Us Airways Strategic Analysis

[funguy2]

William Lauer, chairman of Allegheny Capital Management told the Pittsburgh Tribune-Review that last week’s fare increase or ticket surcharge should bring US Airways' aviation fuel expenses down to levels equivalent to a more-normal $37 a barrel, which is a level that is sustainable in the company’s new business plan.

See Story

Lauer believes the increase in monthly revenue would be about $32 million or equal to a $16 decrease in the price of oil per barrel and the corresponding reduction in spot jet fuel prices. US Airways' new business plan accounts for jet fuel prices equal to oil trading at approximately $40 per barrel. If Lauer's increased revenue estimate is accurate, then the fare increase and the oil price at about $13.50 over budget would provide US Airways with about $5 million per month or $60 million per year in extra liquidity -- at today's ticket prices.

For US Airways to file its POR and have it endorsed by the creditors committee and the bankruptcy court, the airline must project a profit and to do so, it must further increase revenues and/or cut more costs to account for its increased fuel expense.

If Lauer’s estimate is accurate, then US Airways can project higher revenue and the arithmetic of its business plan should work because it is based on oil prices of about $40 per barrel. With that said, the company plans to increase its popular GoFares program from its current 25% of sales to a much higher figure. Therefore, it’s unclear at this time how the new fare structure will effect the new business plan, POR, and unrestricted cash level, which is an important factor in US Airways emerging from bankruptcy on June 30..

This is among the most assinine things I've ever heard. I will view anything further from Lauer with suspicion. I know what he's trying to get at... How a fare increase will try to offset the increases cost of fuel, but INCREASING THE PRICE TO THE CUSTOMER DOES NOT REDUCE THE COST OF FUEL If fuel is $60 a barrel, US Airways is paying $60 a barrel (less any hedges). If US Airways is changing additional fares or fees, that goes to revenue, not a reduction of costs.

Key components of the deal include:

$125 million in DIP financing, with $75 million immediately available and two subsequent $25 million increments that can be drawn at a later date, if necessary.

Upon emergence from bankruptcy the $125 million would then convert to equity in the reorganized US Airways.

The $125 million is 50% of the $250 million "target" for new equity management has been seeking and according to Ashby, this agreement helps keep us on track for a rapid and successful emergence from Chapter 11.

...

Furthermore, according to loan documents filed with the bankruptcy court, Air Wisconsin would have a stake ranging from at least 19.2% to as much as 26.3% in the reorganized US Airways, with minimum equity of $225 million.

Interstingly, AirWisconsin/Eastlake does not appear to have agreed to anything more than $125mil... So far.

The second part of the agreement is a standard affiliate carrier RJ service agreement where Air Wisconsin would provide US Airways with competitively priced RJ feed. What is unique about the particular agreement “is that the number of aircraft Air Wisconsin would fly as US Airways Express has not yet been finalized, because it depends at least in part on the outcome of ongoing negotiations between Air Wisconsin and United Airlines. Air Wisconsin currently flies 70 50-seat CRJ-200 RJs for United Express, which is the exact number that the company can put into service with US Airways. “Nothing in our agreement conflicts with what United and Air Wisconsin agree between themselves, but to the extent some of the aircraft currently flown for United are freed up as part of their discussions, they could be placed into service as US Airways Express,â€￾ Ashby said.

The AP reported Kelly Lanpheer, an Air Wisconsin spokeswoman, said the deal with US Airways is more than a backup option. "Air Wisconsin sees the progress US Airways has made in its restructuring, and we're looking forward to the opportunity to build a new partnership with US Airways and continue one with United," she said.

Exact details of the agreement were redacted from the public record because of the competitive issues surrounding the placement of regional jets within the marketplace.

But... If once US Airways exits BK, then it can no longer reject Mesa, Chautauqua, or Trans States RJs, or its delivery contract with Bombardier for PSA, under the guise of Chapter 11. So, If UAL rejects Air Wisconsin after USAirways emerges from BK... US Airways gets 70 RJ's extra RJ's with some kind of guaranteed profit plan to AirWis... Probably not a good position to be in. Whether or not AirWis is flying for UAL at USAirways BK emergence is likely to become a huge stumbling block, IMO.

 

[funguy2]

USairways will now be know as the "Wham! Bam! Thank you, Senorita!" carrier.

Eleven days.

USAirways expects a totally new market and concept to be fully developed and profitable in eleven days.

This has got to be an all time record for lunacy. I'd like to say than now I've seen it all, but I am convinced that there is no limit to the destructive imagination of the dimwits in CCY.

Industry experts and observers must be in shock and awe over CCY's unending ability to make every bad situation worse. And it's done with such smug obliviousness to reality.

Amazing, really!

[post="252677"][/post]​

The long and short of it is that Airlines with no cash should not be agressively pursuing new markets which might require substantial investment... duh! Dumb strategy from the beginning.

 

[REACC1]

yes lets tell him this...he posts on us avi...hehehe

[post="252740"][/post]​

Maybe you're beyond it, but I am still in "shock and awe". :blink:

 

[funguy2]

Dear Moderators:

Is there a maximum post size?

Should there be?

When I was in college, I've written shorter papers...

 

[javaboy]

.

The motivation behind these decisions is the continued industry wide deterioration of fundamentals. In particular continued low-fare pressure, outrageously high fuel prices, and expensive upcoming aircraft maintenance.







Compounding US Airways cash problem is the recent surge in energy prices. This week crude oil prices continued their climb with NYMEX Futures soaring to a 4-month high at about $53 per barrel. US Airways’ new business plan is based on spot jet fuel prices corresponding to a crude oil price of $40 per barrel. Each $1 increase in crude oil increases the company’s monthly fuel expense by $2 million per month. Thus, with oil at $13 per barrel over budget that equals about $26 million more per month or $312 more pear year in fuel expense, which was not in the last transformation plan revision.

To help offset the increased cost of fuel, this week’s airfare increase initiative started by Northwest Airlines appears to be sticking with every legacy carrier matching the Minneapolis-based carrier, along with AirTran Airways. So far low cost airlines Southwest and jetBlue have not increased their fares, but this is a positive development to help offset extremely high fuel prices.

See Story

William Lauer, chairman of Allegheny Capital Management told the Pittsburgh Tribune-Review that last week’s fare increase or ticket surcharge should bring US Airways' aviation fuel expenses down to levels equivalent to a more-normal $37 a barrel, which is a level that is sustainable in the company’s new business plan.

See Story

Lauer believes the increase in monthly revenue would be about $32 million or equal to a $16 decrease in the price of oil per barrel and the corresponding reduction in spot jet fuel prices. US Airways' new business plan accounts for jet fuel prices equal to oil trading at approximately $40 per barrel. If Lauer's increased revenue estimate is accurate, then the fare increase and the oil price at about $13.50 over budget would provide US Airways with about $5 million per month or $60 million per year in extra liquidity -- at today's ticket prices.



OIL currently trading @ 53.55

 

[BoeingBoy]

When I was in school we still used carbon paper to make copies of reports.

[post="252758"][/post]​

Or in my case, lots of white-out for corrections (oh wait, white-out hadn't been invented yet - make that lots of that correction tape stuff)

Jim

 

[javaboy]

When I was in school we still used carbon paper to make copies of reports.

[post="252758"][/post]​

yeah i remember when paper was invented that really made it easier for me too.


and that electric light thingy wow, working at night,

signed,
junior person

 

[PSA1979]

When I was in school we still used carbon paper to make copies of reports.

[post="252758"][/post]​

When I was in school we used a mimeograph machine! LOL

 

[USA320Pilot]

Javaboy said: “OIL currently trading @ 53.55â€￾

USA320Pilot comments: True, which is why every legacy carrier has increased ticket prices, which could add about $30 million per in US Airways revenue.

Funguy2 said: This is among the most assinine things I've ever heard. I will view anything further from Lauer with suspicion. I know what he's trying to get at... How a fare increase will try to offset the increases cost of fuel, but INCREASING THE PRICE TO THE CUSTOMER DOES NOT REDUCE THE COST OF FUEL If fuel is $60 a barrel, US Airways is paying $60 a barrel (less any hedges). If US Airways is changing additional fares or fees, that goes to revenue, not a reduction of costs.

USA320Pilot comments: Wit hall due respect, if you new what Lauer was trying to get at why make your antagonistic post? It’s arithmetic and if crude oil prices climb to $60 a barrel, every legacy carrier will have to pass that expense onto the consumer or they will fail.

Funguy2 said: “Interstingly, AirWisconsin/Eastlake does not appear to have agreed to anything more than $125mil... So far.â€￾

USA320Pilot comments: As part of the global RJ affiliate carrier solution, that is about to change with another good deal for US Airways.

Funguy2 said: "But... If once US Airways exits BK, then it can no longer reject Mesa, Chautauqua, or Trans States RJs, or its delivery contract with Bombardier for PSA, under the guise of Chapter 11. So, If UAL rejects Air Wisconsin after USAirways emerges from BK... US Airways gets 70 RJ's extra RJ's with some kind of guaranteed profit plan to AirWis... Probably not a good position to be in. Whether or not AirWis is flying for UAL at USAirways BK emergence is likely to become a huge stumbling block."

USA320Pilot comments: Your point is accurate and United must reject its air service agreement with Air Wisconsin, first but there are other options for Air Wisconsin in this deal and the United Express carrier’s hand was strengthened in the US Airways deal. Management of each airline fully understands this point and you are not the first person to recognize this point, but I can tell you this…it is being managed by US Airways and Air Wisconsin.

BoeingBoy, do you ever post anything positive or are you always negative at home too?

Regards,

USA320Pilot

 

[BoeingBoy]

BoeingBoy, do you ever post anything positive or are you always negative at home too?

[post="252782"][/post]​

Sure I do, but since you "don't read every post" you probably missed them. And thanks for asking about my home life - the little lady gets as big a laugh out of your posts as I do. But since you asked, I'll return the favor - have you stopped beating your kids yet?

Jim

 

[RowUnderDCA]

USA320Pilot comments: As part of the global RJ affiliate carrier solution, that is about to change with another good deal for US Airways.

[post="252782"][/post]​

oh gosh.... "the global RJ affiliate carrier solution!?"

I think I know what you mean, and it's even crossed my mind how that might be plausible.... but I think we'd need to work on that term.

 

[bwipilot]

I'd be shocked to see the fuel surcharges add $32 million/month to the bottom line. Fuel surcharges are lousy--a customer expects a transparent price. Breaking out seperate costs to trick the customer has a limited shelf life. Customers look at the final cost--a fuel surcharge is just like a fare increase. Airlines should raise prices rather than add a surcharge. It has more staying power. Off course, US is looking for every gimmick to make it a few more months which explains the surcharge.

 

[whlinder]

Agreed! I didn't know an EMB-145 could make it to Europe, Or as part of the ICT/UCT is US opening a European Hub in Brussels??

That ought to hold the rumor mongers.

[post="252794"][/post]​

I thought you were reading the board this week Bob, didn't you hear the rumor about US Airways merging with Lufthansas and United and being the surviving entity?

 

[whlinder]

Fuel surcharges are lousy--a customer expects a transparent price. Breaking out seperate costs to trick the customer has a limited shelf life. Customers look at the final cost--a fuel surcharge is just like a fare increase. Airlines should raise prices rather than add a surcharge. It has more staying power.

[post="252798"][/post]​

I thought that is what they did, NW raises prices and everyone else matched. They didn't stick in some fuel charge... high fuel prices is how they justified the increase to the media so they could have an excuse to put out a press release letting the other airlines know that they had raised fares and that they should match.

And the price displayed always has to include the fuel surcharge. They display before taxes/fees but always include fuel surcharges.

 

[funguy2]

Funguy2 said: This is among the most assinine things I've ever heard. I will view anything further from Lauer with suspicion. I know what he's trying to get at... How a fare increase will try to offset the increases cost of fuel, but INCREASING THE PRICE TO THE CUSTOMER DOES NOT REDUCE THE COST OF FUEL If fuel is $60 a barrel, US Airways is paying $60 a barrel (less any hedges). If US Airways is changing additional fares or fees, that goes to revenue, not a reduction of costs.

USA320Pilot comments: Wit hall due respect, if you new what Lauer was trying to get at why make your antagonistic post? It’s arithmetic and if crude oil prices climb to $60 a barrel, every legacy carrier will have to pass that expense onto the consumer or they will fail.

Because Lauer's assertion that adding a fuel surcharge to tickets results in lower fuel costs is misleading at best and patently false at worst.

What I think Lauer was trying to accomplish was to put in perspective the effect of the price increase... But his "result" is completely false... Increasing the price of an airline ticket will not reduce the cost of fuel, oil, or tea in China.

Oh, and not to mention that we know price changes impact demand, right? So it is also foolish to think that every person who would be willing to purchase a fare at today's level will be willing to purchase at today's fare level + $5. Thus, increasing fares with a fuel surcharge does not necessarily increase total revenue... That's basic economics (and mweiss has covered it to death in another thread).