Us Airways Strategic Analysis

[USA320Pilot]

RowunderDCA:

RowunderDCA said: "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."

USA320Pilot comments: There is a balance between a “wholly ownedâ€￾ sale and using US Airways new found leverage to lower unit costs in other ways.

A sale of the “wholly ownedsâ€￾ would create additional immediate liquidity (assuming a cash sale); but how much is really a function of the extent to which US Airways is willing to bid them adieu with their current fee structures intact. If US Airways seeks, a la United, to bust back these arrangements to one that is more favorable to US Airways going forward, then they would represent smaller potential streams of revenue/income to a potential buyer.

The smaller the anticipated stream of revenue/income, the smaller the discounted current value of same. Hence, US Airways would face a Hobson's choice in all of this which has nothing to do with the more elemental observation that selling these at all will result in an absolute decline in US Airway's own future revenue stream. The intent in some of this would be to maximize the current recovery out of such a sale would increase (or at lease prevent recognition of a decrease in) US Airway's forward operating costs.

This is just one issue, but the global RJ solution will likely address additional problems too.

For example, the current RJ air service agreements provide the affiliate airline with cost + 8% profit, a healthy margin in today's environment, or for that matter, any airline environment. US Airways has a major problem because its affiliates only need to operate flight and they get cost + 8%, where US airways can get nothing.

Two week's ago Mesa operated a flight between Charlotte and Chattanooga with nobody on board and two passengers on the return flight. Mesa made cost + 8% and US Airways lost a lot of money and gained no revenue. Not good, but up until now there has been very little US Airways could do about this problem. However, with the court’s assistance and the Air Wisconsin agreement, whether or not United release the Appleton-based carrier from its current obligations, US Airways has leverage over its affiliate operators.

An affiliate carrier operating a flight with no revenue happens over-and-over again and Bruce Ashby is hell bent on fixing the problem, since his last job was president of express and he is very aware of the problem. This problem is creating a lot of careful planning for the “executive suiteâ€￾ and is an important part of the POR and there will be more new forthcoming with a positive resolution.

One way to fix the problem is with more equity owners who share in the revenue/profits more equally. This would create more of a more mutually beneficial interest between the parties, which would be an incentive for the current affiliate to try and operate more efficiently because now there profits would be more directly tied to a better combined operation. Thus, the AWAC option and/or solution.

Two other issues that could also be addressed are relatively poor affiliate carrier service, especially by MESA, which is driving customer’s away plus; as well as wasteful cost control programs, such as a non-existent fuel conversation program. It is my understanding that both of these issues are being addressed too, with Mike Pulaski looking into RJ fuel conservation (that is now virtually non-existent).

Regards,

USA320Pilot

 

[funguy2]

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.

[post="252798"][/post]​

I could not agree more...

 

[USA320Pilot]

Whether it’s a fuel surcharge or ticket price increase, the point is it adds to the bottom line. UPS and FedEx seem to do fine with it, albeit they transport cargo.

If crude oil futures prices continue their climb, although current technical analysis models indicate it’s over bought, then the legacy carrier's will have no option but to increase ticket prices.

Regards,

USA320Pilot

 

[funguy2]

An affiliate carrier operating a flight with no revenue happens over-and-over again and Bruce Ashby is hell bent on fixing the problem, since his last job was president of express and he is very aware of the problem. This problem is taking a lot of careful planning for the “executive suiteâ€￾ and is an important part of the POR and there will be more new forthcoming with a positive resolution.

One way to fix the problem is with more equity owners who share in the revenue/profits more equally. This would create more of a more mutually beneficial interest between the parties, which would be an incentive for the current affiliate to try and operate more efficiently because now there profits would be more directly tied to a better combined operation. Thus, the AWAC option and/or solution.

So you have two potential solutions:

1. Pit the Regional operators against each other, such that when the above crappy situation occurs (which it will with all of them), you minimize the expense to US Airways... Or...

2. You eliminate the cost + 8% agreement business model, and come up with something else which ensures US Airways more control over the situaiton...

My guess is that the RJ operators will fight #2 with everything they have. It will be extremely costly to their business plans.

 

[USA320Pilot]

Funguy2:

Yep, and you're now getting the point. Bruce Lakefield holds most of the cards and has a lot of leverage. In fact, he and I recently held an in-depth conversation about it and there is even more to the story that you will hear about, as this continues to unfold.

Regards,

USA320Pilot

 

[funguy2]

Whether it’s a fuel surcharge or ticket price increase, the point is it adds to the bottom line. UPS and FedEx seem to do fine with it, albeit they transport cargo.

If crude oil futures prices continue their climb, although current technical analysis models indicate it’s over bought, then the legacy carrier's will have no option but to increase ticket prices.

Regards,

USA320Pilot

[post="252814"][/post]​

And, if fares increase significantly, demand will decline, there will be EVEN MORE over capacity, and we can expect to that eventually legacy airline capacity will fix itself, probably through catostrophic airline failures, since we know the "shrink to profitability" scenario rarely works for airlines.

 

[funguy2]

Funguy2:

Yep, and you're now getting the point. Bruce Lakefield holds most of the cards and has a lot of leverage. In fact, he and I recently held an in-depth conversation about it and there is even more to the story that you will hear about, as this continues to unfold.

Regards,

USA320Pilot

[post="252817"][/post]​

If US Airways did not seek to reduce the amount of profit they guarantee other companies while in BK, the leadership should be removed immediately. Its stupid for US Airways not to seek these types of concessions.

But, at the end of the day, I don't think the cost+ agreements will go away... So, ultimately, US Airways will pay cost + <8%. Better, but not the best solution I can think of. But of course, the industry was opposed to employee B-Scales... And you got them anyway...

 

[USA320Pilot]

Funguy2:

Funguy2 said: "And, if fares increase significantly, demand will decline, there will be EVEN MORE over capacity, and we can expect to that eventually legacy airline capacity will fix itself, probably through catostrophic airline failures, since we know the "shrink to profitability" scenario rarely works for airlines.:

USA320Pilot comments: Your point is too simplistic and I believe invalid. Aviation is one of the most important industries in the world and DOT,aircraft manufacturer, and other industry reports indicate there will be dramatic traffic increases in the future. In regard to the ticket prices, we are not talking about a lot of money per ticket to cover the price of fuel, especially when the price of a one-way ticket between New York City and Florida can cost less than a pair of shoes.

Supply will match demand and rational ticket pricing will emerge as the industry shake out continues.

Regards,

USA320Pilot

 

[funguy2]

Supply and Demand Currently match at the existing fare levels.

You are right... I am being simplistic. But not necessarily invalid.

Why would you say "Supply will match demand and rational ticket pricing will emerge as the industry shake out continues."? This is the opposite of your arguement that demand will continue to grow, implying that demand will grow into existing supply, and no shake-out is required.

However, your statement is true. With less supply, demand will be constrained, and those who are willing to pay a little more will get to travel... The fact that people are paying more means those carriers left will be able to cover their costs (a big change from today, for most airlines). First some capacity has to disappear, and until that happens, there will be no change in the industry.

During every other recession since 1978, there was a reduction in airline capacity, usually via a catostrophic failure. Following the reduction in supply of airline seats, fares returned to profitable levels. That has yet to occur during this economic cycle. When it does, "order" will be restored. Unfortunately for you, US Airways is still among the most likely capacity to be eliminated.

I cannot comment of the FAA projections, because I don't know what data they use. Do they assume fares will continue to drop, vs CPI, as they have for the past 25 years? Maybe they do, maybe they don't. At some point, that trend has to change, and the demand curve will change with it.

[Post edited]

 

[usairways_vote_NO]

USA320Pilot comments: Most people who post on this board are uninformed regarding what is really occurring inside senior levels of the company. In regard to January’s financial performance, again the S.1110 cure payments, liquidation concerns causing passengers booking away to other companies (much of this labor’s fault), energy costs, and weather problems caused much of the problem.

In regard to key people “on the streetâ€￾, I can tell you they unequivocally support management and have told me so.

[post="252727"][/post]​

Yes and you are Mr. informed insider right? CEO, CFO, Union head, airline analyst, Pilot, board member, fly on the wall, etc all rolled into one. How lucky this board is to have you spending you valuable time here to explain everything to us!! For free no less!!

Please tell us all how you became such a jack of all trades? Or at least such the insider you think you are.

If you have any access to anyone that tells you anything you can bet they are using you as a mouthpiece to spew misinformation.

 

[jack mama]

I agree that the RJ model is broken...cost plus a 8% profit is unsustainable.

I'm also worried the company doesn't have enough time. If they must get out of BK by Jun 30, how does that give Lakefield leverage. The United/Air Wisc deal possibly won't be sorted out until after Jun 30 therefore there is no leverage.

Now if something is in the works to extend the Jun 30 date, then maybe there is a chance....nothing like artifical deadlines to kick them out of bk too early again!!!!

Plus oil is not going down any time soon. It has risen b/w Mar and May 19 of the last 20 years in prep for summer driving....

The POR should have a plan for $60/barrel and one for $40/barrel. And since it is $53 now, the company should be moving towards the $60 plan.

 

[FWAAA]

USA320Pilot comments: Your point is too simplistic and I believe invalid. Aviation is one of the most important industries in the world and DOT,aircraft manufacturer, and other industry reports indicate there will be dramatic traffic increases in the future. In regard to the ticket prices, we are not talking about a lot of money per ticket to cover the price of fuel, especially when the price of a one-way ticket between New York City and Florida can cost less than a pair of shoes.

Supply will match demand and rational ticket pricing will emerge as the industry shake out continues.

[post="252821"][/post]​

With various LCCs adding domestic capacity at rates greatly exceeding GDP growth, it is obvious that much of that traffic gain will go to airlines other than AA, UA, DL, CO, NW or USAir. No matter how little the bankrupt airlines pay their employees.

Some passengers will still prefer to fly the legacy airlines (for a variety of reasons). But there is no reason for six of them to continue to provide that choice. Two or three would probably be sufficient.

 

[whlinder]

Yes and you are Mr. informed insider right? CEO, CFO, Union head, airline analyst, Pilot, board member, fly on the wall, etc all rolled into one. How lucky this board is to have you spending you valuable time here to explain everything to us!! For free no less!!

[post="252824"][/post]​

Apparantly he is the head of revenue management too these days...

 

[funguy2]

[delete]

 

[sfb]

Selling the “wholly owned†provides significant short-term benefit by boosting liquidity, but it reduces long-term profits. This is a means to deal with a deterioration in industry wide fundamentals, in particular fuel prices. It's still unclear how the regional airline issue will be resolved; however, US Airways has a lot of flexibility while it’s still in its formal reorganization.

Selling a wholly-owned will not improve liquidity. Read the following from the revised ATSB Loan Agreement (as of January):

(n) Asset Sales. The Debtors shall remit to the Agent, for the benefit of the ATSB Lender Parties, the Net Cash Proceeds from any Asset Sales, within three (3) business days of the Debtors’ receipt thereof; provided, however, that to the extent that the Net Cash Proceeds from any Asset Sales shall be less than $250,000, the Debtors shall not be obligated to remit such Net Cash Proceeds for the benefit of the ATSB Lender Parties until the next scheduled interest payment date under the ATSB Loan, provided further, however, that at any time that the aggregate Net Cash Proceeds from Asset Sales then held by the Debtors shall exceed $250,000, the Debtors shall, within three (3) business days, remit all such Net Cash Proceeds to the Collateral Agent for the benefit of the ATSB Lender Parties. Such Net Cash Proceeds shall be applied by the ATSB Lender Parties to the pre-petition ATSB Loan Obligations in accordance with the Loan Agreement. Nothing herein shall imply any consent by any of the ATSB Lender Parties to any such Asset Sale, and each of the ATSB Lender Parties reserves its right to object to any proposed Asset Sale. As used in the Supplemental Order, the terms “Net Cash Proceeds†and “Asset Sales†shall have the meanings ascribed to them in the Loan Agreement.

Essentially, if the company sells off assets, the money received must be applied to reducing the balance of the ATSB loans remaining; this makes sense, of course, given that the non-cash assets of the corporation are part of the security for the loans.

By selling a “wholly owned(s)†an affiliate carrier may be more inclined to grant air service cost relief because their expanded company/footprint would have a greater revenue base.

What's the advantage of more revenue (for the regional carrier) if you end up with lower margins and lower profits? You're expecting them to invest capital in order to receive a lower return on capital for the rest of their fleet? Not likely.

We could have 4 or more regional airlines bidding on a US Airways contract that could include current service, expanded wholly owned service/equipment, and potential new Air Wisconsin service.

That all depends on what happens at United and what they decide to do about the service currently being provided by Air Wisconsin. Mesa, for example, might be more than happy to walk away from US Airways if they get the UAL flying.

The real beauty of the AWAC deal is that it gives Lakefield and Stanley options and leverage.

The danger, as others have alluded, is that US Airways may emerge from bankruptcy before United chooses to reject (or not) its contracts with AWAC. If AWAC exercises its "put" option after US Airways loses its ability to reject contracts through the courts, the company will be in a very sticky situation indeed.

To return to your initial post:

In its monthly filing with the bankruptcy court, US Airways announced that it lost $157 million in January. Much of this loss was for significant S.1110 aircraft cure payments...

That's not how it works. If this were indeed true, the company's aircraft lease expense as itemized in its monthly operating report would have increased dframatically between December 2004 and January 2005 -- and it didn't. Aircraft rent increased from $38.0 million to $39.3 million -- likely due to the new RJ's delivered to the company.

The aircraft lease payments show up in the diminution (by $195 million) of the company's cash balance from December 31 to January 31. Moreover, these weren't just cure payments, but also regularly scheduled payments on much of the fleet. More of those will show up in the February numbers in about four weeks.

It’s unclear if the company will retain the additional B737s that are scheduled for return to their owners beginning in May, but the company could elect to keep some of these aircraft if the financiers amend their contract providing the carrier with cost relief, in light of the increased revenue.

This wins the wishful thinking award for the week. The company really doesn't have time (or the money) to make drastic changes to the May schedule at this point, and keeping around a bunch of aircraft sitting on the ground won't help the financial situation.

Leitch noted the loan was well-priced and doesn't have commitment fees or prepayment penalties.

What do you expect the company's lawyer to say in a court filing -- that the loan is really, really expensive but we're desperate for cash?