Wednesday, May 5, 2010

Deregulation and the Last Chapter of Consolidation

It's the Summer of 1978... Most of the original players in the airline industry are still alive and well. The four largest carriers domestically (by passengers carried) are United, American, Eastern, and TWA. Pan Am and TWA are the country's international flag carriers. Other "smaller" majors include Delta, Northwest Orient, Braniff, National, and Western. The "regionals" are Piedmont, Ozark, Southern, Hughes Airwest, Allegheny, Air Florida, North Central, Air California, PSA, Alaska, Texas International, Frontier and Wien. Hubs are present but they are yet to be officially termed "hubs". Flash forward to October of 1978. A major act of Congress has been passed that will reshape the entire industry. Call it survival of the fittest or
call it whatever you want, but The Airline Deregulation Act of 1978 set the stage for where the industry has fundamentally found itself today. The irony is that The Act was intended to "open the skies" nationwide to unrestricted competition. And it did to some extent. Gone are the days when Eastern and National ruled the northeast to Florida corridor. And when American, TWA, and United called the transcontinental routes their own. The Act was to "encourage" the old guard mainline carriers to become more efficient and competitive. The Act was suppose to create a national transportation system with multiple options for travelers that would lead to lower fares. I was fortunate to have had Dr. Alfred Kahn, the leading government economist and the father of deregulation himself explain this to me personally on a flight in 1985. He stated that "in the end, deregulation will be seen as a positive for competition, and more importantly for the consumer. It's now 2010, and thirty-two years after the Carter Administration passed The Act, almost all of the airlines mentioned above are gone. Yes, the current survivors are more efficient than they were thirty years ago, but one can argue that industry conditions (recessions, oil, 9/11, etc.) forced the efficiency - not deregulation. Yes, deregulation in concept has produced the likes of JetBlue, Airtran, and a "grown-up" Southwest. But what about PeoplExpress, Laker, Midway, Independence, and the many others ? They are long gone. So, in reality the concept of deregulation producing a "plethora" of low-fare carriers has been a myth. And with the announcement of the United-Continental merger, along with the 2008 Delta-Northwest marriage, and an expected move by American, we will likely finish the chapter with three mainlines, five low-costs, and the regionals. In 1978 we had ten large carriers and fifteen smaller ones. So, it would seem that in the last chapter of the fairy tale that we call deregulation, the outcome is an environment that it's authors would have never envisioned. You be the judge.



1978 U.S. Airlines

United

American

Eastern

TWA

Pan Am

Delta

Northwest Orient

Braniff

National

Western

Piedmont

Ozark

Southern

Hughes Airwest

Allegheny

Air Florida

North Central

Air California

PSA

Alaska

Texas International

Frontier

Wien

Hawaiian

Aloha

1978 TOTAL = 25 (+Commuters)

2010 U.S. Airlines

United/Continental

Delta

American

Southwest

US Airways

JetBlue

Alaska

Republic (Frontier)

AirTran

Hawaiian

2010 TOTAL = 10 (+Regionals)

Tuesday, May 4, 2010

First Quarter 2010 U.S. Airline Financials

Sometimes in the airline industry we encounter a quarter that gives an accurate snapshot of where each carrier is in the current environment. The first quarter of 2010 did just that. On the positive side, total revenue and revenue per available seat mile (RASM) has continued a healthy climb through the quarter. Capacity (ASM's) has continued to remain in check producing the healthy revenue picture. On the downside, oil prices spiked to an average of $78 per barrel in the quarter compared to the $40 range a year earlier. There were also revenue losses from the severe snow events during the period. To sum it up, if not for good capacity control leading to higher fare levels and the economic recovery, then higher energy prices and of course the weather would have produced a more dismal outcome. Another interesting observation during the quarter was evidence of legacy cost reduction by those carriers who took advantage of the bankruptcy process during the last decade or earlier. The bankruptcy participants: United (one filing), Delta (one filing), US Airways (two filings), and Continental (two filings - 1982 and 1990), all have seen core legacy expense reduced substantially. Compare those results to American who did not participate in the bankruptcy process. American is in a tough spot. While cash balance (for now) is adaquate, its overall cost structure is on the high side. It still has substantial pension liability and is highly leveraged. It requires high fares and low oil prices just to approach break-even, let alone make an acceptable profit to pay down debt and remain competitive. American is also in tense contract negotiations with it's unions as they seek (and rightfully so) a fair return on concessions given during the last several years. American is expected to produce losses for the remainder of 2010, while the rest of the industry is expected to return to the black. Assuming that oil prices remain at the current level or lower, and the economy continues it's climb, we should see healthy results for the remainder of 2010. Finally, a true recovery may be at hand.



Q1 2010 FINANCIAL RESULTS:
  • DELTA: Revenue=$6.8 billion (+2.0%), Net Loss=$266.0 million
  • AMERICAN: Revenue=$5.1 billion (+4.7%), Net Loss=$505.0 million
  • UNITED: Revenue=$4.2 billion (+15.0%), Net Loss=$92.0 million
  • CONTINENTAL: Revenue=$3.2 billion (+7.0%), Net Loss=$146.0 million
  • SOUTHWEST: Revenue=$2.6 billion (+11.6%), Net Profit=$11.0 million
  • US AIRWAYS: Revenue=$2.6 billion (+7.9%), Net Loss=$45.0 million
  • JETBLUE: Revenue=$870 million (+10.0%), Net Loss=$1.0 million
  • ALASKA: Revenue=$830 million (+8.0%), Net Profit=$13.0 million
  • SKYWEST/ASA: Revenue=$632.2 million (-9.3%), Net Profit=$15.0 million
  • REPUBLIC: Revenue=$608 million (+87.0%), Net Loss=$36.0 million
  • AIRTRAN: Revenue=$605 million (+11.7%), Net Loss=$12.0 million
  • HAWAIIAN: Revenue=$298.0 million (+9.0%), Net Profit=$216,000
  • PINNACLE: Revenue=$208.0 million (+0.9%), Net Profit=$1.7 million
  • EXPRESSJET: Revenue=$189.2 million (+11.5%), Net Loss=$16.1 million
  • ALLEGIANT: Revenue=$169.6 million (+19.4%), Net Profit=$22.6 million

*Net amounts include extraordinary items, all figures obtained from wire reports