Across the Pond.
Amid the race to find fault on this side of the pond, some interesting reading from the Financial Times about life on the other.
American grounds aircraft as losses hit $604m
By Doug Cameron in Chicago
Published: January 18 2006 15:36 | Last updated: January 18 2006 23:41
American Airlines on Wednesday said it had permanently grounded 27 aircraft, highlighting the strategic gulf between the network carriers and the rapid growth of low-fare rivals.
The parking of aircraft by bankrupt carriers last year helped fuel a recovery in revenue across the industry, and prospects for a return to profitability after five years of losses hinge on how much capacity is added in 2006.
American, the largest US airline by revenue, led the industry last year by cutting flights in response to soaring fuel prices, and the decision to ground more aircraft permanently will raise hopes that network carriers will add little or no domestic capacity this year.
Meanwhile, low-fare rivals such as Southwest, JetBlue and AirTran plan to add dozens of new aircraft in 2006.
American booked a $155m charge in the fourth quarter against the 27 MD-80 aircraft, 24 of which were already parked in the desert.
The charge helped widen its net loss from $387m to $604m in the three months to December 31, though the airline said cost cuts and efficiency measures helped to generate its first full-year operating profit since 2000, excluding special charges.
A net loss of $861m in 2005 compared with a deficit of $761m the previous year, with fuel costs adding an extra $1.7bn to expenses in 2005.
The airline said its unit costs fell 2 per cent year-on-year, excluding fuel, and it has already announced plans to cut an additional $500m a year from expenses and boost revenues by an incremental $300m a year through measures such as charging passengers for guaranteed standby seats.
The improving industry revenue environment in 2005 combined with record load factors in all 12 months for American, with revenue per available seat mile – a standard industry measure – climbing 9.3 per cent in the year and 13.8 per cent in the final quarter.
American ended the year with $4.3bn in cash and short-term investments as it enters the traditionally slow first quarter.
Alongside Continental Airlines, it is the only network carrier to have avoided filing for bankruptcy protection during the current industry downturn, helped by new labour contracts agreed in 2004.
And even more interesting...
‘We are all low-cost carriers now’
By Doug Cameron in Chicago
Published: September 22 2005 22:05 | Last updated: September 22 2005 22:05
The Society of Airline Analysts this week welcomed Gary Kelly, chief executive officer of Southwest Airlines, to a breakfast gathering, neglecting to tell their guest whether his entrance fee was waived. “I take it I don’t owe the $75,” joked the head of the most predatory US carrier. “We can’t afford it. We’re an airline.”
Southwest is now the largest domestic US airline, having expanded from its Texas base to both coasts. Its average fare in July was $92 one way – little more than coffee and muffins with the analysts. And therein lies the problem facing the six US network carriers, four of whom are in bankruptcy protection.
Real domestic fares have halved since deregulation in 1978, and costs have failed to match this trend despite close to 300,000 job cuts over the past five years and the gains from innovations such as internet booking.
Delta’s latest transformation plan, outlined on Thursday, a week after the carrier filed for bankruptcy protection, seeks to address the problems at home and tap opportunities abroad. But it is a moving target.
Bankruptcy protection is helping the legacy carriers towards the cost levels set by Southwest and newer entrants such as JetBlue and AirTran. Delta, like its peers, is pushing its wage levels down and shrinking some of its hubs in favour of more point-to-point flying, which improves aircraft utilisation. “We’re all low-cost carriers now,” says Doug Parker, CEO of America West, which plans to complete its merger with US Airways next week to create the fifth-largest US carrier.
Gerald Grinstein, his counterpart at Delta, also aims to “save” his airline and restore profitability in a little over two years by finding its feet in the international market, away from Southwest’s glare. International routes account for 24 per cent of Delta’s capacity, compared with a sector-leading 42 per cent at Continental and 40 per cent at Northwest, which also filed for bankruptcy last week.
Delta is accelerating plans to reconfigure aircraft which, for example, once flew from its Atlanta hub to Florida, to expand its international capacity by a quarter. Airline insiders accept this will take time, with modifications such as new fuel tanks pushing out the transfer of some until next summer.
The attraction of the international market is clear. While a little domestic pricing power has returned, pushing up year-on-year revenue growth to 6.3 per cent in July, international revenues were 17 per cent higher over the same period. “The reason they are doing it is that the international industry is still regulated, and you can get away with higher costs,” says Sam Peltzman, professor emeritus of economics at the University of Chicago Graduate School of Business.
The transatlantic market is Delta’s strongest international card. But with rivals also pushing more aircraft towards Europe, it stands at a disadvantage because its main hubs are away from the coasts which account for the bulk of originating US traffic. Moreover, its request to secure antitrust immunity to co-operate with Northwest and its partner Air France-KLM – which would help boost transfer traffic to the hubs – was turned down by the Department of Justice.
But Mr Peltzman believes this exodus abroad is simply storing up trouble for airlines which he says are still “tinkering” rather than challenging high costs head-on.
“They are going to get bitten by the same animals in the international markets,” he says. “It’s only a matter of time before we see a Jet-Blue-style operator over the Atlantic, and then that game will be over.”
I wondered why Boeing's 777 sales team are on the phone to Dublin so often.