Dick,
I believe that the business market will decline slightly as business travelers consolidate trips to save expenses but will continue to travel at a fairly normal rate. On the other hand, the leisure travel will decline significantly. Both younger travelers and older retirees will cut back or stop flying all together. This condition will continue for the next 12 to 18 months. After this period, travel will adjust to the new fare structures and I believe we will see some return to more normal levels. However, traffic will not return to the full level for the next several years. In the long run, I still believe MSP will reach 45-50 million passengers per year by 2025 if Delta treats MSP as a major hub and grows with the market.
Jeff
Airlines - Sunset Industry?
Monday, June 23, 2008; Posted: 08:30 AM
© 2008 The Connors Group, Inc.
(RTTNews) - The beleaguered U.S. airline industry is struggling to make
a 'safe landing' in a turbulent air of financial and operational crisis.
Fleet cancellations, grounding of planes, massive workforce reduction
and bankruptcy filings are among the problems that are compounded by the
skyrocketing of fuel prices. Adding oil to the fire, consumer confidence
and travel demand have been receding, reflecting the slowdown in the
overall economy.
Fuel expenses of major airlines, which control 71% of the U.S. market
share, increased 128% since 2000 to $27.6 billion in 2007. During
this seven-year period, capacity as measured by Available Seat Miles
decreased 7% and operating revenue remained nearly the same at about $95
billion. The industry has laid off nearly four out of 10 of its
employees over the years. The carriers have also defaulted on about $20
billion worth of pension payments.
Airline Industry - Evolution
The U.S. airline industry was deregulated in 1978 following the Congress
passing the Airlines Deregulation Act. Prior to the deregulation, the
Civil Aeronautics Board controlled routes as well
as ticket prices.
Following deregulation, the industry flourished with the number of
passengers carried rising manyfold. In the early years of deregulation,
there was intense competition among established airlines and from
new entrants as well as from carriers formerly confined to intra-state
markets. In the mid-to-late 1980s, there was a wave of industry
consolidation. The major carriers developed a powerful hub-and-spoke
networks system that secured them monopoly over certain airports and
regions.
However, coinciding with the Gulf War and the economic recession in the
early 1990s, the industry went into a slump, when airlines like Pan
American and Eastern disappeared. A few gusty players like Continental
Airlines Inc. and TWA, meanwhile, sought protection under Chapter 11
bankruptcy.
Although low cost carriers operated without much success and were
assimilated by the bigger carriers, the emergence of Southwest Airlines
Co. as a discount carrier in
the late 1990s sent tremors down the spine of the major operators.
Southwest's success rested on its strategy of averting a head-to-head
showdown with the major carriers and the usage of second tier airports
near the biggest cities. It also hedged most of its fuel requirements
and purchased fuel options years in advance to smooth out fluctuations
in fuel costs. In the years 2001, 2002 and 2003, Southwest reduced its
annual fuel expense by $171 million, $45 million, and $80 million,
respectively, through its fuel hedging operations. The company hedged
95% of its fuel usage at $50 a barrel in 2006 and nearly 70% of its
fuel requirement at about $51 per barrel in 2007.
In 2000, just as the industry was emerging from a slowdown, it entered into another
downturn in 2001. In the period between 2001 and 2004, the industry
turned in net losses of $32.1 billion, pressured by an economic slowdown
in 2001, the SAARs epidemic, intense competition, the aftermath of the
September 11 attacks and a rise in oil prices. During this period, the
average crude oil price rose about 60%.
Fuel Price Impact
Of late, jet fuel prices are hovering near new record highs due to
higher prices of crude oil, which in turn, some say, is driven higher by
speculation and fears of supply disruptions. The airline industry
purchases about 80% to 95% of its jet fuel requirements directly from
refiners on a formula pricing basis.
In the week ended May 30, the price of jet fuel was $160.7 a barrel, a
12.6% rise from April and a 90% increase from the same period last year.
Nevertheless, the price represented a 6.5% decline from the week ended
May 23rd.
Meanwhile, July crude rose $3.90 to $135.83 a barrel on the New York
Mercantile Exchange on Friday amid supply jitters following news that
Israel practiced an attack on Iran's nuclear sites. Last Monday, crude
for July delivery had settled at a record $139.89 a barrel.
According to the International Air Transport Association, or IATA, which
represents about 230 airlines globally comprising 94% of the scheduled
international air traffic, jet fuel price would average around $131.5
per barrel in 2008, adding $74 billion more to the 2008 fuel bill of
airlines.
In 2007, worldwide airline operators' fuel expenses were $136 billion,
roughly 29% of their total operating expenses. In 2006, the fuel bill
reached $111 billion, accounting for 26% of the industry's total
operating expenses. In 2005, fuel expenses, representing 22% of
operating expenses, rose to $90 billion from $61 billion a year ago.
U.S. airlines' recent quarterly results reflect the impact of soaring
fuel prices on their earnings. Continental, JetBlue, Delta, Northwest,
United and U.S. Airways reported losses for
the first quarter, primarily due to high fuel costs. Revenue growth and
cost control measures did not help United and JetBlue to weather the
weakness induced by higher fuel costs. Delta, which emerged from
bankruptcy in 2007, incurred a goodwill impairment charge of $6.1
billion relating to a decline in the company's market value due to a
surge in crude prices to fresh records. Southwest was the only airline
to post a profit, though lower than the year-ago period, reaping the
benefit of its fuel-price hedging.
Other Costs and Bottlenecks
Other than fuel costs, the airline sector is paying several charges and
fees relating to airport, Air Traffic Control and taxation, all of which
are increasing. These infrastructure charges form the second largest
external cost to airlines after fuel. Worldwide, airlines pay at least
$43.5 billion a year to airports and Air Navigation Service Providers,
or ANSPs, or about 11% of airline revenues. The aviation industry is
also highly taxed in comparison to other transport modes.
(Editor's Note: But airlinss pass on these charges to their customers, just
as most other industries routinely do.0
Further, the industry is facing pressure from Government agencies and
policy makers to harness technology to meet new environmental
challenges, as technological improvements can play a major part in
reducing the "carbon footprint" of the aviation industry. Aviation is
under the spotlight of environmental groups because it is one of the
most rapidly growing sources of greenhouse gases.
Also, the sector has recently witnessed several unexpected groundings
and flight cancellations due to safety issues and functional checks
following a crackdown by the Federal Aviation Administration (FAA).
The agency has been auditing airline maintenance records following the
discovery of fuselage cracks in four planes of Southwest in mid-March.
FAA directive has ordered the nation's airlines to inspect their older
Boeing 737 jets for problems.
The latest in a series of grounding of aircraft by United Airlines,
in April, delayed or cancelled flights due to a functional check ordered on all 52 of its Boeing 777
aircraft.
Prior to that, American Airlines canceled most of its Boeing MD-80 flights
for FAA-ordered inspections. About 171 of the airline's 2,200 daily flights
were canceled, while about two-thirds of its 300-plane MD-80 fleet was
temporarily grounded.
Delta had revealed the cancellation of about 275 flights for a voluntary
safety review. Meanwhile, the National Transportation Safety Board, or
NTSB, has been investigating the separation of a composite panel from
the wing of a Boeing 757 aircraft of U.S. Airways on the route from
Orlando, Florida, to Philadelphia, Pa.
U.S. airlines lost $26.5 billion in 2007 as air travelers
made about 41 million fewer trips due to frustrations stemming from
unexpected cancellations and delays and inefficient security screening,
according to a survey by the Travel Industry Association, or TIA. This
is not a small amount for the aviation sector and the economy,
especially when both are trying to find equilibrium in a tough time. The
survey also showed that nearly 50% of air travelers felt the air
travel system was not likely to improve in the near future. Monthly load
factor and traffic data reported by many airlines reveal the impact of
this decline in passenger numbers.
According to Roger Dow, president and CEO of
TIA, the crisis has hit a tipping point, with more than
100,000 travelers each day voting with their wallets by choosing to
avoid trips. He also said that the time is up for a meaningful reform in
the airline sector.
Hard Steps
With rising fuel costs, the market recession in the U.S, and intensified
competition, the only way for airline operators to limit losses
is under way: capacity reduction and maximum efficiency gains.
With oil hovering near $140 a barrel, many have announced plans to cut service
another 12% this fall after 10% reductions six months earlier. Some analysts are
calling for an overall 20% reduction in industry service to stem red ink.
Continental's chairman and chief executive Larry
Kellner recently declared. "The airline industry is in a
crisis. Its business model doesn't work with the current price of fuel
and the existing level of capacity in the marketplace. We need to make
changes in response." The company has decided to cut 3,000 jobs and pull 67 older,
less fuel-efficient jets out of service. In the first six months of
2008, Continental removed six older aircraft from service.
Just a day before Continental's announcement, United said that it is
planning to cut as many as 1,600 workers and ground 100 airplanes in its
struggle for viability. United has also hiked domestic fares up to $60
round trip to mitigate the impact of higher fuel prices.
The hard steps taken by Continental and United were followed by American
Airlines, which will reduce domestic capacity by
11% to 12% in the fourth quarter and retire about 75 airplanes, while
cutting several thousand jobs. The company has also begun charging $15
for the first piece of checked luggage on domestic flights. Meanwhile,
Delta plans to reduce capacity by about 10% and slash 3,000 jobs.
Last week, U.S. Airways revealed additional
domestic capacity reductions, eliminating about 1,700 positions and
implementing several new revenue initiatives. The
company's domestic mainline capacity for 2009 is proposed to be reduced
by 7% to 9% over 2008. Additionally, U.S. Airways plans to
introduce a first-checked-bag service fee of $15 and a new in-flight
beverage purchase program.
Northwest Airlines has announced a series of capacity reductions for the second time this year. The company will reduce its
consolidated capacity by 3% to 4%, mainline capacity by 8.5% to 9.5% and
domestic capacity by 7% to 8%. Earlier, in April, the airline had
indicated a 5% reduction in its scheduled domestic system capacity over
the 2008 business plan. In May, the company started collecting fees for two or more checked bags. On June 26, it announced suspension of its two-month-old Minneapolis-Paris nonstop flight this fall, and will terminate Detroit-Dusseldorf and Hartford-Amsterdam service this fall.
Additionally, many carriers have cancelled orders for new aircraft.
JetBlue said it will delay buying 21 new Airbus jets for four to five
years. Qantas Airways also has cancelled an order for a new Airbus jet.
Airbus said recently that it expects more cancellations and
postponements for aircraft orders as carriers lower capacity.
Meanwhile, beginning June 1, the world's leading airlines have switched
to e-ticketing, which translates into major cost savings in terms of
paper. According to industry observers, airline should emulate
e-commerce companies and increase the number of services they offer
online, such as travel insurance, hotel reservations and rental cars,
all services available to passengers after booking a ticket. It broadens
the revenue base.
Further, in an effort to tackle fuel price costs, Continental and United
have announced a framework agreement that would link their networks and
services worldwide to create revenue opportunities and cost savings.
Additionally, Continental plans to join the Star Alliance that will
allow the airline to cooperate with other airlines in international
regions.
Mergers and Bankruptcy Filings
As the global aviation sector is waging a war for survival, more mergers
and bankruptcies are likely, according to Willie Walsh, the chief
executive officer of British Airways.
"I suspect that many airlines out there that struggled when fuel was
less than $100 a barrel are not going to be able to take the required
actions and we will see further failures," Walsh said.
Seven airlines have failed in the last five months, including Oasis Hong
Kong Airlines Ltd., Skybus Airlines Inc., Frontier Airlines Holdings
Inc., Silverjet Plc and Aloha Airlines. Frontier Airlines and ATA
Airlines filed for bankruptcy in April.
A Chapter 11 bankruptcy filing, which is considered as a painless
bailout strategy, would mean the unsecured bond holders of the company
are likely to lose about 90% of the value of the security. Ironically,
the fact is that none of the airlines had filed for bankruptcy before
the deregulation.
Also, the recent $17.7 billion merger agreement between Delta and
Northwest reflect the aviation industry's largely unsuccessful efforts for combinations
that deliver effective cost synergies and additional profit. Many fail on the rocks of unresolved culture issues that affect customer service. The Delta/NWA merger's proposed billion-dollar cost savings are being challenged by many investors as insufficient to cover the recent 60% rise in jet fuel prices.
Just a day after the Delta-Northwest merger deal announcement,
Continental Airlines said that it is looking at strategic alternatives.
Continental backed away from a rumored merger plan with United. But the two firms have held
discussions about forming an alliance to secure some benefits of working
together without actually going into a merger. There was also media
speculation that United was pursuing talks with U.S. Airways. However,
a report May 30 suggested that United's
officials have decided not to continue the negotiations.
Industry experts believe that, apart from the Delta-Northwest deal, no
mergers among U.S. carriers are likely to take place until 2009.
However, days of some sort of "combined action", including a strategic
amalgamation or sharing of common amenities, are not very far off, some say.
Further, the recent "Open Skies" agreement between the U.S. and the European
Union is expected to open new transatlantic service. The new
deal allows flights from Europe to fly directly to their U.S.
destinations, ending the previous practice tht required governments on both sides of the Atlantic to
negotiate access for airlines to airports on a city-by-city basis.
Continental, Delta and Northwest have already
added flights to London's Heathrow International Airport.
Also, changes in rules limiting foreign ownership of U.S. airlines is a
major agenda in the "Open Skies" agreement. Liberalizing the cap of 25%
would give carriers another source of potential capital. German carrier
Lufthansa's purchase of 19% stake in JetBlue earlier this year is seen
as a movement in this direction. As per reports, Air France-KLM has
contemplated the possibility of making an investment in Delta.
Weakening 2008 Outlook
With the relentless rise in fuel costs, IATA now expects the airline industry to
lose upwards of $2.5 billion in 2008, compared with a profit of $5.6 billion in 2007. If fuel costs continue to rise, the loss could widen to $5 billion, IATA
IATA also believes that assets owned by airlines in other
sectors, which have provided a cushion, would not act as a savior this
year. This source of cash may diminish in 2008 as the crisis in the
financial market makes asset sales more difficult, the firm noted.
Stock Performance
Reflecting the turmoil in the sector, airline stocks have declined more
than 22% in the last three-month period. UAL, U.S. Airways and AirTran
Holdings Inc. were the biggest losers, with their stocks plunging 69%, 64% and 57%,
respectively. Meanwhile, shares of Southwest gained over 15% during the
period.
Tough Time Ahead
Few analysts are very optimistic about the immediate future, fearing that the massive job cuts
and layoffs will make the coming years the worst for the industry since 2001.
"Nobody right now has a viable long-term business plan," said Darryl
Jenkins, a Virginia-based airline industry observer. According to him,
the cuts should have been made years ago. Meanwhile, in spite of the aforementioned criticism,he highlighted the deal between Delta and Northwest as the future business model for legacy carriers.
Certain industry experts foresee the industry having to cut more than 60,000 jobs
in 2008. Additionally, with fuel prices showing no signs of decline, passengers have seen ticket prices rise 30% since the first of the year, and may need to face further increases of up to 20% before many airlines can begin a recovery, says Doug Steenland, outgoing CEO of Northwest.
However, recently, brokerage Lehman Brothers upgraded the U.S. airline
sector to "positive" from "neutral," saying the industry restructuring
was coming at an accelerated pace. "We see real value in the capacity
reductions now under way and believe it is time for investors to revisit
the airline space," analyst Gary Chase said.
"We believe a compelling survivor play is developing,"
Chase said. "If nothing changes, bankruptcy risk is significant for the entire industry. It is for that
very reason, however, that we believe significant changes must, and
ultimately will, happen." Chase believes that the industry may
need to access almost $3 billion in new equity in the coming 12 to 18
months to stabilize its liquidity positions.
Analyst Michael Derchin of FTN Midwest Securities in New
York also suggest that there is still a ray of hope. If the strategies
are effective, 2009 will possibly be a turnaround year and 2010 a
solidly profitable one as actions start to bear fruit, assuming oil
stabilizes at high levels, Derchin said.
Southwest's new Chairman Gary Kelly is also optimistic that the industry
will rebound. "As they have in past downturns, the best airlines, large
or small, legacy or low-cost, will adjust," Kelly said. He believes
there is a very high demand for air travel, and if improvements can be
made, demand will be even higher. However, "there is not going to be
instant gratification," Kelly added.
Comments (0)
You don't have permission to comment on this page.