Us Airways Strategic Analysis

[sfb]

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.

To summarize what you've just said, US Airways Group can choose to get a bit more money for "burning the furniture" now (selling off the wholly-owneds) if they're willing to eat higher-cost RJ operating agreements at PSA & Midatlantic in the future. While that's all fine and good, high-cost RJ operating agreements won't help a restructured US Airways compete with efficient LCC's (or even Delta, for that matter) as they continue to expand in US's core markets.

The point is that a sale of those assets might help generate cash for an exit from bankruptcy, but sweetheart deals for capacity purchase in the future will make US Airways Group's business plan upon emergence less viable.

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.

Of course the ATSB and the company could amend the agreement -- but this is only likely if the company manages to get a significant premium for selling these assets (above the value assigned to the wholly-owneds in reaching the previously-amended agreements). The ATSB agreed to less restrictive terms on use of the cash collateral based on some valuation of the company assets on which it holds liens.

The danger is that the intrinsic value of any operating agreements between divested wholly-owneds and US Airways Group is highly dependent on the viability of Group. If the company continues to lose money and/or is unable to reorganize successfully, a potential buyer could be left with a bunch of RJ's and no customer.

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.

One problem with this scenario is that neither Mesa nor Republic (parent of Chautauqua) has a whole lot of cash to drop on US Airways. As of September 30, Republic had about $50 million in cash; Mesa had $220 million in cash and $157 million in short-term debt at year-end. While Republic does has a parent with deeper pockets (Wexford), Chautauqua is less dependent on the US Airways business. It's likely that RJ's made available by the end of agreements with US could be flown for United, Delta, or AmericanConnection.

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.

Mesa and Trans States probably have the most to lose from a hypothetical US failure. I'm fairly certain that Delta would be happy to deploy additional capacity from CHQ into US Airways' core markets in order to hasten US's failure. You have to consider that all of the RJ operators are in discussions with oher network carriers as well, and that this strategy could easily backfire if one or more of them simply choose to walk away from US, as Independence did.

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?

The regional carrier(s) in question would have to agree to go along with that, and there are no guarantees of this.

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.

You're sure about those better economics? SkyWest, one of the best-run regionals out there, operates primarily EMB-120 props and CRJ-200 jets, and posted a CASM of 13.4 cents for the first 9 months of 2004. ExpressJet's CASM for the same period (operating ERJ-145/135 jets) was 12.6 cents. Having been on both, I find the ERJ-145 to be more comfortable than the CRJ-200, especially when seated in the "A" seats which are both window and aisle. The Embraers offer larger windows and overhead bins, not to mention far better jetway compatibility.

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.

If this is the same quality of "planning" as seen for staffing at Christmas, aircraft cleaning, pricing, low cost competition, new routes from FLL, the web site, etc., I have very little confidence in management.

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.

No kidding. US already missed the first deadline with GE in mid-February but managed to get GE to agree to an extension. If the business plan really were that stupendous, US wouldn't be trying to arm-twist its regional partners into investing money and venture funds would be clamoring to get a piece of the action. If Dave Bronner really wanted to put more money into the company, he would have already done it. The uncertainty about funding for emergence is not helpful to the company.

 

[USA320Pilot]

When US Airways crafted its new business plan it anticipated oil in the $35 to $38 per barrel range. The company altered the plan for oil to to increase to $42 and $44 per barrel when prices began to rise, but there is not one legacy airline, and for that matter not even Southwest, that can make money at $55 per barrel.

The recent industry wide fare increase will help, but revenue remains low and energy prices too high.

Management is exploring its options trying to raise money, talking to all
interested parties, and then we will see what "shakes out". This could include MDA and/or "wholly owned" asset sales, M&A activity, the sale of the company, or an outside investor who has their own ideas. Every legacy carrier is talking about different modeling plans and consolidation -- how this ends up is still to be determined.

Regards,

USA320Pilot

 

[diogenes]

In other words, everything is on the table.

Doesn't that fact indicate the TP is tp?

 

[DCAflyer]

When US Airways crafted its new business plan it anticipated oil in the $35 to $38 per barrel range. The company altered the plan for oil to to increase to $42 and $44 per barrel when prices began to rise, but there is not one legacy airline, and for that matter not even Southwest, that can make money at $55 per barrel.

The recent industry wide fare increase will help, but revenue remains low and energy prices too high.

Management is exploring its options trying to raise money, talking to all
interested parties, and then we will see what "shakes out". This could include MDA and/or "wholly owned" asset sales, M&A activity, the sale of the company, or an outside investor who has their own ideas. Every legacy carrier is talking about different modeling plans and consolidation -- how this ends up is still to be determined.

Regards,

USA320Pilot

[post="253688"][/post]​

Well Southwest doesn't have to pay $55 per barrel. They are hedged through 2007 at, I believe, something in the area of $30-32. Which means, of course, that while most other airlines are raising their prices, LUV doesn't need to... or it can raise prices at a lower percentage than the legacies and other LCC's, put the money away to pay for future increases, or use that money to further hedge past 2007.

 

[sfb]

When US Airways crafted its new business plan it anticipated oil in the $35 to $38 per barrel range. The company altered the plan for oil to to increase to $42 and $44 per barrel when prices began to rise, but there is not one legacy airline, and for that matter not even Southwest, that can make money at $55 per barrel.

What you neglect to mention is that Southwest isn't paying $55 per barrel. To quote their 2004 annual report, "the Company has hedges in place for approximately 85 percent of its anticipated fuel consumption in 2005 with a combination of derivative instruments that effectively cap prices at a crude oil equivalent price of approximately $26 per barrel." Even with crude at $55/barrel, their average price of fuel corresponds to crude at just over $30/barrel.

Not just that, but Southwest has been looking far, far into the future with its hedges. I quote again:

As of December 31, 2004, the Company had a mixture of purchased call options, collar structures, and fixed price swap agreements in place to hedge its total anticipated jet fuel requirements, at crude oil equivalent prices, for the following periods: 85 percent for 2005 at approximately $26 per barrel, 65 percent for 2006 at approximately $32 per barrel, over 45 percent for 2007 at approximately $31 per barrel, 30 percent in 2008 at approximately $33 per barrel, and over 25 percent for 2009 at approximately $35 per barrel.

While these certainly don't cover all their fuel expense for the future, they will likely continue to enjoy an advantage over the rest of the industry for several years. They've managed to parlay best-in-the-industry balance sheet strength into lower cost of capital and fuel.

The recent industry wide fare increase will help, but revenue remains low and energy prices too high.

Soooo this is why US announced yet another fire sale yesterday? $79 each way between BOS and IAH is well below US Airways' costs to provide the service, especially given that most US service to IAH is now on RJ's.

Management is exploring its options trying to raise money, talking to all
interested parties, and then we will see what "shakes out". This could include MDA and/or "wholly owned" asset sales, M&A activity, the sale of the company, or an outside investor who has their own ideas. Every legacy carrier is talking about different modeling plans and consolidation -- how this ends up is still to be determined.

MAA will be something of a tough sell unless it's sold to Chautauqua given its current status as a division of mainline and no operating certificate of its own. Cash is definitely king right now. The biggest problem for US is that they don't offer much of a value proposition for an acquirer(s) over what the various assets would be worth separately.

 

[ClueByFour]

Management is exploring its options trying to raise money, talking to all
interested parties, and then we will see what "shakes out". This could include MDA and/or "wholly owned" asset sales,

[post="253688"][/post]​

Sell what? The vast majority of the assets are hocked to the gills.

What specific unencumbered assets could be sold to raise cash?

 

[usairways_vote_NO]

Management is exploring its options trying to raise money, talking to all
interested parties, and then we will see what "shakes out".

[post="253688"][/post]​

I hear a litte birdy saying "more pain " to 320

 

[FrugalFlyerv2.0]

When US Airways crafted its new business plan it anticipated oil in the $35 to $38 per barrel range. The company altered the plan for oil to to increase to $42 and $44 per barrel when prices began to rise, but there is not one legacy airline, and for that matter not even Southwest, that can make money at $55 per barrel.

[post="253688"][/post]​

I don't follow the price of oil that closely - was there ever a point in 2004 when the price per barrel dropped below $40? For more than a few days? If not, then what kind of a management team crafts a business plan based on crude oil prices of <$40? Nobody in CCY saw a flaw in this? Or were the numbers so bad that the only way the 'plan' could work is that if one assumes an unreasonable oil price of ~$40 per barrel? Why not be conservative and assume $45-50 to start out with?

 

[ELP_WN_Psgr]

I hear a litte birdy saying "more pain " to 320

Yes, and this time the management might even invoke (clap of thunder, followed by eerie music).........the PAINFUL clause. Not to be confused with Sandy Clause.

what kind of a management team crafts a business plan based on crude oil prices of <$40?

If this were jeopardy (I'll take foolish airline management for $500, Alex)
the correct jeopardy question would be: "Who are incompetent airline managers?"

 

[FWAAA]

I don't follow the price of oil that closely - was there ever a point in 2004 when the price per barrel dropped below $40? For more than a few days?

[post="253717"][/post]​

I'm too lazy to look, but IIRC, it was less than $40 for about the first 8 months or so - the real price spike seemed to begin around Labor Day.

But to answer your question - had the managers estimated conservatively, the plan would have been non-viable on its face. A plan based on $50/bbl oil would have probably accurately predicted the current failure to cover costs, and it would have been laughed at.

 

[savyinvestor]

Oil is expected to continue its rise with no end in sight. China and I believe India are becoming major consumers if I'm not mistaken. Seems to me managements estimates are flawed big time. I've even heard $80. per barrel is a possiability in 12-18 months. Savy

 

[luvn737s]

USAir has no more leverage over the potential regional investors than a whore has over her johns. In exchange for a little cash (read "major percentage") AWAC and whoever else responds to the dinner bell will come in and write themselves juicy contracts with whatever guaranteed profit they think they can get away with and huge minimum fleet levels. Remember when GE was reported to be dictating the terms of the concessions? Try imagining the future of scope with RJ operators on the BOD. A savvy RJ operator could easily make back it's equity investment in a few months and be in the money from there on out.

 

[mweiss]

I don't follow the price of oil that closely - was there ever a point in 2004 when the price per barrel dropped below $40?

Illinois Basin crude was below $40 for the first seven months of 2004.

 

[whlinder]

Back in July of 1982 West Texas intermediate crude averaged 66.23 a barrel. These prices aren't unprecedented.

 

[FWAAA]

Back in July of 1982 West Texas intermediate crude averaged 66.23 a barrel. These prices aren't unprecedented.

[post="253863"][/post]​

Is this figure in 2005 dollars or in 1982 prices? Reason I ask is that oil rose to about $41/bbl for a short time in 1981 (in 1981 dollars) which would easily be over $80 in today's dollars.

Here's a link alleging that the price of WTI in 1982 was more like $32 to $33, but a price spike might have caused prices to exceed $66 for a very short time. Adjusted for inflation, 1982's $33 would easibly be $66 in today's dollars.

http://www.mrm.mms.gov/Stats/pdfdocs/w_texas.pdf