Why United Airlines will fail again (By Joe Brancatelli)

[Busdrvr]

Neeleman was quoted recently (in the NYT IIRC) saying how oil should be in the 40s and he expects it to go there. I don't know where the price of oil is going, but I do know that UA catches a lot of flak for the supposed $50 long term average, yet I haven't read a single negative comment about B6 'basing oil' in the 40s...

as much as I despise Neeleman, I agree with his price forcast. Heck, it might even be high for LT prices. Inventories are building.....

 

[FWAAA]

Name one airline whose business plan makes a profit at current fuel prices? Or even breaks even for that matter.

And leave SWA out of it. They do not pay current prices for fuel. If they did, they would have huge losses today. Their hedges will run out eventually. As that happens they too will either lose money or raise prices. So their current business model does not work under CURRENT fuel prices either.

I'd say breaking even is pretty darn good compared to the rest of the airlines out there. Which puts UA ahead of the pack.

Well, there's BA, which just reported a net profit of $208 million on revenue of $3.8 billion for the quarter ended 12/31, almost double last year's quarterly profit for the same period:

http://biz.yahoo.com/ap/060203/earns_brita...rways.html?.v=5

Didn't Airtran also recently report a profit? And, of course, there's WN, which hasn't reported a loss for a long, long time.

 

[mrman]

And leave SWA out of it. They do not pay current prices for fuel. If they did, they would have huge losses today.

Very bad logic and shows a lack of understanding of hedges. Hedges are put in place so one can plan and 'know' the future costs, so you can plan and price accordingly. Where your logic goes afoul is you assume WN would have acted in the same mannor with other costs and pricing no matter what their known fuel costs were. Since WN set the market price in most of its markets, if their fuel costs were higher they would have acted differently either by raising prices if the market allowed or reducing costs or changing routes. They would not have acted in the same mannor as they do with a known future cost

 

[Rhino]

Fuel.

No one is making a profit at these prices. SWA had the cash to hedge or they'd be losing money as well.

Would be nice if UAL execs were sharing the pain.

The big thing to think about: most carriers are leveraged to the hilt. (They OWE buttloads of $). Entrants are coming in at unheard of capitilazation. It will get worse for legacies, not better, in the near term (five years).

 

[Busdrvr]

Fuel.

No one is making a profit at these prices. SWA had the cash to hedge or they'd be losing money as well.

Would be nice if UAL execs were sharing the pain.

The big thing to think about: most carriers are leveraged to the hilt. (They OWE buttloads of $). Entrants are coming in at unheard of capitilazation. It will get worse for legacies, not better, in the near term (five years).

When new LCC's enter the market, it's usually not ORD-HKG or DEN-DSM, it's in the LCC market place: high traffic city pairs (LAX-LAS, OAK-LAS).

 

[Busdrvr]

Very bad logic and shows a lack of understanding of hedges. Hedges are put in place so one can plan and 'know' the future costs, so you can plan and price accordingly. Where your logic goes afoul is you assume WN would have acted in the same mannor with other costs and pricing no matter what their known fuel costs were. Since WN set the market price in most of its markets, if their fuel costs were higher they would have acted differently either by raising prices if the market allowed or reducing costs or changing routes. They would not have acted in the same mannor as they do with a known future cost

So what you're saying is that maximizing profit is NOT the goal of the SWA leadership? REGARDLESS of the hedges, a company should price it's product at the profit maximizing point. The fact that they are pricing their product BELOW cost while rapidly expanding just illustrates the predatory nature of SWA. I think the goal is to weaken the other companies as much as possible before we're all paying the same for fuel. But just as a reference, if SWA was pricing it's product BELOW what the market will bare, they would be selling out for every flight AND therre'd be scalpers out front of the terminal selling SWA tickets. Last I checked, SWA had one of the lowest LF's in the business. Somehow I don't think raising ticket prices will result in higher loads at SWA, and BEST CASE, as SWA raises fares, the other airlines will also, resulting in MUCH higher revenue for the industry. It won't happen in DEN though, mark my word. SWA will NOT pull out of DEN, for reasons of pride, but they won't be a large player or make money there.

 

[767jetz]

Well, there's BA, which just reported a net profit of $208 million on revenue of $3.8 billion for the quarter ended 12/31, almost double last year's quarterly profit for the same period:

Uhhhh... I believe I was talking about US airlines, not government subsidized ones.

 

[767jetz]

Very bad logic and shows a lack of understanding of hedges. Hedges are put in place so one can plan and 'know' the future costs, so you can plan and price accordingly. Where your logic goes afoul is you assume WN would have acted in the same mannor with other costs and pricing no matter what their known fuel costs were. Since WN set the market price in most of its markets, if their fuel costs were higher they would have acted differently either by raising prices if the market allowed or reducing costs or changing routes. They would not have acted in the same mannor as they do with a known future cost

Yes, you do show a lack of understanding of fuel hedges. With current fuel prices, future hedges are more expensive than the past ones. WN's fuel costs do go up substantially over the next couple of years even with their hedges. And their business plan is based on the equivilent of about $25 per barrel oil. So what happens when they are paying the equivilent of $35-$40 per barrel? Yeah it is still less than everyone else, but not something they can sustain without adjusting their busines plan. What will they do? Eliminate the peanuts??? They will have to raise prices or ask for concessions.

So my original statement stands. WN would lose money at TODAY's oil prices.

 

[KCFlyer]

So my original statement stands. WN would lose money at TODAY's oil prices.

You miss his point...yes, they'd lose money at today's fuel prices...IF they priced their product for a loss. I've seen on other boards where some UAL employees post with pride that UAL beats SWA pricing. SWA recently annouced a price increase, albeit a small one. What he was saying was SWA has the ability to price for today based on their fuel hedges of yesterday. When SWA's hedges run out, It wouldn't surprise me to see them raise prices to cover. Unfortunatly, it wouldn't surprise me to see UAL, NWA and DAL keep their pricing at current levels.

 

[Bear96]

KCFlyer is correct.

Yes, WN would lose money at TODAY's oil prices -- IF they were stupid enough to not raise fares sufficiently to cover those prices.

WN is smarter than that. They price their product so that they cover their costs and make a profit. The problem for most other airlines when they try to match is that there is a price point at which WN is profitable, but most other airlines are not.

 

[767jetz]

When SWA's hedges run out, It wouldn't surprise me to see them raise prices to cover.

I didn't miss that point at all. What I am saying is in response to those who claim that UA's plan for $50/barrel oil makes their business model an inevitable failure. According to that logic, everyone's business model is a failure. Including SWA because it assumes no one will price their product according to the cost of doing business. (ie: fuel costs.)

UA has and will continue to raise prices to absorb the "over $50 oil" problem, at least to the extent that they won't lose money. So will B6, F9, and WN, as you have stated.

On the other hand, even WN has limits to how high they can raise fairs and not lose market share to, let's say Ted or Frontier.

Every airline eventually will have to raise fares to continue doing business with $65+ oil. But it only works when all airlines in a particular market follow suit. With WN and B6 having to raise fares, it helps airlines like UA make up the difference between the $50 oil plan, and the $65 oil reality. It's that simple.

 

[KCFlyer]

I didn't miss that point at all. What I am saying is in response to those who claim that UA's plan for $50/barrel oil makes their business model an inevitable failure. According to that logic, everyone's business model is a failure. Including SWA because it assumes no one will price their product according to the cost of doing business. (ie: fuel costs.)

UA has and will continue to raise prices to absorb the "over $50 oil" problem, at least to the extent that they won't lose money. So will B6, F9, and WN, as you have stated.

On the other hand, even WN has limits to how high they can raise fairs and not lose market share to, let's say Ted or Frontier.

Every airline eventually will have to raise fares to continue doing business with $65+ oil. But it only works when all airlines in a particular market follow suit. With WN and B6 having to raise fares, it helps airlines like UA make up the difference between the $50 oil plan, and the $65 oil reality. It's that simple.

IMHO, the winners will be the ones who decide that market share isn't going to make them profits, and price their product accordingly. On other boards, some UAL employees pridefully point out that UAL is cheaper than SWA...and if SWA has priced their product to cover their costs, they will make a profit. IF they are getting fuel for a significanly lower cost, yet still charge above the competition, one has to wonder if profits or market share is the guiding force to their competitors.