While technology has improved reliability and added many safety features, jet engines still fail and weather will always be a significant factor which requires knowledgeable and experienced pilots to navigate safely through.

 

Many passengers are surprised to learn only a few runways are equipped to allow an automatic landing. The fact is most landings are being hand flown by pilots as over 95% of the runways commercial airlines use do not have the technology required for auto pilot landings.

Note: Every auto pilot landing has pilots diligently monitoring the instruments with their finger on the switch to take over if any ground or aircraft system fails.

 

So what does it really take to be a commercial pilot?

 

Since I have flown commercially for the last 40 years, I’d suggest I’m qualified to share a few facts you may not know.

 

First, similar to a doctor taking years to get qualified in the operating room, there are no -entry level- pilot jobs at the major airlines. Before being hired by a major airline you will likely have a college degree and either been trained as a pilot in the military or have spent several years acquiring thousands of flight hours experience on smaller aircraft.

 

Fully depending on the airline’s growth, it could take as many as 20+ years to move from a co-pilot to captain.

 

Airline pilot wages, benefits and working schedules are based on company seniority. If a pilot leaves one airline he/she will start at the bottom of the next airline’s seniority list as a new hire.

 

Once hired by a major airline, regardless of your prior experience, you will go through several weeks of training and testing before being qualified on that airline’s specific aircraft operations. Every time you move to a different type of aircraft or move from co-pilot to captain you will again require more weeks of training and testing.

 

Every 9 months for the duration of a pilot’s career, he/she will go through several days of training and check-rides to make certain they are prepared to deal with dozens of emergency procedures.

 

You will routinely and unknowingly, have a company and/or FAA inspector show up for your flight and sit in the cockpit to monitor your performance.

 

Pilots have to pass a medical check every six months with an annual EKG required as you get older. Due to very stringent medical requirements, approximately 15% of airline pilots are forced to retire before they reach their mandatory retirement age. Commonly used medications for typical colds and medical issues are not allowed to be used by pilots on duty.

 

Unacceptable performance on any of the above will remove a pilot from flight status and depending on the circumstance, a pilot can be terminated.

 

FAA has strict limits on the maximum number of hours pilots are allowed to fly: The maximums are 1,000 in a year, 100 in a month and 30-32 in 7 days (international flight limits are slightly higher than domestic). In order to actually get an hour of flight time, depending on your seniority and the airline’s schedule, you can expect to be away from your base from two to four times actual flight hours. For the most part, you only get paid when the aircraft is moving (Note: Pilots do not get premium pay for working holidays or weekends. Pilots can also expect to miss many special events as they are working a multi day flight sequence.)

 

Before every flight, an airline captain must sign a release stating he/she is accepting responsibility, and authority for an aircraft valued at tens of $millions carrying hundreds of lives. Similar to a surgeon in the operating room, there is a large support group of fellow employees to make it possible for all of the objectives to be safely accomplished. But in the end, it is the captain that must use his/her knowledge and experience to make critical and occasional life saving decisions. 

 

Is the job worth it?

 

Actually the important question should be: In the future, is the job -going- to be worth it for those individuals you want and expect to be responsible for so much?

 

Since 9/11 and the bankruptcy or reorganization of every legacy airline, pilot hourly pay rates have been reduced to what they were almost 20 years ago. In addition, work rule changes force pilots to work more and longer days than they ever have. Fatigue is a growing problem as long scheduled days get even longer when weather and maintenance delays are encountered.

Note: Pilots from United (UAL), Delta (DAL), Northwest (now merged with Delta) and USAir (LCC) all lost significant amounts of their pensions as those airlines went through bankruptcy after 9/11.

 

Recognizing the above, how much of the average passenger airline ticket fare is now used to pay pilots to accept the responsibility they have? Not very much!

 

Tables below use industry data to calculate the average -cockpit- wage cost for two pilots per hour of flight for the average passenger fare.

Note: Data considers reported passenger revenue kept by the airline and does not include taxes and airport fees. USAir data includes America West pro forma. Delta and Northwest merged in October 2008. Aircraft movement is considered flight time for this report. 

 

For year 2008 the average cockpit wage cost per average passenger fare per hour of flight was $3.73. See figure 1 for specific airlines.

 

Compare this to what a surgeon is compensated for the responsibility of one life at a time.

 

 

Figure 1

 

Since 9/11, United, Delta, Northwest and USAir filed bankruptcy. American (AMR) and Continental (CAL) reorganized outside of bankruptcy in 2003.

 

In the past seven years, while inflation increased by 20%, the average hourly cockpit wage cost for the average passenger fare dropped by 29%.

See figure 2 for the year over change since year 2002.

 

Figure 2

 

When comparing year 2008 with 2002, Southwest and JetBlue were the only two airlines which had their passenger fare ratio of cockpit wage costs increase. In year 2002, both of these airlines were the lowest in the industry. In figure 3 you can see how the average cockpit wage cost ratio of the average passenger fare per hour of flight changed for each selected airline since year 2002.

 

Figure 3

 

On your next airline flight, as you walk by the cockpit, you now know on average, the coffee you purchased in the terminal cost more than what both pilots will earn from your passenger fare for each hour of flight they accept responsibility for your safety.

 

If your flight crew appears tired, it is because they are likely to be in some part of their duty day that will routinely go more than 12 hours and end with a short layover at some airport hotel before they start over the next day.

 

Whether it is in the operating room or an airline cockpit, if you want the “best” individuals there, you will have to provide the incentives to get them first.

 

The bottom line questions are: In the future, who do you want replacing these aging and very experienced veteran pilots? Is it worth a few dollars more to attract the “right stuff” to be responsible for such an important job?

 

 

[Data source: SEC filings and BTS reports]

 

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October 28, 2009

Airline Industry 3^rd Quarter Summary-

Airline Industry 3 Quarter Summary-

Finally there appears to be sun light piercing through several recent months of storm clouds for the airline industry.

Recognizing the 3^rd quarter is normally the best for airline profits, the relatively small loss, while disappointing, was more positive than what was projected only a few weeks ago.

Mathematically, the 9 largest airlines reported a cumulative $28.3 billion in operating revenue. This was $156 million higher than First Call estimates and $223 million higher than AirlineFinancials.com estimates.

Net earnings, excluding one-time and special charges came in at a $256 million cumulative loss which was $212 million better than First Call estimates and $52 million better than AirlineFinancials.com estimates.

Following is a summary of the year-over-year (y/y) cumulative changes for selected financial and operational metrics for the 9 largest airlines.

Specific airline data follows the summary.

Note: The airlines covered below, with their affiliate partners, carry approximately 90% of the US passenger market share.

* Total Operating Revenue-

$28.3 billion = 18.0% less than 3^rd quarter 2008.

* Regional Affiliate Revenue-

$4.1 billion = 12.5% less than 3^rd quarter 2008.

(included in total operating revenue)

* Net Profit or Loss-

$256 million loss = $527 million improvement over 3^rd quarter 2008.

* Cash & Short/Term Investments as of 9/30/2009-

$23.3 billion = 10.9% less than 9/30/2008.

* Total Consolidated Capacity - Available Seat Miles (ASMs)

238,861 million = 5.1% less than 3^rd quarter 2008.

* Regional Affiliate Capacity (ASMs)-

24,403 million = .4% less than 3^rd quarter 2008.

(included in total consolidated capacity)

* Traffic -Revenue Passenger Miles (RPMs)

199,900 million = 2.6% less than 3^rd quarter 2008.

* Regional Affiliate Traffic (RPMs)-

19,253 million = 4.4% higher than 3^rd quarter 2008.

(included in total consolidated capacity)

Click here for specific airline details for 3^rd quarter 2009 (ending 9/30/2009)-

Conclusion: It is the opinion of AirlineFinancials.com that the added liquidity each airline was recently able to achieve greatly reduced the risk of bankruptcy for the weaker carriers.

Year-over-year revenue growth could begin as early as the 1st quarter of next year.

As reduced capacity reconciles with our expected higher traffic demand, airlines will finally have the opportunity to increase fares enough to generate measurable profits.

The potential for a double dip recession and/or significant increase in fuel costs are the unknown wild cards.

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October 15, 2009

Airline Baggage Fees:  Southwest vs. the Industry-

Airline Baggage Fees:  Southwest . the Industry-

 

Most airlines now add fees for everything from checking your baggage to getting a pillow. Free meals are long gone. Southwest (LUV) has attempted to use their no-fee policy in media advertisement to entice passengers away from their -charge for everything- competitors.

 

Last week the DOT released data showing many airlines are now achieving approximately 4% of their operating revenue from ancillary fees. These are the add-on costs to the base airfare such as baggage fees and charges to change a reservation.

 

Some industry commentators have suggested these ancillary fees are pushing traffic from the old legacy airlines over to Southwest.

 

Before getting into the data, let’s set the stage. Typically, airline data is compared year-over-year (y/y). In more stable times, y/y comparisons actually had some relevance but with today’s volatility caused by unexpected and significant changes in fuel costs and monthly double digit capacity changes, I suggest more attention needs to be placed on the month-to-month and quarter to quarter (q/q) data.

 

Adding baggage fees did not get into full swing for all of the participating airlines until early 2009. As such, there is very little meaningful impact from ancillary fees when comparing current y/y data.

 

One rumor I’d like to address is that there has -supposedly- been some relevance to an airline’s y/y drop in operating revenue being attributed to their ancillary fee charges. The fact is all airlines have had a drop in revenue including Southwest. Legacy carrier revenue has also been pressured lower by large reductions in international yields and historically weak demand for premium/business fares.

 

For those not aware, the 3^rd quarter of last year had the highest average air fares in history. As the recession moved full steam ahead into 2009, passenger/traffic demand fell off a cliff. Typical to the industry, in order to entice passengers, airlines reduced fares. The simple fact is the y/y drop in revenue has occurred because fewer people were willing to fly at the higher fares and not because of baggage fees.

 

The following detailed analysis compares month-to-month mainline traffic over the past year for the 3 Texas based airlines: Southwest, Continental (CAL) and American (AMR).

 

Figure 1 shows month-to-month revenue passenger miles (RPM’s).

Figure 2 shows the month-to-month percentage change in RPM’s.

Note: revenue passenger miles are the miles a seat is filled with a passenger. RPM’s are typically used to measure market share.

 

Figure 1

 

 

Figure 2

 

Figures 1 & 2 show at the time American & Continental were steadily increasing add-on baggage fees, Southwest did not have any consistent increase in market share.

 

For a bigger picture view, figures 3 & 4 show available seat miles (ASM’s) for the same time period.

   

 

Figure 3

 

Figure 4

 

Figures 3 & 4 show ASM capacity for Southwest had a similar monthly up and down range as both American and Continental.

 

Figure 5

 

Figure 5 shows the most recent 8 months’ load factor (LF) for each airline.

Once again, Southwest’s LF moved up and down relative to Continental and American. Note: load factor is the percentage of seats filled and reconciles capacity with demand.

 

Conclusion: There is no evidence to show Southwest’s competitors lost passenger traffic as they increased add-on baggage fees.

The question should be how many hundreds of $millions is Southwest giving up by not joining the crowd? Southwest typically gets credit for being more of an industry leader than a follower. This time, Southwest needs to do some catching up.

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Below is an updated chart showing month-to-month revenue passenger miles (RPM's) with the month-to-month percentage change. These are mainline system miles which include international for all airlines except Southwest.

The far right column shows Southwest and JetBlue with the weakest average market share performance over the most recent six month time period.

 

 

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August 31, 2009

How the Legacy Airlines Lost So Much Altitude Since 9/11

 

 

After losing over $5 billion last year, the airline industry is now on course to lose a similar amount for 2009. This projected loss comes after the airlines will spend over $13 billion less for fuel compared to 2008.

 

Losing money for the old legacy carriers is nothing new. But this year, even low cost Southwest (LUV), after 35 consecutive years of profits, is expected to lose money. Of significance for how serious the revenue problems are for the industry, Southwest’s load factor will be the highest in the airline’s history.

 

If you’ve taken a flight or read a newspaper lately, you’re probably aware the airline industry has serious problems from customer service to record financial losses.

 

Before jumping to conclusions and attributing blame, let’s do a review of what has –really- occurred to the industry.

 

While this article focuses on the largest legacy carriers, over the past two decades over a hundred smaller airlines went out of business or have struggled to stay alive.

 

The following considers the 6 largest legacy carriers and their mergers/acquisitions before and after the September 11, 2001 tragedy.

 

These airlines –American (AMR), Delta (DAL), Northwest, United (UAUA), Continental (CAL) and USAir (LCC)- currently carry 58% of the US market share or approximately 65% after accounting for regional carrier affiliates.

 

Since 9/11, United, Delta, USAir (twice) and Northwest all filed bankruptcy. American and Continental reorganized outside of bankruptcy.

 

For the 8 years leading up to 2001 (1993-2000) the airlines noted above had cumulative net profits of $17.1 billion.

 

The same airlines had a cumulative net loss of $38.5 billion in the following 8 years (2001-2008). Note: Amounts exclude reorganization and goodwill write downs. See Chart 1.

 

 
Chart 1

 

 

While many billions of debt and employee pension obligations were abrogated through the bankruptcies and reorganizations; Cumulative long term debt and capital leases are still 15% higher than they were just prior to 9/11. Note: Data includes impact from acquisitions and mergers. See Chart 2.

 

 Chart 2

 

 

One of the most recognized losses to the airline industry and investors has been the large drop in market cap (share price x shares outstanding). This loss of shareholder value affects each airlines borrowing power and increases the cost for financing.

 

Over the past 8 years and not accounting for tremendous losses through the bankruptcy process, cumulative market cap for the airlines noted above dropped by over 52% going from $21.8 billion in the 2^nd quarter of 2001 to $11.4 billion in the most recent 2^nd quarter of which Delta alone claims half of the current market cap. Note: Change in market cap does not reconcile significant stock value losses from bankruptcy. See Chart 3.

 

Chart 3

 

As we approach the 8^th anniversary of the 9/11 tragedy, here are some startling statistics showing what has –really- occurred since then to the legacy carriers that were once recognized as the best airlines in the world.

 

Comparing year 2008 to 2000 for the 6 remaining legacy airlines:

 

·         Total Operating Revenue decreased by $2.3 billion falling from $89.2 billion to $86.9 billion.

 

·         Fuel cost skyrocketed from $11.3 billion to $36 billion (+218%).

 

·         The fuel cost for the average one way passenger fare increased by 402% going from $23 to $93.

 

·         Capacity as measured by available seat miles (ASM’s) decreased by 14.3%.

 

·         Employee wage/salary expense decreased by 33.5%.

 

·         The average one-way passenger fare increased by 22% going from $162 to $198. This increase was below the 25% CPI inflation over the same time period. Note: This is revenue to the airlines and does not include taxes, airport fees, security charges etc. that airlines are required to collect but do not keep.

 

·         While the average air fare increased by $36, the labor wage cost for the average air fare decreased by 36% to $41.

 

·         Since 9/11, over 155,000 jobs for just the airlines noted above have been lost falling from 428,000 to 272,000 (-36%) total employees.

 

·         The average passenger ratio to airline employee increased from 1,139 passengers per employee to 1,413. In other words, the reservation or ticket agent, flight attendant etc., on average, now resolve issues and provide customer service to over 24% more customers than 8 years ago.

 

·         As employees worked more for less, the average revenue generated per employee increased by an astounding 53% as it went from $209,000 per employee to over $319,000.

 

·         While 155,000 jobs were lost and the average revenue per employee increased by over $110,000; general management wages/salaries as reported on DOT41 forms, increased by 44% as it climbed from $243 million to $350 million.

 

The airline industry is vital to our economy and national defense. It is not going to go away.

 

When discussions and questions revolve around why is customer service and morale so bad in the airline industry? It seems like a rather easy question to answer after you understand what has actually occurred in the last few years.

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August 1, 2009

Airline Industry 2^nd Quarter Review and 2009 Outlook

 

As an industry, the airlines just can’t seem to fly very high or very far. Last fall when oil prices dropped rapidly it looked promising on the cost side, but revenues soon began falling even faster than the price of fuel and the optimistic outlook, once again, turned negative.

 

The “industry”, for this analysis, considers the largest 9 US airlines: Delta (DAL), American (AMR), United (UAUA), Continental (CAL), Southwest (LUV), USAir (LCC), JetBlue (JBLU), Alaska (ALK) and Air Tran (AAI).

 

Collectively these airlines and their affiliate partners carry over 88% of the US domestic market share.

 

For the recent 2^nd quarter, excluding special charges, the airlines noted above lost $959 million on $26.56 billion in revenue. Including special charges, the loss increased to $1.55 billion.

 

Historically, the 2^nd quarter is one of the best for generating revenue and profits for airlines. Considering load factors were at or near record highs, losing this amount of income shows how low yields/fares impact the overall profitability of the industry.

 

While economic down cycles typically see a drop in high yield business travel, this recession has turned every airline into a low fare carrier with little choice but to offer seats to the highest bidders or leave the gate empty. 

 

The 2^nd quarter earnings and revenue breakdowns for each airline can be found here

  

Outlook going forward:

Early estimates for the current 3^rd quarter show year-over-year (y/y) revenues down by over 20% with another quarter of losses projected for all but the 3 smallest airlines noted above. When looking at y/y comparisons, it is important to recognize the 3^rd quarter of 2008 had both record high revenues and record high fuel costs.

 

AirlineFinancials.com estimates the industry needs to increase revenues and/or decrease costs by at least 15% in order to be minimally profitable and replace an aging fuel inefficient fleet.

 

Since most airlines recently restructured either out of or through the bankruptcy process, it is difficult to see any way to further reduce costs.

 

Based on current industry capacity, there is simply not enough demand at high –enough— fares to support the fixed and variable costs of the industry.

 

Until the global economy returns to solid growth, it will be a challenge for some airlines to achieve –enough— yield/revenue to support their costs.

 

Click here for 2009 projections and outlook for the industry and each of the airlines covered in this report.

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July 2, 2009

Are Airlines Going Bankrupt Again?

Let’s see if I have this correct? Many airlines have reduced seat capacity by a record amount. Recent traffic demands are showing at or near historically high load factors.

 

And some of these same airlines are now rumored to be looking at bankruptcy again?

 

Without doubt the balance sheets of most airlines are weak. If fuel prices continue up and/or we experience another global event similar to 911, it’s likely the airline industry will race to the courthouse with Chapter 11 bankruptcy filings. At the same time, I believe there are enough positives to suggest recent analyst estimates for the industry are too negative. 

 

Looking at the largest US airlines since 911, United, Northwest and Delta filed bankruptcy. USAir filed twice. American and Continental talked about it before they were able to restructure outside of bankruptcy. Southwest had fuel hedges which provided the cushion to avoid most of the financial turmoil experienced by the rest of the industry.

 

In my analysis of the airlines that filed bankruptcy and restructured, I calculated some average –benchmarks- that can be used to project the current financial weakness relative to the more recent airline bankruptcies.

 

The chart below provides the 1^st quarter 2009 cash ratios as they compare to the pre-bankruptcy averages (note: not all airlines were used to conclude the averages)

 

  

 

 

My analysis shows none of the airlines are currently in a critical cash position

(Cash includes unrestricted cash and short term investments).

 

The chart below provides 1^st quarter 2009 debt ratios to total operating revenue and assets as a comparison to recent bankruptcies. (Note: not all airlines were used to conclude the averages. LT debt includes capital leases. Pension includes post-retirement obligations).

 

 

Using debt ratios noted above, some airlines are currently at or below the averages just prior to the more recent bankruptcy filings.

 

Projecting which, if any, airlines are approaching bankruptcy should consider weakness in both cash and debt ratios.

 

Before looking into the future for solutions, it’s important to review the past.

 

Year 2008 operating revenues -for the airlines noted above- were around $3 billion more than year 2000. Over the same time period, employee wage/benefits dropped by nearly $6 billion. 150,000 jobs (over 32%) have been lost just from the airlines noted above. It would seem –labor- has paid more than their share to keep this industry alive.

 

Everyday media articles and some analysts point to a variety of reasons why airlines aren’t profitable. To me, after reviewing airline industry financials, it is obvious air fares are simply too low to support the on-going fixed and variable costs of one of this country’s most important business sectors. Safety, schedule reliability and customer service comes at a price. These should not be compromised for cheap fares.

 

Disclaimer- The above opinions should not be used to determine the worth of any stock or investment. At the time of writing, the author and his family hold stock and derivative positions in AMR.

 

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February 22, 2009

AMERICAN AIRLINES – Annual Report --

 

A comment in AMR’s recent SEC 10-K filing caught my attention.

 

“Early pilot retirements resulted in $917 million in total lump sum payments to 517 pilot retirees (approximately $1.8 million per retiree consisting of payments from Company-funded defined benefit and defined contribution plan trusts) for which the Company incurred a $103 million settlement charge.”

 

Since I don’t recall seeing anything previously written when annual wage/salary expense for AMR’s “General Management” increased from what was historically well under $50 million to an average of $165 million from 2005-2007; it would appear this SEC comment pointing out the –average- pension payment to these pilots goes beyond just reporting financial numbers.

 

So I’m not accused of taking sides here, when it comes to the spreadsheet side of the business, AMR management has been outperforming most of the industry. The operational side of the business is a different story.

 

Note: Under the direction of the National Mediation Board, all of the major unions for AMR are currently negotiating new contracts that were amendable nearly a year ago.

 

For some clarification: The AA pilot’s pension plan consists of a “Defined Benefit Plan” [DBP] and a “Defined Contribution Plan” [DCP]. These pension plans have been in existence for over 50 years. In 2003 the AA pilots took major concessions, in part, to preserve the fundamentals of their pension plans and provide AMR the option to avoid bankruptcy.

 

The relatively large pension payouts noted in the SEC comments were effectively caused by the run up in the stock market and is the reason why over 400 pilots, most with decades of experience chose to retire early thereby --preserving the market gains and increased value of their DCP--.

 

Contrary to AMR’s suggestion that all pilots retire as multi millionaires; the current value of the DCP funds for the remaining pilots is currently down by over 40% from a year ago. Due to years of no hiring stagnation combined with significant pay concessions, most of the remaining AA pilots will retire with considerably less than the pilots who choose to take their money and leave last year.

 

Below is a chart showing the percentages of pilot wage/salary expense comparing year 2007 with 2003. The total wage/salary for all employees is also provided for the same time period.

 

   

Wage/salary expense  (millions)			Pilot percentage of labor wage/salary expense
2003	2007		2007	2003
$194	$374	Air Tran	39.8%	38.3%
$2,224	$3,213	Southwest	37.6%	32.6%
$267	$648	Jet Blue	34.8%	28.8%
$118	$224	Frontier	34.2%	30.1%
$561	$549	Alaska	32.8%	39.2%
$2,705	$1,882	Northwest	30.4%	30.6%
$2,007	$2,144	Continental	28.6%	26.9%
$4,049	$2,824	Delta	26.9%	34.9%
$4,748	$4,400	American	26.3%	29.7%
$2,074	$1,723	US Airway	25.7%	31.1%
$3,314	$3,011	United	24.4%	27.0%
Source: DOT41 data filed by the airlines

 

 

Five years ago the AA pilots were getting close to the industries average percentage of the wage/salary dollars. AA pilots are now near the bottom of the industry. This wage amount is –effectively- compounded lower when considering the AA pilots have one of the most (stagnated) senior group of pilots on the planet.

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January 23, 2009

 

 

January 7, 2009

AIRLINE INDUSTRY – 2008 REVIEW

 

Over the next few weeks airlines will publish their Q4 and 2008 annual financial reports. Significant losses for the year will be common but with a great sigh of relief as the year ended considerably more positive than the mid-year predictions.

 

My top three most significant events affecting the airline industry in 2008 were:

 

·         The price of jet fuel- 2008 started with jet fuel costing approximately $2.70/gallon increasing to a historical high of over $4.25/gallon by mid-July followed by a rapid decrease ending the year at close to $1.35/gallon. (Note: The spot price of jet fuel has been above $1.50/gallon since early 2005).  

 

·         Ala carte pricing- In an effort to make up for some of the large cost increase from fuel, most airlines created a new source for revenue. In addition to a fuel surcharge, it is now common to pay for service and amenities that not long ago, came with the price of your airline ticket. Checking baggage, on board food & beverages, booking/changing your ticket through airline reservations is now added to the cost of your flight with most airlines.

 

·         The on again off again marriage of Delta and Northwest Airlines- The  3^rd and 5^th largest airlines (as measured by revenues) finally made it to the altar and officially merged in October. Delta is now the world’s largest airline moving American to the number two ranking.

 

Honorable mention for importance to the airline industry in 2008 would include major capacity cuts, historically high air fares, fuel hedging strategies and the failure of several smaller US and International carriers.

 

Below are my updated revenue/income estimates:
The airlines below carry just over 75% of the US domestic capacity.  

Detailed cost/revenue breakdowns can be found here.

Looking forward into 2009, the three issues I see having the most affect on the airline industry will be-

 

- Labor/contract issues

- Fuel cost instability

- Consumer demand

 

Disclosure- At the time of this writing, the author or and family members held long and derivative positions in AMR.

 

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August 5, 2008

The Airline’s Recent -Death Defying Actions-

Not long ago daily media stories were predicting which major airline would be the first in line to fail. Las Vegas type odds were given to a list of inevitable airline bankruptcies.  

 

 

There should be no argument the US airline industry is facing unprecedented challenges as they restructure their business models to survive with record high fuel costs and a questionable forward looking Global economy.

In reviewing each airlines recent 2^nd quarter financial reports, it is obvious cash liquidity has become a very high priority for airline management going into the future.

Using various types of financing initiatives and asset sales, five of the eight largest US Airlines increased their unrestricted cash positions by significant amounts.

(billions)	AA	UAL	DAL	CAL	NWA	SWA	USAir	JBLU
Cash 3/31/2008	$4.41	$2.92	$2.60	$2.52	$3.23	$3.12	$2.07	$.753
Projected cash available 6/30/2008	$5.93	$4.40	$3.34	$4.31	$3.26	$5.84	$2.29	$1.35

In consideration that DAL and NWA will acquire approval for their merger by year end, only USAir appears to have a potential cash liquidity problem in the near-term. (See table) 

In my opinion, the increased cash liquidity and upcoming capacity cuts combined with recent fare increases make -predictions- of airline failures very pre-mature.

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April 13, 2008

A PILOT’S PERSPECTIVE ON THE FAA’S ACTIONS TO GROUND THE MD80 AIRCRAFT

The airline industry has been scrutinized and criticized for decades. Recent media reports of FAA actions gives the perception that today’s airlines are cutting maintenance to save costs and may be operating unsafe aircraft.  

 
The fact is the major US airlines currently have the safest record ever recorded. Based on my 4 decades as a commercial pilot, I can confidently tell you this excellent safety record has not occurred due to FAA oversight but it has occurred in spite of the FAA! The FAA has routinely followed the industry in safety related rules opposed to leading it.  

It is very common to have FAA maintenance inspectors with zero pilot flying time in the cockpit supposedly monitoring the performance of very experienced airline pilots. On those times there may be a FAA pilot inspector in the cockpit monitoring performance, it is common to find this FAA pilot inspector has never been qualified or even flown that type aircraft. Instead of “checking” the actual complex operations of getting an airliner from point A to B, the FAA routinely focuses on some piece of paperwork to make sure a “t” is crossed or an “i” is dotted. 

The recent attack by the FAA on American and other airlines operating MD80’s and forcing the grounding of over 300 aircraft not only disrupted travel plans for hundreds of thousands of travelers, it also needlessly destroyed consumer confidence. The financial cost to American will be tens of millions.  

Meanwhile, in order to comply with an Airworthiness Directive [AD] that, by many accounts, was already complied with, the entire maintenance staff for American Airlines has been required to divert time away from other maintenance issues.  

The questions that need to be asked are;   

 

·         If this was such a critical safety issue to require the sudden and immediate grounding of this entire fleet of aircraft for American, why did the FAA provide so much time for all MD80 operators to comply with the AD?  The Airworthiness Directive [FAA AD #RIN 2120-AA64] was issued in September, 2006 and provided 18 months for operators to complete the work. 

 

·         Why is it that individuals from different FAA regional divisions scattered around the country were unable themselves to agree on how the -exact- specific language in the Airworthiness Directive should be interpreted? 

 

·         If this issue of having tie wraps at -exactly- 1 inch spacing opposed to 1.2 inches was so critical to safety, where has the FAA -oversight- been for the past 2 years while these same MD80 aircraft have been sitting in hangars getting routine airline maintenance frequently located across the airport from FAA inspector’s offices? 

 

·         Why, if this was such a serious safety issue, did the FAA not have any objections -until now- to billions of passengers flying back-and-forth across the US and foreign countries on over 1,000 DC9/MD80 aircraft affected by this specific Airworthiness Directive for the past 18 months? 

 

On a regular basis, the National Transportation Safety Board, aircraft manufacturers, pilot and maintenance labor groups have submitted recommendations to the FAA to improve safety by changing rules in numerous areas from pilot rest and duty periods to the security of the aircraft to the Air Traffic Control System. In spite of these recommendations to improve safety and coming from experienced industry experts; FAA history repeatedly shows most recommendations are never put in place and those that are can take years to become official. 

The recent -media show- by the FAA’s sudden decision to go after America’s major airlines is absurd and deserves a full Congressional investigation. 

Over the past week I have discussed the MD80 Airworthiness Directive with several airline mechanics each who have over 20 years in the industry. In off the record discussions, they have all confirmed the following statement released from the American Airlines mechanics union leadership Thursday, April 10. 

“The Transport Workers Union, which represents aircraft maintenance technicians at American Airlines, put out a statement Thursday afternoon defending the quality of the AMT's work and the safety of MD-80s.

From TWU international vice president Dennis Burchette on Grounding of Flights at American Airlines:

I have spent 22 years as a mechanic and quality assurance inspector at American Airlines and I want to say unequivocally that our MD-80s are safe. This is more a compliance issue than a safety question. 

Let's be clear -- once the wiring harness was re-routed and then covered by a protective sleeve, the chances of any safety of flight issues were minimized. This particular engineering change order first came to light almost four years ago. Since then there have been approximately ten revisions! Since the Airworthiness Directive was issued there have been at least four revisions.

Hundreds of highly trained FAA award-winning technicians, the best in the business, with decades of experience, didn't simply get it wrong. These changes have been a moving target.

Our members have been working around the clock to get these planes up in the air as soon as possible. We take our jobs and our responsibilities seriously. Our goal is to take planes that are safe and bring them into precise compliance.”
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December 13, 2007 

The MIT-ADP Report- 

Recently  the Massachusetts Institute of Technology published their Airline Data Project [MIT-ADP] http://web.mit.edu/airlinedata/www/default.html  

 

When I first read the report; I "thought" it's about time this [type] of information was made available to the public.

Unfortunately, as I started to compare their [MIT-ADP] data with mine, the differences were large and many. What follows is my analysis of the MIT-ADP report and why it cannot be used in airline-to-airline comparisons. 

The ADP report primarily utilizes Bureau of Transportation [BTS] data. BTS filing policy provides considerable flexibility in how individual airlines chose to categorize income, expenses and operational metrics. In addition, delays in filing some data with the BTS are not reconciled with similar data provided in the required SEC Corporate filings. For these reasons, BTS data, while accurate as reported by individual airlines, cannot be used in the raw-data form to make analogous airline-to-airline comparisons.

Why the MIT-ADP report is not valid for airline-to-airline comparisons.

  

* “System Total Operating Revenue and Operating Expenses”  

The ADP report includes all affiliate driven revenue from capacity purchase agreements in mainline operating revenue totals. Due to the uniqueness of each airlines operation there is a large airline-to-airline variance in the amount of capacity and revenue generated by these affiliate capacity purchase agreements.  

[note: “capacity purchase agreements” are contracts between mainline carriers and smaller regional jet airlines to provide passenger - feed - and revenue to the mainline. The costs to obtain the affiliate capacity is added in the mainline’s total operating expense].  

ADP’s labor and capital productivity conclusions attempt to compare airlines like Southwest with no affiliate capacity/revenue/expense input to an airline like Delta, which has over 23% of total revenue accounted for by several affiliate carriers - year 2006 data -. Specific to AMR, the ADP report includes non-airline driven revenue and expenses into the airline system metrics. Note: AMR files two separate SEC reports, one for AMR and one for American Airlines [AA].  

* “Average Annual Wages and Salaries”  

The ADP report uses 12-month cumulative wage and benefit totals for various employee groups but only considers the year ending labor count as the divisor. Due to large employment changes some airlines incur for specific labor groups over short-term time periods, the methodology ADP uses to calculate “averages” incurs considerable distortion in the wage “average”.  

Example: In 2006, Southwest’s pilot employment increased 6.8% during the year while American’s pilot count decreased by 5.9%. In addition, due to American’s older pilot seniority list relative to Southwest, hundreds of American pilots retired during the year.  

Most of these retiring [American] pilots were at the top end of the wage/salary scale and were replaced by bottom end wage/salary pilots. If these factors were reconciled into the actual wage/salary conclusions, the Southwest pilot average wage/salary would increase while the American pilot wage/salary average would decrease.  

Summary- the average wage and salary conclusions presented in the ADP analysis are  distorted by considerable amounts.  

* “System Total Expense per Available Seat Mile [CASM]”  

The ADP report calculates CASM by using total expense, including all costs attributed to the affiliate capacity purchase agreements but then uses only mainline capacity [Available Seat Miles - ASM’s -] as the divisor.  

The methodology ADP uses to calculate CASM works for an airline like Southwest or JetBlue, as they do not have any capacity purchase agreements.  

Using this same methodology to calculate CASM for airlines with affiliate driven capacity, revenue and expense distorts the real CASM. For example, ADP uses all up expenses - mainline and affiliate feeders - but does not include the affiliate capacity [ASM’s] attributed to the affiliate expense.  

This misrepresented ADP CASM conclusion is clearly identified when comparing mainline CASM from the SEC required filings with the calculated ADP CASM.  

Summary- the methodology used by the ADP to calculate “CASM” without using the capacity attributed to the expense from capacity purchase agreements distorts “real” CASM for some airlines by over 30% for year 2006.  

This same misguided methodology is used by ADP to calculate unit revenue [RASM]. Without including affiliate capacity attributed to the revenue, the RASM calculation is simply not valid.  

* “Total Revenue per Employee Equivalent”  

The ADP analysis uses all mainline and affiliate driven revenue but uses only year ending mainline employee counts.  

ADP calculates employee/revenue productivity by using a 12-month cumulative revenue total and a year ending employee count as the divisor. This methodology ignores the relatively large employment count changes that frequently occur during the year.  

In addition, using all up revenue which includes mainline plus affiliates but only using mainline employees distorts the employee revenue productivity metric by more than 30% for those airlines that derive large amounts of their revenue from capacity purchase agreements.  

* “Total Operating Fleet”  

There is considerable difference between the numbers of operating aircraft the ADP uses and what some airlines report in their SEC filings and corporate reports.  

Specific to Delta, the ADP report uses 371 operating aircraft while Delta’s SEC and Corporate reports identify 440 aircraft.  

Summary- the inaccurate number of operating aircraft used by ADP creates large errors in capacity, employee and revenue productivity ratios relative to operating aircraft totals.  

* “Costs labeled to specific labor groups”  

Most airlines include “pilot training costs” as a sub-expense of  “total pilot labor expense” in their BTS filings. Continental is one airline that reports zero “pilot training” expense in their BTS filing.  

When using BTS data to conclude all up pilot labor costs and average costs per pilot, there is no reconciliation by ADP for these unique reporting variances from airline-to-airline.  

- Conclusion - The above are only some of the more noticeable errors and misleading calculations in the MIT ADP report. Due to differences in the way airlines report data to the BTS, conclusions provided by ADP are misleading or distorted. The ADP analysis should not be considered as a credible airline-to-airline industry comparison.  

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October 10, 2007

Industry in General-

    Since the tragic events of September 11, 2001, the airline industry has struggled through unprecedented $billions in balance sheet losses. Four of the largest seven airlines in this country have restructured through the bankruptcy process.  
 
    Yields while making some recovery since 9-11, are still at the same levels as the early 1990’s. Year-to-date yields are 13% less than year 2000.  

    In spite of recent increases, overall passenger airfares are currently less than 10 years ago.   

   Since year 2000, fuel prices for the industry have tripled from approximately 10% to 30% of operating costs and are now the single largest expense category for nearly all airlines. In large part, lower labor costs through higher productivity and reduced salaries and benefits has subsidized these fuel increases.   

   Even with $billions in additional fuel costs, recently most airlines have improved their balance sheets while increasing operating income.
  
   While an industry financial recovery is underway, there can be no argument this ongoing improvement to balance sheets and net income is primarily derived from unprecedented and historically high load factors. These positive changes to both income and the balance sheet are occurring In spite of stagnated yields and overall reductions in domestic legacy mainline capacity.

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