Us Airways Strategic Analysis

[jack mama]

I can only add one thing...Fuel is here to stay, I personally don't expect to see anything lower than $50/barrel for the forseeable future...maybe even into the $60 range....this better be built into the plan, because I am pretty tired of the High Fuel Prices excuse of the last 10 years!!!!

 

[ClueByFour]

The good news is that the consumer perception is the carrier will survive and fares have increased during the last month, although PRASM is coming in slower than desired.

[post="259811"][/post]​

Based on my own thoughts (as a consumer) and the rhetoric from my travel department and the discussions overheard onboard and at places like LGA, CLT, PIT, RDU, etc--I can assure you consumer perception is mixed, at best.

People from the hubs and focus cities who would otherwise book on US are waiting for US fare sales and then booking their vacation plans on another carrier who may have matched the sale, even in light of a connection, because of their concerns that there will be no airline to fly.

 

[sfb]

The good news is that the consumer perception is the carrier will survive and fares have increased during the last month, although PRASM is coming in slower than desired.

I'd add that yields in two key markets, PIT and CLT, will begin to take a significant hit once Southwest and AirTran respectively start service in these cities. The days of $241 average fares between ATL and CLT and $273 average fares between PIT and PHL are about to come to a crashing halt. AirTran's management didn't mince any words when they said that they liked high fuel prices because it would lead to certain competitors failing.

 

[eolesen]

I'd add that yields in two key markets, PIT and CLT, will begin to take a significant hit once Southwest and AirTran respectively start service in these cities.

[post="259830"][/post]​

CLT is turning into a RASM pig-pile. Not only do you have AirTran building up, but AMR and FlyI have also been adding service, and it isn't because they have a great food court.....

 

[autofixer]

I get tired of hearing how the business plan was conceived with fuel prices of <$40 in mind. They should have hired me to do their fuel research. The information about China and India and static oil supply has been out there for over a year. Where is U management's plan for sustained fuel prices above $40 per barrel? Shut down? What kind of plan is that? Merge? What kind of plan is that? Too many variables involved in the merger route. Might happen, might not...so you must plan accordingly.

 

[TheLarkAscending]

The good news is that the consumer perception is the carrier will survive...

Baghdad Bob?

 

[Rob]

You cite current assets of $1.159 billion. Unlike cash, this number is relevant only in conjunction with current liabilities, which are $2.581 billion in the same statement.

 

[delldude]

I understand the company has closed the “fuel delta gapâ€￾ by about 75% and needs more revenue increases, cost cuts, or a fuel price reduction of about 10% to 15%, but the money needed to submit the final POR is much smaller than I first thought, which is good news.



Regards,

USA320Pilot

[post="259649"][/post]​

yeah....just can't wait....
cheap fuel on the way

 

[autofixer]

And what is the plan for >$80 per barrel oil? Ther SHOULD be one as it is a possibility. But then again, I am still pondering the plan for >$30 per barrel oil that U management has in place.

I may very well be that sustained high fuel prices may signal the end to the LCCs. Just a thought. When the hedges expire, what then? Can these low fares sustain the revenue needed to operate in a high fuel environment? No. Oil in excess of $40 per barrel is the new reality. I for one, do not understand how the current low fare environment can continue.

It is very possible that this fuel environment may be a truely world changing watershed event. 9-11 was to a smaller extent, however, sustained fuel prices will change the aviation industry in ways that are not yet appearant. Will the LCCs be around in 5 years, if the current environment of high fuel continues? I though I might throw that out there and see where it sticks.

 

[700UW]

US has no fuel hedged.

 

[whlinder]

WN's hedges go until something like 2009. Can US play for time for 4 years?

 

[JS]

And what is the plan for >$80 per barrel oil?  Ther SHOULD be one as it is a possibility.  But then again, I am still pondering the plan for >$30 per barrel oil that U management has in place. 

I may very well be that sustained high fuel prices may signal the end to the LCCs.  Just a thought.  When the hedges expire, what then?  Can these low fares sustain the revenue needed to operate in a high fuel environment?  No.  Oil in excess of $40 per barrel is the new reality.  I for one, do not understand how the current low fare environment can continue. 

It is very possible that this fuel environment may be a truely world changing watershed event.  9-11 was to a smaller extent, however, sustained fuel prices will change the aviation industry in ways that are not yet appearant.  Will the LCCs be around in 5 years, if the current environment of high fuel continues?  I though I might throw that out there and see where it sticks.

[post="259924"][/post]​

The extra fuel costs are nothing compared to the difference between Go and Blo Fares. It's something like 20 bucks a person, not hundreds of dollars.

The real problem with $100/barrel oil for the airlines is going to be the fact that such high prices will drag down the economy, and then people won't have the money (leisure) or the need (business) to fly no matter what the fare is.

 

[whlinder]

I can't find anything more specific except than this and I am tired of searching :

The company has a long-range strategy in place. It's 85 percent hedged for 2005, with prices capped at $26 a barrel, and it has various hedges in place through 2009.

Link

I also found this:

The following is a summary of what the leading airlines, ranked by size in terms of passenger traffic, have said about the impact of fuel prices:

American: 15 percent hedged in first quarter, not at all in remaining quarters. Negative impact on fuel costs from 33.7 cent a gallon increase in jet fuel in 2004: USD$1 billion.

United Airlines: 11 percent hedged for 2005, at about USD$1.27 per gallon, excluding taxes.

Delta: Not hedged. Every one-cent rise in the average jet fuel price per gallon will increase its liquidity needs by about USD$25 million per year. Business model assumes an average 2005 jet fuel price of about USD$1.22 per gallon.

Northwest Airlines: Hedged about 25 percent for the first quarter, and 6 percent for the full year. Said a one cent change in the cost of each gallon of fuel would impact operating expenses by about USD$1.6 million per month.

Continental: Not hedged. Annual fuel costs seen increasing by USD$40 million for each USD$1 increase in crude oil prices, which have risen by about USD$14 a barrel so far this year. Also contractually liable to pay regional carrier ExpressJet's fuel costs above 71.2 cents a gallon. ExpressJet's fuel and fuel taxes exceeded that cap by USD$126 million in 2004.

Southwest: 85 percent hedged with derivatives that cap prices at USD$26 a barrel, compared with current market prices of over USD$57 a barrel. Expects first quarter fuel costs with hedge to exceed fourth-quarter's 89.1 cents average price per gallon.

US Airways: No fuel hedged as of December 31, 2004, but added it will recognize about USD$2 million a month for previously liquidated hedges, representing about 4 percent of its 2005 jet fuel requirements.

America West: 45 percent hedged for the rest of this year, and 2 percent hedged for 2006. A one cent per gallon increase in jet fuel prices will increase its annual operating expense by USD$5.7 million.

Alaska Air: 50 percent hedged for 2005; A one-cent per gallon increase in jet fuel prices will increase its annual operating expenses by about USD$4.0 million.

JetBlue Airways: 22 percent hedged for 2005.

(Reuters)

So with fuel, US is basically on the same playing field as everyone else except for the select markets where they face AS, HP or B6, and of course all the markets they go up against WN.

 

[funguy2]

For those of you who are implying that LCC's may flounder in the face of higher fuel costs, you are wrong.

The LCC's spend less on non-fuel expenses than the legacies. For Q404, US Airways (mainline only) CASM ex-fuel was 8.79 cents... in the same range with other legacies, less than Northwest's CASM ex-fuel. America West and AirTran CASM ex fuel was 6.00cents, Southwest was 6.22cents (probably reflective of their payroll vs. the others, which pay less and/or have less seniority). JetBlue's CASM ex-fuel was an incredible 4.74cents.

As long as the LCC's can maintain that, even with airplanes were fueled by dreams, the LCC's get to set the pricing, and have the ability to set pricing levels where they are profitable and the legacies are not... Unless the legacies can justify to consumers why they are worth a premium... which hasn't happened yet.

 

[sfb]

In the interest of completeness, Southwest reported the following in its 10-K filing for 2004:

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.

In any case, Southwest's cost advantage extends far, far beyond their fuel hedges. US Airways' mainline CASM, excluding fuel, was 8.79 cents in the 4th quarter. Southwest's CASM, excluding fuel, was 6.47 cents for full-year 2004 (up a whopping 1.5% over 2000). Even if US got its fuel for free, Southwest's CASM would be lower. And this doesn't even begin to address all the RJ's which have CASM's well over 10 cents/mile.

As JS astutely observed, Southwest wouldn't need to charge GougeFares to make up for significantly higher oil prices. Even if their fuel costs were to triple from 2004 levels, they'd only need to raise average fares by about $25 on a 1000-mile trip to cover the difference. They still wouldn't try to charge $400 each way to go between PIT and PHL, though the minimum fare might go from $30 to $50. And, in fact, very high oil prices might actually improve their short-haul traffic (subject to the effects on the economy as a whole and what that would do to the overall travel market). Southwest has often stated that one of their primary competitors is the private automobile. If gas goes up to, say, $4.00/gallon, plunking down $100 to travel between DAL and HOU walk-up looks like an even better deal.