Airline Analysis
by Robert G Herbst
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. 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
In reviewing each airlines recent 2nd quarter financial reports, it is obvious cash liquidity has become a very high priority for airline management going into the future.
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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January 15, 2008
Airline Industry Consolidation
Why it’s coming and why it’s necessary-
When was the last time you flew with an empty seat next to you? How many times in the last year has your flight arrived on time? How was your airline “customer service” experience?
The facts are that each month the airlines are setting new records for the average number of seats sold on every flight. Late arrivals for last year set an all time record. Consumer complaints are at an all time high and increasing.
Since 2001, most of the legacy airlines have reduced non-fuel expenses by 20-30%. Unfortunately for the airline passenger, this cost reduction has been at the expense of labor and customer service.
If you fly often, it should come as no surprise airline “customer service” is at an all-time low. This negative change can be easily explained after considering since year 2001, the average ratio of airline passengers to employees has increased by 27-34% for the large legacy airlines .
Yet, even with all-time record load factors and reduced [non-fuel] expenses, the industry as a whole has dismal profit margins and an aging fleet of older inefficient aircraft badly in need of replacement.
Rising airfares are not able to keep up with the unpredictable future price of jet fuel, which has increased from less than 12% of operating expense to 35% over the past 8-9 years .
2008 – The Year of Airline Industry Transformation
History has proven how drastic and quick changes to the airline industry can occur:
-1960’s Jet Age- -1978 Airline Deregulation- and the 2001 financial devastation of the industry caused by the 911 tragedy are the most recent three major events that changed the industry.
American Air Tran
Continental Alaska
Delta American Eagle
Northwest ATA
Southwest Frontier
United Jet Blue
USAir Spirit
It’s my guess over the next 12-18 months, at least 2 airlines from each of the lists above will disappear and here is why:
Last month two significant laws were changed and are now in effect:
And
What this all means is that many of the costly and once restrictive obstacles to airline acquisitions and mergers are now gone.
In the past, pilots as well as some other labor groups had very restrictive contract language regarding how an acquired airline’s pilots and employees were to be integrated into the newly merged company. Past history shows It has been common to take years to fully integrate different airline labor groups into one.
The new LPP’s now provide only a few weeks for merged labor groups to reach an integration agreement before an arbitrator decides the outcome. This new law will not only force mergers of different labor groups to be considerably faster and predictable but also far less costly from what has occurred in the past.
The “Open Skies Agreement” removes most of the restrictions that long prevented US and EU airlines from flying beyond each countries “Gateway” cities. In addition, this agreement requires on-going discussions intended to eventually permit unilateral foreign ownership above the current 49% level and the 25% restriction on foreign [voting] control.
Conclusion- Only with considerable industry consolidation will the remaining airlines gain enough pricing –power-- to achieve much needed financial stability.
Considering the lack of acceptable profit margin in the airline industry combined with the issues noted above, I expect considerable industry consolidation to include increasing foreign airline ownership over the next 12-18 months.
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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
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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