Many industries were battered by the economic recession and credit crisis over the past several years. And the airline industry was one that was very hard hit. Some estimates peg the global losses for the airline industry at around $30 billion for 2008 and 2009. Business travel was significantly cut back by companies looking for ways to save money. Consumers significantly trimmed vacation plans. Airlines were forced to cut routes and capacity. They grounded lots of planes.
So, if you think the economy is rebounding and that businesses and consumers alike are getting ready to spend more travel money, the cyclical airline business is one place to invest. But now, there will be another alternative way to bet on an airline recovery – and one that may show less volatility in its business.
Southwest’s proposed $1.4 billion acquisition of rival AirTran wil certainly be about cost savings – the two discount carriers operate in many of the same cities. But for Southwest, it will also mean serving markets it is not in, and that includes international for the first time.
AirTran currently flies to a few places in Mexico, Aruba and Jamaica and this acquisition takes Southwest into a new direction. In addition, it gets into Atlanta via this acquisition – right into Delta Airlines’ backyard. Toss in Miami and Washington Reagan. And an expanded presence in New York at LaGuardia airport. And you can see why this was such an attractive target for Southwest.
This falls into the category of “don’t they ever learn?”
Airline stocks were weaker on Monday after Delta Airlines reported earnings. It wasn’t the gains in income and sales that had investors worked up – the same gains that had CEO Richard Anderson declare: “Delta’s profit this quarter is our best result in a decade.” No, it was a declaration by the company that its mainline business (it’s business but not that of the regionals it works with) should see capacity growth in the next quarter – domestic growth from 1% to 3% and international growth of 2% to 4%.
The airline industry was plagued in recent years by having too much capacity – flying too many planes with empty seats. That, of course, spells a lack of profitability. They began to cutback on capacity a few years back when fuel prices skyrocketed and they continued the paring back process as the recession hit. Clearly, investors feel the industry should sit tight on the capacity issue until there is clear evidence more planes are needed in the skies.
The Department of Transportation will slap airlines with heavy fines for subjecting domestic passengers to long tarmac delays. The Obama administration said today that DOT will fine airlines at the rate of $27,500 per passenger, for planes with more than 30 seats that tarry on the tarmac for more than three hours. Is this really the best we can do?
No one will argue against the concept that sitting in a plane stuck on the tarmac indefinitely is a Very Bad Thing. The stories have been told of planes running out of food, water and baby diapers; toilets filling to overflowing; imprisoned passengers calling airline CEOs at home to alert them of their predicaments; and the like. It shouldn’t happen.
By imposing a system of fines, DOT gets to look like it’s doing something. But DOT oversees the Federal Aviation Administration. Isn’t the FAA responsible for setting the rules by which the U.S. airline industry is governed? Don’t they have it in their power to force airlines to limit their schedules at the hub airports responsible for most of the delays in the U.S. grid? Continue reading…
Scotland’s largest airline, Flyglobespan, failed Wednesday, stranding some 5,000 Scots abroad on holiday, mostly in Spain, France, Cyprus and Egypt. The airline billed itself as offering “cheap flights and low-cost holidays.” No one is against cheap flights, but it becomes difficult to sustain a low-margin business model when fuel prices remain high, and oil above $70 a barrel claimed another victim.
Apparently, this isn’t unusual for the U.K. The nation’s Civil Aviation Authority has an Atol plan, which stands for Air Travel Organisers ‘ Licensing. Atol is a means for consumers who’ve booked a vacation to get their money back, or if they’re already on vacation, to get home if their airline goes bust. The service certainly fills a need – Flyglobespan is the 21st travel company listed on the Atol site as having gone belly-up during 2009 alone.
Unveiled to great fanfare in 2005, the Dreamliner was hailed as an entirely new direction for the airline industry, with half the plane made out of lightweight, yet strong carbon-fiber composite material, which the company touts will yield greater durability and fuel efficiency. It was a winning spiel; customers placed more orders for the plan ahead of its first flight than any previous passenger jet.
The management disarray at EasyJet is shameful and sad. The European budget airline was once a no-frills trend-setter. Now it’s a poster child for how not to run a company. As DJN colleague Kaveri Niththyanathan writes (here’s her story; and blog), EasyJet’s founder, Stelios Haji-Ioannou, appears to be a big part of the problem. If you’ve met Stelios, you’ll know he’s nothing less than a dynamo; this was overwhelmingly positive when the airline was up-and-coming but has become a negative as the company matures. It’s a wonder EasyJet is still going strong, transporting 12.2% more passengers in November than a year earlier – compared with British Airways’ 3.4% decline in the same period. What EasyJet, its employees and its shareholders now need is for its founder and 15.5% owner to take a back seat and just enjoy the ride for a change.
Many companies are still reporting earnings that are more powered by cost cuts rather than revenue growth. But we are starting to see some positive, albeit small, developments that might indicate the economy is indeed starting to turn the corner:
–Continental Airlines, in reporting that its 3rd quarter loss narrowed to $18 million, said it is seeing signs of business travel budgets loosening up, an important development for airlines that rely heavily on business travel for profitability.
–Wells Fargo noted in its earnings report that the growth in nonperforming loans and net loan charge-offs is slowing for both consumer and commercial loan portfolios.
–Manpower said conversations with companies indicates many of them now feel they cut too many jobs and may need to do some temporary hiring to at least get them through the year.
A Continental Boeing 777 arriving at Tokyo Narita airport. This blogger took the plane back to Newark recently, riding in the back of the plane. A good example of what's been ailing airlines - more companies have required coach flights for business travel and a reason revenue per available seat miles has been off sharply at airlines.
The breathless beginning to the press release (“Fares are falling! Fares are falling!”) is almost enough to make you hop online at southwest.com and start buying some of those cheap airline tickets. That is until you go to Expedia and see that, well, these new Southwest fares are and aren’t cheaper than what some competitors offer.
There are restrictions and travel must occur between certain dates. And the prices we mention below are all before taxes. So, here’s what we found. Southwest, in its press release, offers a new low fare between Phoenix and San Diego for $59 each way (we are looking at travel on Oct. 13 and returning Oct. 19) – for $118. USair already offers a fare of $117. Looking to go from Chicago to Columbus, Ohio? Round trip on Southwest will be $138, while United is offering $117. Southwest does offer the lower fare between Boston and Chicago ($178 versus the $188 on JetBlue.)
Bottom line – just because it’s a sale doesn’t mean it’s the cheapest around. Oh, and one of the other Southwest restrictions? Good for travel every day except for Friday and Sunday. That’s 28% of any week and likely when most people would like to get away: on the weekend.
President Reagan’s former budget director David Stockman says Edward Snowden performed a heroic act, the Patriot Act should be repealed, and this whole spying-on-U.S.-citizens thing is a symptom of an out-of-control military-industrial complex. Click here to watch him go on YahooFinance. The author of “The Great Deformation: The Corruption of Capitalism in A […]