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Speculation from the Boyd Group of Denver about what the US airline industry will look like with oil making new highs. There has been much speculation about mergers in the US airline industry, all intended to reduce capacity, which would allow the surviving airline to raise prices. If industry consolidation can't happen for whatever reason, then the airlines will begin reducing capacity unilaterally.
If this pace continues, then airline flying will be what it was in the 30's and 50's; the preserve of the wealthy. No more weekend getaways to Vegas, etc.
Perhaps the beneficiaries of airline cutbacks will be the rent-a-car companies and those companies providing virtual conferencing.
Interesting Boyd Group Article
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At $110 Oil - There's No Easy Way Out. Airline Market Planning Hits The Rewind Button Tumble to it: from every financial and strategic perspective, the airline industry's just gotten nuked. The reality is that $100+ oil is not going away. A lot of airplanes and a lot of markets are now well below the financial waterline. That by itself means that much of the air transportation system - as currently structured - is essentially non-economic. Going forward, a lot of things are going to be different. Schedules, market flows, and fleets need to be re-structured... and fast. There's no time for airlines to form vapid task teams and engage in backroom political posturing. The bomb's been dropped, and the financial neighborhood they've known for the last 20 years has been vaporized. This is not a cyclical change. It's one that dictates a whole new approach to the US air transportation system. Add to this the possibility of a consumer downturn (albeit at least partially created by sensational media reporting with no basis in fact) and one thing is clear. It's DEFCON 1 time for the US airline industry.
One key competitive factor: leadership and vision in the airline front office. Just as doing nothing can be lethal, so can doing the wrong things. Airlines with the strongest, most decisive and most focused CEOs are those which have the best chances of crafting solutions for the future. Those few carriers with CEOs who wait to get cribsheets from outside advisors before making a decision are essentially deer in the financial headlights. And they'll probably make the wrong decisions, anyway. Air Transportation System: Shrinking Fast. The point is that constriction, not consolidation, may be at immediate hand. That's because at $3+ a gallon jet-A, the number of communities that can be economically served - regardless of the number of airlines in existence - is going to drop like a baby grand off the 43rd floor. As our Global Fleet Forecast has noted, not one airliner in the US skies was designed with $100 oil in mind. Consolidation of airlines may or may not occur. Eventually. What is certain, however, is the near-term reduction in air service levels. What's also certain is that several cost components of the airline business will need to change very quickly, or we're going to see not just less flying, but less airlines - mergers or not. One of these, as we pointed out last week, is the imperative to shed large numbers of RJs that are being leased on a fuel-cost-plus basis. Delta has already announced the end of RJ service to SLC from BLI and FAR, as well as ATL RJ service to ISP and ACY. And these are likely just the warm-up act to one whale of a chainsaw application to the air service network as we know it today.
Another outcome may be the acceleration in retirement of older, paid-for mainline aircraft that were previously expected to remain in-fleet for the next several years. Running Full Airplanes And Bleeding Cash. The fact is that fuel costs have come over the transom in many markets that may have until recently been system-revenue contributors. An Airports:USA® flow analysis of ISP-ATL directional traffic and revenue indicates clearly why Delta has no choice but to dump the route as quickly as possible. These data are from analyses of 3Q 2007, factoring in estimates of current fuel costs. Thin is the only way of putting it. Considering that almost two-thirds of the ISP-ATL passengers are connecting to other flights, the system contribution is microscopic, if at all, particularly when spill is factored in. When the ASM costs may be pushing 17 cents or higher, even with an 83%-plus load factor, the combination of escalating fuel prices and the fact that much of the flow traffic is connecting on to other high-cost flights, we have a conclusion: the ISP-ATL market's become a threat to Delta, not an asset.
It's not just Delta. American, for example, is saddled with a fleet of 37-seat and 44-seat ERJs, which enjoy most of the sector costs of their larger 50-seat siblings. High fuel costs can be lethal to markets in all sectors of a comprehensive network carrier (CNC) system. That in turn is threatening to undermine one of the key advantages the comprehensive network carriers have had compared to LCCs: the flexibility to access stronger and more diverse revenue streams. Much of the new business-travel revenues are being generated from emerging secondary cities in the Midwest and the Deep South. They have small populations that are not supportive of larger units of capacity, but have new industrial plants that generate strong incremental domestic - and strong international - traffic. As smaller jets become increasingly non-economic, the ability of CNCs to access these revenues starts to go south, and fast. Then there's the "servo effect" of cutting hub spokes. There's less feed, and that means some diminution in revenue to other, currently-viable hub spokes. It weakens the entire system to one degree or another. After 50-Seaters, The Next Plane Up Is 130+ Seats. Maybe. There's no question that RJ
economics have been going in the wrong direction for years. The Boyd Group accurately forecast a glut of these machines well before OPEC and hedge funds started to get frisky with oil price games.
But the real danger now is that most US carriers are stuck with the "100-seat capacity gap." Take American. As 50-seat (and smaller) jets gravitate toward the operational dog pound, the smallest pieces of iron AA has are 140-seat MD-80s. (Give or take the miniscule Eagle fleet of 25 CRJ-700s.) That describes a decision conundrum that's pretty ugly. AA can operate markets with RJs that provide negative system margins, or operate them with airliners way too large and too sector-cost expensive, or drop such markets entirely. This also points to the possibility of AA retiring a number of MD-80s (nee "Super-80s") from its fleet to cut costs. Or NW suddenly slashing out the last of its DC-9s from its fleet. (Note that these are the mainstay of the NW focus operation at IND, along with CRJs. Conclusions can be drawn.)
Air Traffic Control Hit: Time Just Ran Out. The airline industry is not entirely the victim in this mess. The industry has known for decades that the deteriorating ATC system was costing it billions annually - excess costs that today are contributing to the need to slash flying. In 1994, The Boyd Group testified to Congress regarding the enormous excess cost burden being inflicted on airlines due to the obsolete and deteriorating ATC system. The bottom line then was $5 billion in excess costs, all up. Internal studies by United and American indicated around $1 billion being drained just from those two carriers. Along with the ATH Group, we noted that airline CEOs should "form a conga line" into the FAA Administrator's office, demanding action. Their companies and their passengers were being materially harmed by the lack of ATC progress at the FAA. That was 14 years ago. Nothing - yes, nothing - has been done to substantively address the ATC issue. It's gotten worse and worse year after year. And far from a conga line, the airline industry took the role of cheerleader on the cocktail-party circuit for a succession of Administrators whose main claim to fame is that they consistently accomplished nothing. At the FAA, "nothing" is the operative word when it comes to ATC. Political correctness has a price - we estimate that the $5 billion is now around $9 billion. The FAA's NextGen scam is fully supported by the industry, which means they're several zip codes away from supporting anything but continued failure. But it's too late now. There's no fix on the horizon. The $9 billion that the airlines could be saving is still going down the financial garbage disposal.
Red Pencil Days In The Planning Department. Airlines have very little leeway. And very little time until the situation starts to punch serious holes in their cash piggy-banks. They can't do anything now about the 12% - 15% extra flying necessary to be scheduled due to ATC inefficiencies. Labor is in no mood for more concessions - quite the contrary. A lot of costs have already been cut in the wake of 9/11. The concept of dynamic management of the entire airline production line (such as the Attila(R) system from the ATH Group) is still foreign to most carriers. All this points to only one immediate option: cutting back on flying to cull a growing number of loss leaders such as FAR-SLC and ISP-ATL. Airline planners will be drawing red lines through a lot of markets in the weeks ahead. Partially or entirely shutting down wholly-owned small jet providers, such as Comair or American Eagle, is not out of the question. (And the potential for selling them off is zero. Let's get real. If they can't make money with these entities, an outside buyer can't, either.) It's possible that some current connecting hubs may be cut way back - maybe to the point of reducing a couple to being, at best, focus city operations. Some big announcements are likely. For mid-size and small airports, the next few weeks may not be much fun. Exciting. But not fun.
If this pace continues, then airline flying will be what it was in the 30's and 50's; the preserve of the wealthy. No more weekend getaways to Vegas, etc.
Perhaps the beneficiaries of airline cutbacks will be the rent-a-car companies and those companies providing virtual conferencing.
Interesting Boyd Group Article
-----
At $110 Oil - There's No Easy Way Out. Airline Market Planning Hits The Rewind Button Tumble to it: from every financial and strategic perspective, the airline industry's just gotten nuked. The reality is that $100+ oil is not going away. A lot of airplanes and a lot of markets are now well below the financial waterline. That by itself means that much of the air transportation system - as currently structured - is essentially non-economic. Going forward, a lot of things are going to be different. Schedules, market flows, and fleets need to be re-structured... and fast. There's no time for airlines to form vapid task teams and engage in backroom political posturing. The bomb's been dropped, and the financial neighborhood they've known for the last 20 years has been vaporized. This is not a cyclical change. It's one that dictates a whole new approach to the US air transportation system. Add to this the possibility of a consumer downturn (albeit at least partially created by sensational media reporting with no basis in fact) and one thing is clear. It's DEFCON 1 time for the US airline industry.
One key competitive factor: leadership and vision in the airline front office. Just as doing nothing can be lethal, so can doing the wrong things. Airlines with the strongest, most decisive and most focused CEOs are those which have the best chances of crafting solutions for the future. Those few carriers with CEOs who wait to get cribsheets from outside advisors before making a decision are essentially deer in the financial headlights. And they'll probably make the wrong decisions, anyway. Air Transportation System: Shrinking Fast. The point is that constriction, not consolidation, may be at immediate hand. That's because at $3+ a gallon jet-A, the number of communities that can be economically served - regardless of the number of airlines in existence - is going to drop like a baby grand off the 43rd floor. As our Global Fleet Forecast has noted, not one airliner in the US skies was designed with $100 oil in mind. Consolidation of airlines may or may not occur. Eventually. What is certain, however, is the near-term reduction in air service levels. What's also certain is that several cost components of the airline business will need to change very quickly, or we're going to see not just less flying, but less airlines - mergers or not. One of these, as we pointed out last week, is the imperative to shed large numbers of RJs that are being leased on a fuel-cost-plus basis. Delta has already announced the end of RJ service to SLC from BLI and FAR, as well as ATL RJ service to ISP and ACY. And these are likely just the warm-up act to one whale of a chainsaw application to the air service network as we know it today.
Another outcome may be the acceleration in retirement of older, paid-for mainline aircraft that were previously expected to remain in-fleet for the next several years. Running Full Airplanes And Bleeding Cash. The fact is that fuel costs have come over the transom in many markets that may have until recently been system-revenue contributors. An Airports:USA® flow analysis of ISP-ATL directional traffic and revenue indicates clearly why Delta has no choice but to dump the route as quickly as possible. These data are from analyses of 3Q 2007, factoring in estimates of current fuel costs. Thin is the only way of putting it. Considering that almost two-thirds of the ISP-ATL passengers are connecting to other flights, the system contribution is microscopic, if at all, particularly when spill is factored in. When the ASM costs may be pushing 17 cents or higher, even with an 83%-plus load factor, the combination of escalating fuel prices and the fact that much of the flow traffic is connecting on to other high-cost flights, we have a conclusion: the ISP-ATL market's become a threat to Delta, not an asset.
It's not just Delta. American, for example, is saddled with a fleet of 37-seat and 44-seat ERJs, which enjoy most of the sector costs of their larger 50-seat siblings. High fuel costs can be lethal to markets in all sectors of a comprehensive network carrier (CNC) system. That in turn is threatening to undermine one of the key advantages the comprehensive network carriers have had compared to LCCs: the flexibility to access stronger and more diverse revenue streams. Much of the new business-travel revenues are being generated from emerging secondary cities in the Midwest and the Deep South. They have small populations that are not supportive of larger units of capacity, but have new industrial plants that generate strong incremental domestic - and strong international - traffic. As smaller jets become increasingly non-economic, the ability of CNCs to access these revenues starts to go south, and fast. Then there's the "servo effect" of cutting hub spokes. There's less feed, and that means some diminution in revenue to other, currently-viable hub spokes. It weakens the entire system to one degree or another. After 50-Seaters, The Next Plane Up Is 130+ Seats. Maybe. There's no question that RJ
economics have been going in the wrong direction for years. The Boyd Group accurately forecast a glut of these machines well before OPEC and hedge funds started to get frisky with oil price games.
But the real danger now is that most US carriers are stuck with the "100-seat capacity gap." Take American. As 50-seat (and smaller) jets gravitate toward the operational dog pound, the smallest pieces of iron AA has are 140-seat MD-80s. (Give or take the miniscule Eagle fleet of 25 CRJ-700s.) That describes a decision conundrum that's pretty ugly. AA can operate markets with RJs that provide negative system margins, or operate them with airliners way too large and too sector-cost expensive, or drop such markets entirely. This also points to the possibility of AA retiring a number of MD-80s (nee "Super-80s") from its fleet to cut costs. Or NW suddenly slashing out the last of its DC-9s from its fleet. (Note that these are the mainstay of the NW focus operation at IND, along with CRJs. Conclusions can be drawn.)
Air Traffic Control Hit: Time Just Ran Out. The airline industry is not entirely the victim in this mess. The industry has known for decades that the deteriorating ATC system was costing it billions annually - excess costs that today are contributing to the need to slash flying. In 1994, The Boyd Group testified to Congress regarding the enormous excess cost burden being inflicted on airlines due to the obsolete and deteriorating ATC system. The bottom line then was $5 billion in excess costs, all up. Internal studies by United and American indicated around $1 billion being drained just from those two carriers. Along with the ATH Group, we noted that airline CEOs should "form a conga line" into the FAA Administrator's office, demanding action. Their companies and their passengers were being materially harmed by the lack of ATC progress at the FAA. That was 14 years ago. Nothing - yes, nothing - has been done to substantively address the ATC issue. It's gotten worse and worse year after year. And far from a conga line, the airline industry took the role of cheerleader on the cocktail-party circuit for a succession of Administrators whose main claim to fame is that they consistently accomplished nothing. At the FAA, "nothing" is the operative word when it comes to ATC. Political correctness has a price - we estimate that the $5 billion is now around $9 billion. The FAA's NextGen scam is fully supported by the industry, which means they're several zip codes away from supporting anything but continued failure. But it's too late now. There's no fix on the horizon. The $9 billion that the airlines could be saving is still going down the financial garbage disposal.
Red Pencil Days In The Planning Department. Airlines have very little leeway. And very little time until the situation starts to punch serious holes in their cash piggy-banks. They can't do anything now about the 12% - 15% extra flying necessary to be scheduled due to ATC inefficiencies. Labor is in no mood for more concessions - quite the contrary. A lot of costs have already been cut in the wake of 9/11. The concept of dynamic management of the entire airline production line (such as the Attila(R) system from the ATH Group) is still foreign to most carriers. All this points to only one immediate option: cutting back on flying to cull a growing number of loss leaders such as FAR-SLC and ISP-ATL. Airline planners will be drawing red lines through a lot of markets in the weeks ahead. Partially or entirely shutting down wholly-owned small jet providers, such as Comair or American Eagle, is not out of the question. (And the potential for selling them off is zero. Let's get real. If they can't make money with these entities, an outside buyer can't, either.) It's possible that some current connecting hubs may be cut way back - maybe to the point of reducing a couple to being, at best, focus city operations. Some big announcements are likely. For mid-size and small airports, the next few weeks may not be much fun. Exciting. But not fun.
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