US majors are looking for new tools to achieve a repeat of last year's strong performance
Few US airline executives are celebrating their relatively strong showing for the year 2007. Although earnings have just been tallied, 2007's optimism is already an old story, with this year poised to wipe out all the good work. After a year of truly strenuous cost cutting and reworking almost every aspect of their operations to meet rising fuel costs, managers now face more of the same challenges but no new tools to meet the challenge.
Worse, the US economy is slowing, no matter how optimistic executives are, and so the biggest tool in the toolbox, capacity cuts, may not be enough. Hence the industry is focusing on consolidation as a tactic.
Consolidation
The one chief executive of the only US airline that has had real recent experience of blending airlines, US Airways head Doug Parker, has some thoughts worth considering. More than two years after Parker's America West bought US Airways and brought it out of bankruptcy reorganisation, and just over a year after Parker made an unsuccessful unsolicited bid for Delta Air Lines, the combined US Airways is still grappling with blending the two carriers and faces labour difficulties over a combined pilot unions contract that is still under negotiation. Even with a post-merger slice of 15% out of the carriers' combined networks, the airline faces the same issues as every other US carrier.
Parker warns that rising fuel prices could in effect wipe out all of the good work of the last year, saying: "If oil prices stay where they are, where the current foreign curve is, we project our fuel expenses will be about $800 million higher than they were in 2007, and while we really haven't seen anything yet in terms of our bookings, we certainly read enough about a slowing economy that gives us cause for concern about our ability to pass along $800 million in higher fuel prices to our customers."
Indeed, the annual fuel bill for US passenger and cargo airlines is approaching $40 billion this year, more than double the $15.2 billion expense in 2003, according to the US Air Transport Association. Worse, fuel prices over the last several years have increased while domestic fares have decreased, ATA chief economist John Heimlich says.
Through last year, for example, domestic fares were down 9% from 2000, while jet fuel more than doubled in price, according to ATA statistics.
Uncertainty about fuel costs is counterbalanced by the fact that few carriers have yet to encounter first-hand evidence of the slowdown. Heimlich says that some anecdotal evidence of yield strength had emerged in mid-February, and suggests that the carriers have shown enough capacity discipline that they can manage their way toward profits - "unless oil goes and stays firmly above $100 a barrel for the full year". Heimlich adds: "They've shown they can do it", and thinks that 2008 could be the third year for an annual industry profit, or a "three-peat".
At US Airways, yield prospects remain strong and Parker told analysts that first quarter unit revenues could increase at a faster rate than the fourth-quarter's 3.9% growth for passenger unit revenues.
Better than expected
At United, chief executive Glenn Tilton says yields are looking to continue to be strong and "he likes what he sees". At Continental, "demand throughout all regions remains strong and yield continues to run higher than last year", executives said.
Still the capacity cuts get deeper. For instance, Alaska Airlines has its eye on costs. It is planning to complete the phase-out of its remaining 14 Boeing MD-80s this year, accelerating the retirement dates for two of these aircraft.
"We're looking at the fall schedule now to see if there are further opportunities to pare unprofitable flying and perhaps retire some of the MD-80s a couple of months sooner than currently planned," Brad Pedersen, Alaska's vice-president of finance, told analysts on a recent conference call.
Both United and Continental are also looking at capacity cuts, with Continental having taken about 13% out of its mainline last year and planning to take at least a half percent out of mainline capacity this quarter. United is looking at cuts of 3.5-4.5% in its domestic capacity, while Delta will shrink domestic capacity by as much as 5% this year.
Still, with the twin question marks of the price of oil and the economy, will capacity cutting be enough - either with or without consolidation?
Source: Airline Business
