Us Airways Strategic Analysis

[sfb]

SFB:

Some of your points are inaccurate and I do not have time to respond now due to family obligations. But I will respond tomorrow night.

I shall patiently await your rebuttal, and I hope that your responses will have more substance than "senior management told me _________ in confidence.

I will say this about the RJ situation.

The affiliate carrier deals have been "pretty sweet" by guaranteeing profitability for the regional airline. The agreements are called a "Fee for Service" contract. All Mesa, Chautauqua, and TSA have to do is fly their contracted flights on the day specified -- with or without passengers -- and not necessarily at the scheduled time.

Fee-for-departure is pretty much the standard for regional jet carriers in partnership with the network carriers. I can't think of a single example, at present, of any of the regionals operating at-risk RJ service. That's not to say that things can't change, but you can bet money that AWAC isn't going to be flying at-risk for US Airways when they own 20-25% of the company. US management would also be forced to give up some level of control of scheduling and capacity for at-risk flying given that the regional carriers would have little interest in subsidizing poor marketing decisions by US management.

Another "real world" example is Mesa flew a Charlotte to Memphis round trip "empty" both ways. Mesa then presented to US Airways its completion of service record and then receives its payment. The fee guarantees Mesa an 8 percent operating margin and is a waste of money and precious natural resources.

First of all, 8% operating margin is already quite competitive in comparison to the rest of the industry. ExpressJet is guaranteed 10-14% if memory serves, Pinnacle is guaranteed around 10%, and SkyWest's operating margin is over 11%. Chautauqua's parent company (Republic) reported an operating margin of 20% last quarter.

Moreover, for Mesa or any regional carrier to be paid for operating empty/extremely late flights points to US management agreeing to flawed contracts without sufficient performance guarantees and penalties for failure to meet standards.

Mesa's new problem: the flight was flown with a J4J pilot who reported the abuse to ALPA.

Great, but shouldn't US management be reviewing Mesa's operating performance to catch "abuses" like that?

P.S. By the way, senior management personally told me that all of the "wholly owneds" could be sold with ATSB approval.

BoeingBoy addressed this already, but it doesn't matter that the company has ATSB approval to sell the wholly-owneds; in fact, I'm sure the ATSB would be happy to see this happen. To repeat, proceeds from the sale of one or all the wholly-owneds must be applied to paying down the balance of the ATSB-guaranteed loans. While this would have the beneficial effect of reducing US Airways' overall indebtedness, it still would not improve the company's liquidity; the company cannot keep the cash from an asset sale.

 

[CynicalResAgent]

OMG, Only A320 can try to spin the Christmas meltdown to be a positive thing....

 

[LGA Fleet Service]

USA320Pilot comments: Most people who post on this board are uninformed regarding what is really occurring inside senior levels of the company.

[post="252727"][/post]​

It has been mentioned before by other posters, but I have a really hard time getting my head around the idea the senior managers at Airways take a line pilot into their confidence and disclose strategic plans with you.

Has it ever occured to you that you are being used?

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]​

"Much of this labor's fault"?

You fawning little sychophant, arent *you* labor? :blink:


And who exactly on "The Street" is an unequivocal supporter of management?

CSFB? Citi? JP Morgan?

I dont recall any of the major houses lining up to give the crack team at UAIR a wooden nickel, much less $250 million dollars.

It's sad when a regional carrier for another airline lends you $125 million as insurance so it'll have a place to fly its RJ's if it looses its conract with the other airline.

 

[LGA Fleet Service]

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??

[post="252794"][/post]​

Bob, didnt you hear?

Boeing is taking back the old 767 fleet and replacing them with half a dozen KC-767's, which will allow the entire RJ fleet to range over the North Atlantic and into the EU...

 

[Smartest Loser]

320 Wrote: 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.

This is from the same guys that missed the mark last time....$40 a barrel..??? When, 1998-99..?? Not in 2005...!!!

Live in the real world when making these projections.

SL

 

[delldude]

Live in the real world when making these projections.

you've hit to the core of his little world and all the spins he sells........

 

[javaboy]

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.


Regards,

USA320Pilot

[post="252782"][/post]​

ok, but that does nothing for the bottom line at best the 35 mill ONLY covers the addtional increase in fuel which means continued negative cashflow. unless the price increase remains and oil drops

 

[UALDC767]

SFB:


The affiliate carrier deals have been "pretty sweet" by guaranteeing profitability for the regional airline. The agreements are called a "Fee for Service" contract. All Mesa, Chautauqua, and TSA have to do is fly their contracted flights on the day specified -- with or without passengers -- and not necessarily at the scheduled time.

Another "real world" example is Mesa flew a Charlotte to Memphis round trip "empty" both ways. Mesa then presented to US Airways its completion of service record and then receives its payment. The fee guarantees Mesa an 8 percent operating margin and is a waste of money and precious natural resources.

Mesa's new problem: the flight was flown with a J4J pilot who reported the abuse to ALPA.

320,

I would assume that U's express agreements are pretty much like the industry standard.

So that means U is doing the pricing/reservation/scheduling of flights. It's not under Mesa/CHQ etc purview. So should there be zero or two or 50 pax on board that is all U's doing, the express carrier just flies from A to B. And the express carriers have a penalty if they do not complete a certain minimum percentage of flights. Don't fly= don't get paid. So why wouldn't they fly empty? Again, that is not their fault (most of the time unless very late due to weather/Mx) but U's for not filling the plane. They are in business for themselves first.

It sucks, we do it UAL (including covering all cost of fuel increases!!!!), but thats the contract management came up with.

DC

 

[ClueByFour]

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

[post="252821"][/post]​

What exactly is "rational ticket pricing?"

If LUV and B6 can continue to make money selling tickets from NYC-FLA for "less than a pair of shoes" that that represents rational pricing.

That's why the entire overcapacity thing is a myth--because the majors lack pricing power does not beget they'll get it back by shrinking. It's gone.

All the majors have done (and US in particular) with the influx of RJs, things like TED, reducing the F cabin on the 757s, Song, "buy on board" meals, etc is completely eliminated any differential in cabin service that might have commanded a price premium. By increasing fees for things like standby, phone reservations, and the like they've reduced their value propositions.

Case in point--in a few months, one will be able to pay US some amount of money to book a ticket from PIT-CHI. This will probably be on an RJ (unless they throw capacity onto the route, which could happen). If you want to buy this ticket over the phone, that'll be extra dough. Want to change your plans? Cost of the new ticket-$25. Or, one can buy the ticket from Southwest, not get dinged for doing it on the phone, and being able to apply the entire value of the ticket to travel anywhere else in their system within a year. Oh, and you don't get crammed into the back of a flying lawn dart and schlepp your stuff across the tarmac at ORD in the rain or snow.

Right now, strictly as measured by pure value proposition, LUV has the best thing going. Period. This will not change with a reduction in capacity. Fares are not going to go back up again, unless and until LUV's hedge expiration or incrases force them to jack up fares to cover the cost of gas.

 

[REACC1]

you've hit to the core of his little world and all the spins he sells........

[post="252955"][/post]​

Who is that, Seths dad?

 

[BoeingBoy]

Michael & sfb,

I'm going to attempt to move this discussion to this thread where it may be a little more appropritat.....

They could have kept it all. However, in order to do so, they would have had to throw more seats on the route, too. If they have to throw more seats on the route, they're not throwing the seats on there at 7 cents, either. That's why I made the "lose on every seat, make it up in volume" comment.

[post="253048"][/post]​

You've identified my single misgiving over rationalized fares at U. WN, B6, etc have the capability to add capacity to absorb additional traffic generated by the "Southwest effect" since they are adding seats (at lower unit cost than their overall CASM). With our static (and declining in the future) mainline fleet, adding capacity hinges on one or both of two things - increased utilization (which will only offset decreasing fleet count at best) or RJ's (which have higher unit costs).

This is a good reason for such actions, provided you can expect to bring unit costs down below unit revenue.

[post="253048"][/post]​

To me, rationalizing fares the way U has done it is a vicious circle. Do it in response to LCC entry into a market and only get a portion of the increase in traffic (and probably less revenue than before to boot). So losses are higher, and other markets are sought that are somewhat isolated from LCC competition. Charge high fares in these new markets - until one or more LCC's enter these markets. Then the cycle starts over.

While for the most part it's too late to adopt the opposite strategy - rationalizing fares as a defensive measure to keep LCC's out of markets (or lessen their impact) - it's worth discussing.

You are right that the best of all worlds is to have revenue above cost. However, increasing revenue (and it has been pretty well proven that the "Southwest effect" increases total revenue in a market) is never a bad thing, as long as U can keep most or all of that additional revenue. To me, that's where U has missed the boat. By rationalizing fares only as a response, we have lost the opportunity to keep most of that additional revenue.

Jim

 

[BoeingBoy]

SFB:

Some of your points are inaccurate and I do not have time to respond now due to family obligations. But I will respond tomorrow night.

[post="252852"][/post]​

I shall patiently await your rebuttal, and I hope that your responses will have more substance than "senior management told me _________ in confidence.

[post="252930"][/post]​

Looks like sfb has given up on getting a response tonight. I'll admit to waiting with bated breath to learn what the supposed inaccuracies were, but I think I'll have to give up waiting also....

Jim

 

[N628AU]

Another "real world" example is Mesa flew a Charlotte to Memphis round trip "empty" both ways. Mesa then presented to US Airways its completion of service record and then receives its payment. The fee guarantees Mesa an 8 percent operating margin and is a waste of money and precious natural resources.

Mesa's new problem: the flight was flown with a J4J pilot who reported the abuse to ALPA.

[post="252852"][/post]​

I believe there is a clause the flight must be operated within a certain time fram from the scheduled departure for the fee to be paid.

 

[USA320Pilot]

SFB:

Monetizing the “wholly-owneds†or MDA (particularly to maximum value) inherently contradicts any strategy to further reduce operating costs through restructure of the rj operating agreements. The less stable and potentially lower the revenue stream from US Airways to any of the regionals,

The less valuable they would be to any acquiror. If US Airways wants to lower its RJ operating agreements for additional operating cost savings (and, like United, it clearly ought to), then any recovery upon monetization of its ownership of the “wholly-owneds†will be reduced.

On the other hand, USAir's recovery could be materially enhanced if it were willing to "look beyond" any efforts to wring cost savings out of the RJ agreements and sell off the “wholly-owneds†complete with their current "sweet deals" in place.

In regard to the ATSB agreement, management fully understands your point since they wrote part of the agreement and then signed the documment.

But, let me ask you this. Has the ATSB ever changed their agreement with US Airways and could they do it in the future? Let me tell you this again -- senior management has personally told me the “wholly owneds†and MDA could be sold to boost US Airways’ liquidity.

Moreover, the news media has seemed to pick up on this too.

On February 27, the Pittsburgh Post-Gazette said, some observers believe that US Airways, in its search for more investors, will look to its other affiliate carriers -- some of which are independent and some of which it owns -- that carry US Airways passengers to smaller cities and receive fees in return.

Williman Lauer, a local airline analyst, believes that US Airways could sell the carriers it owns -- PSA Airlines or Piedmont Airlines -- to raise cash. Or, it could ask other regional carriers with feeder contracts, such as Mesa or Chautauqua, to invest in US Airways as Air Wisconsin did and receive guaranteed service in return.

"In the quest for exit financing," Lauer said, US Airways "has zoned in on this whole area of the regional contracts." Chief executives at Phoenix-based Mesa and Indianapolis-based Chautauqua could not be reached for comment.

See Story

In regard to an affiliate carrier buying a “wholly owned†or MDA, the current "Fee for Service" contracts provide cost plus 8%, but are too rich in today’s environment. If US Airways fails, the affiliate carrier will be in immediate trouble and have a beneficial interest in US Airways’ survival. Thus the incentive to reach a mutually acceptable solution such as cost plus 4%. If the affiliate carrier and US Airways reach new “Fee for Service†contracts, since US Airways has not affirmed the current agreements, then the only way for the affiliate carrier to grow gross profits is to have a larger operation. How do you do this? By expanding ASM’s through internal growth or an acquisition, which is currently being discussed by a number of business entities and US Airways.

I agree with your point that United now has renewed interest in keeping Air Wisconsin in the United Express network, but that agreement does not have to preclude Air Wisconsin flying for US Airways or replacing an affiliate carrier. For example, the US Airways –Air Wisconsin agreement provides for the Wisconsin-based airline to fly 90-seat RJs. Moreover, it appears management has already planned for this because LOA 93 specifically permits both the EMB-190 and CRJ-900 to be flown at an affiliate carrier. One obstacle: J4J, but ALPA is already looking into this too.

Another option being evaluated is could US Airways reject the current affiliate carrier contract and then sign a month-to-month agreement, a la like the ACAA deal over the Pittsburgh airport, and incrementally replace an affiliate carrier with new Air Wisconsin service?

Another reason adding Air Wisconsin to the network and removing an EMB-145 operator is that the CRJ-200 has a more comfortable cabin, a greater passenger acceptance rating, and better economics than the EMB-145.

In regard to US Airways emerging before United and losing its leverage, management understands this and has planned according. Ron Stanley knows exactly what he is doing and is a significant improvement over both Neal Cohen and Dave Davis. US Airways and Air Wisconsin both recognize this and US Airways is using every tool it can to upgrade service and lower unit costs.

In conclusion, there is a lot of conversation going on in the “executive suite†regarding selling the “wholly owneds†and/or MDA, rejecting or affirming the current affiliate carrier contracts, requiring current affiliate carriers to provide US Airways with equity in exchange for keeping their “Fee for Service†contract, lowering the current affiliate carrier fee, an expanded Air Wisconsin role in US Airways Express, the ATSB, LOA 93 implications, and J4J.

The whole situation is very complex and at this point, even US Airways management does not know the final result pending final negotiations because it has a number of good options, but US Airways holds a lot of cards and management will make the best deal possible for the Arlington-based airline.

One other point that needs to be emphasized is the importance of US Airways obtaining DIP financing. Bruce Lakefield commented on this in his weekly code-a-phone message that can be heard at 800-US-DAILY and then selecting prompt 4.

The Pittsburgh Post-Gazette reported on this yesterday and wrote, US Airways Chief Executive Officer Bruce Lakefield, in his weekly telephone message to employees, said the company had enough cash on hand last week to exceed the $325 million needed to keep its bankruptcy financing intact, but the $75 million it received last Tuesday from an investment group led by Air Wisconsin Airlines gave it an "ample cushion." Early March is typically the airline's lowest point for cash. Air Wisconsin's investment, which will eventually total $125 million, "cannot be underestimated," he said. It is "a cornerstone from which we can attract additional financing." US Airways needs at least $250 million to exit bankruptcy comfortably.

See Story

Best regards,

USA320Pilot

 

[usairways_vote_NO]

USA320Pilot

[post="253089"][/post]​

Question how many readers bother to wade completely through a post like 320's above?