Financial trouble ahead for the big US carriers - again

[Viewfrom5Bells]

http://money.cnn.com/2008/04/23/news/airlines.oil.fortune/index.htm?postversion=2008042313

[Airbubba]

Here come the next round of pay cuts, bankruptcies and furloughs.

[chrisbl]

Well if the customers cannot afford to fly, who is there to pay the salary?

[tsgas]

Pax have been given a free ride for too long on the backs of airline employees.
A good shack out in the industry will do a world of good.

[slip and turn]

Well I had an email here in the UK from FR yesterday offering me £35 for a £10 stake !

Is that just coincidental marketing by their gambling casino affiliate, or is there a cashflow crisis generally at the moment ? :p

... and anyway, I always find it most unseemly receiving an email from an airline inviting me to gamble :hmm:

[CityofFlight]

How much do you think airfare would need to increase for a full domestic flight? $50...$75...$100?

I ,for one, would pay more if it meant that overall service improved and cabin crew treated SLF's like CUSTOMERS. After all, customers provide the pay checks. I'm tired of experiencing the surliness with my favorite carriers and would relish the return of "flying the friendly skies..."

[Golf Charlie Charlie]

""How much do you think airfare would need to increase for a full domestic flight? $50...$75...$100? ""

I thought US flights were always pretty full already. Average load factors are 85-90%, which in practice means flights at times most people actually want to travel are full. I don't think the problem is load factors, it's costs.

[Yellow Snow]

I thought US flights were always pretty full already. Average load factors are 85-90%, which in practice means flights at times most people actually want to travel are full. I don't think the problem is load factors, it's costs

If this is the case then ticket prices are too cheap, you cannot maximise your revenue as an airline with high load factors! From a purely commercial POV High load factors mean seats being sold too cheaply!

[saccade]

Some scary news from easyJet:

Traditional network carriers like Air France KLM have slapped extra fuel surcharges on ticket prices in recent months to help compensate for soaring crude oil prices.

"If we ourselves passed on these increases completely we would have to raise ticket prices by 10 percent in one go and our payload factor (the proportion of seats sold) would fall from 85 percent to 60 percent. Our whole low-cost business model would be thrown into question," Bacchetta said.


http://www.reuters.com/article/marketsNews/idUSL2332471920080423


I can't believe this, is the low cost business model that fragile? No wonder ryanair is starting gambling games in order to make some money...

[CityofFlight]

I think maybe you missed my question...?

Business aviation dictates that when an aircraft is full, you achieve your optimum profit after operating costs. Assuming that airfare per customer is where revenue is achieved, I'm wondering where the range of increase would be to keep airlines going.

I'd still pay $50-100 more per ticket if that's what it took to experience a carrier that would put "service" back into the travel experience and also allow that carrier to meet it's operating costs.

I was curious if anyone had any guesses how much of an average increase is required for a domestic flight in order to bring carriers out of the nose dive.

[Golf Charlie Charlie]

Yellow Snow, I think that's right. But as the Irishman said when asked the way to Dublin, you don't start from here. Yet we are where we are now. Recent years have been devoted to boosting load factors so capacity can be cut (in the name of reducing costs). On the revenue side, however, the yield earned by the majors has been undercut by the low-cost airlines and, above all, by continuing high demand for travel, so much so that airlines don't need to place customer service as a high priority. Why should they when they can fill aircraft with zero service ! Of course, whether demand for travel will continue at the same levels in the current economic environment remains to be seen. I think the airlines themselves think it may not : hence further capacity reductions that have been announced in recent weeks (eg. United 4% reduction in overall seats).

One thing the major airlines in the US do have going for them is higher yield international flights, so the domestic low-cost people, in my view, may be even more vulnerable. A similar parallel may also exist in Europe.

Finally, on the cost side, US airlines were actually quite well hedged against rising fuel costs up to 2007. What we are seeing now is a double whammy : oil hedging at $60-70 no longer available, while the oil price has risen way above the $80-$100 or so that was expected last year.

[BRE]

What is the average ticket price then?

In September, when I last visited the US, my experience was that domestic legs were quite expensive, no matter whether bought separately or as part of an international ticket.

The connections I considered were IND - ROC (one way about as expensive as an international return ticket, still running at $600 to $850 depending on carrier and time of day if I tried to book a ticket now for travel two months from now), ROC - JFK (about $80 on Jetblue about what we pay on a legacy carrier in Europe with two month's advance booking) or ROC - EWR ($300 on Continental).

Admittedly, this is only a snapshot, but it doesn't sound like airlines are giving tickets away right now.

[PAXboy]

CityofFlight I ,for one, would pay more if it meant that overall service improved and cabin crew treated SLF's like CUSTOMERS.History says that you are in an absolute minority. In the world, everybody (99%) wants to get something for less. When money is tighter - like in a recession - then people either want to pay even less or will stop purchasing. That is what will happen (is happening) and, I suggest, it will happen globally AND not just in aviation.

You will soon either be paying more for your flight - irrespective of service levels - or not paying for it at all as the service will be closed.

[alexgouk]

Well, I'm with City of Flight on this one, what's more I back it with my wallet, Recently when I flew to Amsterdam for my son's wedding we went with a mainstream company rather than suffer the contempt we get from the low cost carriers. And we are OAPs on a limited income. I read of someone recently who would stay in a low cost hotel at the destination but fly first class on the grounds that the whole airport/plane thing was the most stressful part of any trip and to minimize that made absolute sense

[airfoilmod]

Flights are Full and generally oversold. This is due to (Partially) overpromoted and unrealistically low fare structure. It isn't unusual for a full A/C to lose money, after buybacks and Fuel cushion. The goal, as I see it is to raise fares to the point that "tickets sold reduction" is balanced by gross revenue. The off set is not easy to calculate, but the loss in numbers will most likely be in the area of customers who are flying "only" because it's Cheap. A friend Flew 757 coach roundtrip SMF to Philly for 190 Dollars (plus taxes) last week on Legacy. That's like buying a pint for a quarter. Lower load, better service, higher fare, the Old way. This can't continue.

[Huck]

Classic overcapacity. The herd must be culled. Don't be fooled by full airplanes - half of those pax aren't paying the costs associated with hauling them.....

[CityofFlight]

Like the whole Dot.com era...when money is being funneled into a black hole, with little or no profit....it will implode.

The numbers of flights/day were scaled back to insure full flights. It's simple business. Since deregulation, airlines have struggled to contain the operating costs against profits and it's no secret it's one of the toughest industries to manage. While I don't know if $50-100 more per ticket would offset the status quo, I'm fairly confident that it wouldn't break the wallets of average pax. Regardless....it has to come from somewhere.

[20driver]

Until airlines can make an increase stick passengers will stick with the lowest price/time combo. There is no differentiation on safety or service so why not?
Are you going to offer your GM dealer an extra K just because they are having a hard time?

Looking at the recent round of mergers two drunks holding each other up comes to mind. Hate to say it but the best deal is let some outfits go under.

Sadly pilot seniority works against this. Looking the USAIR/AWA debacle you have to wonder if all would not have being better off with both going tits up and letting a newbie in. If pilots were truly mobile the newbie is going to end up paying at least market rates.

20driver

[PAXboy]

'when they can make it stick' Indeed 20driver, indeed that is the acid question.

I am sorry to be a pessimist but, having seen recessions before, by the time this one is in full swing people will not be picky about paying another $/£ 100 but can they get a flight at all? Aircraft and crews will be cut back very rapidly and then some carriers will have no choice but to close their doors. Capacity will be reduced and then fares will rise to realistic levels.

What will then be left between the old and new style carriers?? No one knows as this is all uncharted air space. Many uncomfortable times now on the doorstep.

[coolbeans202]

What is the average ticket price then?

In September, when I last visited the US, my experience was that domestic legs were quite expensive, no matter whether bought separately or as part of an international ticket.

The connections I considered were IND - ROC (one way about as expensive as an international return ticket, still running at $600 to $850 depending on carrier and time of day if I tried to book a ticket now for travel two months from now), ROC - JFK (about $80 on Jetblue about what we pay on a legacy carrier in Europe with two month's advance booking) or ROC - EWR ($300 on Continental).

Admittedly, this is only a snapshot, but it doesn't sound like airlines are giving tickets away right now.

BRE, living in Washington DC it is not uncommon for me to find fares to the west coast for under $250 and, with the exception of Christmas, I've never been forced to pay more than $300 for a flight to LA or SF. While there are certainly expensive flights out there, IND-ROC for example, there are plenty of others that are given away for peanuts.

[11K-AVML]

Maybe it's less of an issue for the domestic flights, but as a passenger, I've never touched a US carrier (nor BA) ever since my first experience of them, despite the option (and cheaper at that) being present.

On international routes I currently do go for quality over price.

Maybe it's my naivety, being young I've never experienced a recession before, but I do like to think I'll still keep choosing quality over price. At the end of the day *some* at least (I agree I'm in the minority but maybe there are more like-minded individuals than you at first think) do regard air travel as a journey and not simply another means of public transport.
(I'd rather spend less of my cash elsewhere than crimp on my air travel preference - i's just not fair on the quality employers otherwise.)

[sevenstrokeroll]

raise fares 20 to 30 percent to start to overcome the fuel price.

[FLCH]

There's a little more to the "losses" other than operational, it's spin at it's finest.





Behind the Delta-NW Mega Loss

Posted by: Justin Bachman on April 23
Delta Air Lines and Northwest made a bit of a financial splash on Apr. 23, reporting a combined loss of $10.5 billion. This red ink wasn’t, however, an operating number. It was primarily a paper exercise in which Delta took a $6.1 billion goodwill impairment charge due to a decline in its market cap. Northwest did the same to the tune of $3.9 billion. Aside from all the non-cash charges, Delta lost $274 million and Northwest lost $191 million. Like rivals, both saw high fuel costs decimate their financial performance. Passenger revenue grew at each airline, up 10% to $4 billion at Delta, and 6.2% higher at Northwest, to $2.6 billion.

When Delta left bankruptcy reorganization a year ago, it put $12 billion of goodwill on its books, and had a market cap of $9.4 billion. (At the time, Delta had recently been presented a takeover offer by a rival, so the market value wasn’t totally out of whack.) Without mangling the accounting rules too much, goodwill impairment relates to the difference between book value and fair value for all the intangible assets a company owns. “A key assumption in that valuation was the price of fuel of $70 per barrel,” Delta said in its earnings statement. Oil settled Wednesday just above $118. Companies have to assess their goodwill at least once per year.

“This change in economic conditions combined with the recent merger announcement created a triggering event for accounting purposes, requiring us to update the valuation of our stand-alone business plan using current assumptions regarding fuel price and the economic environment,” Delta president and CFO Ed Bastian said on a conference call with analysts. As Delta’s stock has tumbled from almost $22 a share to $6 since resuming NYSE trading on May 3, the airline has a market capitalization of $1.9 billion, down from $3.7 billion at the start of 2008. Northwest’s market cap has plunged from $3 billion to $1.7 billion so far this year.

These two airlines are not special in their current difficulties. United lost $537 million in the first quarter based on fuel spending, and American parent AMR Corp. came in with a $328 million loss. United’s market cap has deteriorated by $2 billion so far this year, to $1.7 billion. United parent UAL Corp. does its yearly goodwill impairment assessment on Oct. 1, and one surmises that without a substantial improvement in industry fundamentals, a robust charge is likely there. US Airways is also expected to show a loss when it reports results on Apr. 24. In a memo to employees Wednesday, Delta’s Bastian wrote that the company expects others in the industry to have similar goodwill adjustments.

Delta and Northwest are, of course, the very same airlines hoping to win regulatory approval for their proposed combination. Such charges certainly supply further evidence of the industry’s horrific state and need for quick relief to cope with the raging oil beast. Their $10.5 billion in red ink made the first Associated Press headlines on the story wrapping the two airlines’ results. The timing of the charges was the first reporter’s question posed to Northwest officials on their conference call. CEO Doug Steenland said companies have “no discretion” about when to report goodwill impairment charges. “There are clearly laid out standards for how one looks at when an impairment is necessary,” he said. Delta “would be taking the charge regardless of the merger,” spokeswoman Betsy Talton says.

True enough. Moreover, these are two companies who recently reported a very material event, their merger intention, and need to have spotless balance sheets before the regulatory reviews commence. “You want to go into this with an absolutely clean balance sheet,” says Ray Neidl, an analyst with Calyon Securities.

All well and good. But the vast majority of the general public makes no distinction between a net loss that includes paper-based impairments and the net loss that was caused by soaring energy costs. In the real world, it all gets lumped into a very large figure: $10.5 billion. This is the kind of number blasted on Web sites and cable television. (The number was also in the lead of the AP, Reuters and New York Times stories on Wednesday.) It is a persuasive amount, one that can help sway the average Joe or Jane who may not care to read into the finer print. A $10.5 billion loss reeks of dire finances, the last gasp of a dying enterprise. Their combination must happen, as soon as possible, right? In this case, it looks as if Delta and Northwest found silver linings in multi-billion dollar losses.

[airfoilmod]

That 10.5 Billion is laughable on its face to anyone with an HP20. BOTH airlines had a combined Gross of 3 Billion this first quarter. The loss isn't real money, if it was, it would take 30 years if then to retire that debt (sic). What are the assets? the Credit Line? Cap can change with my aunties slippers, the merger (Read: consolidation) gives DAL and NWA AGILITY in every important room (save Fuel). As loads decrease in the next year (~40%) look for Oil to plummet 30-40% along with them. In the long term, Big is good.

[BRE]

I still don't get it. LH just posted €188M (about $300M) operating profit for the first quarter. And it's not like their fleet was only made up of super-efficient new jets. They are operating quite a few B744, A34x to the East Coast where an A33x would easily do the job. And on short haul, they are still operating a substantial number of B737 classics and Avros.

And I don't have the impression that the other European majors are starving, despite fierce competiotion from thriving LoCos on short and medium haul.

Don't tell me the labor costs are lower this side of the pond...

[PAXboy]

primarily a paper exercise in which Delta took a $6.1 billion goodwill impairment charge due to a decline in its market capWhilst no source is quoted for all of that spiel ... When the boys in the City think up this kind of stuff - no wonder they fool themselves into taking bonus' that show up as being based on vapour. :=

[Huck]

I still don't get it. LH just posted €188M (about $300M) operating profit for the first quarter. And it's not like their fleet was only made up of super-efficient new jets. They are operating quite a few B744, A34x to the East Coast where an A33x would easily do the job. And on short haul, they are still operating a substantial number of B737 classics and Avros.

And I don't have the impression that the other European majors are starving, despite fierce competiotion from thriving LoCos on short and medium haul.

Don't tell me the labor costs are lower this side of the pond...

For what it's worth, I had a "pop-up" trip to CDG last week - got the call at 12pm on a Friday, get there as soon as I can, spare no expense, etc....

Found a Northwest flight, through MEM and AMS, $2800 one way in business class.

Took care of the issue in Paris, crashed and burned for ~30 hours in the hotel, then hopped home. Air France this time - through DTW - this time $4000.

Thing is, NWA could have charged $4000 too - I would have paid it.....

[Wino]

The problem is that airlines are hostages to the lowest fares.

If they raise ticket prices by 10 dollars, 10 measly dollars, if no on else goes along with it, then the flight doesn't even make it onto the first couple of pages of the internet ticket services (where most of the tickets are booked) Its like the flight doesn't even exist, and loads fall to zero.

Cheers
Wino

[airfoilmod]

Astute point. The Market will adjust. Aviation for some reason known to all but not generally discussed, has excellent technology in flight ops and neanderthal thinking in the Front office. Most markets are not only agile enough to react to conditions, but also exhibit some vision and proactively spank the audience into novel thinking and usage. In Aviation, Fuel prices need to be punitive forever before a decision can be made, and only then the carrier wants to fire and hire several dozen managers before a tentative call will be gingerly employed. Labor Relations, commodity flow, marketing and ops are what, 50 years behind the times? I wear a Rolex, the Ceo wears a Sundial.

(What part of "stop the Bleeding" do you not "get").