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Analysis Of Q2 Financials For Big 6 Carriers  
User currently offlineB747-437B From , joined Dec 1969, posts, RR:
Posted (12 years 5 months 1 week 4 days 9 hours ago) and read 1435 times:

AMR (American Airlines)

Overview : Atrocious results for yet another quarter raise questions about what Carty has up his sleeve, and more importantly how long before he implements it. Operating margin improved marginally over Q1 but is still at an absolutely horrendous -20%, the worst among the majors by a long way. Year-on-year CASM continues to increase, which is not good and points to the need for more cost savings. Load factor remains anorexic at just 71.4% with a breakeven of 86.4%. AMR was the only major to announce an actual DECREASE in RASM from Q1 to Q2 which is a very troubling sign. Cash position remains very strong, but continues to be depleted by this poor operational performance.

Outlook : Unless there is a major change to AMR's revenue model or cost structure, this airline will go nowhere really fast. I'd give them till Q3 before I start seriously worrying, but if there isn't a DRASTIC improvement by Q4 its time to hit the panic button.

Q2 Grade : D-

CAL (Continental Airlines)

Overview : Its a pity that Continental is mired in so much debt, because from an operational standpoint they are the absolute cream of the crop. Q2 numbers remained solid, with negligible variation in most major categories, except for a nice solid reduction in CASM. Operating margin is finally positive, albeit barely by a nose, but is a welcome step in the right direction. Load factor was a good, but not great 74.6% on a breakeven of 76.9%. Liquidity is sufficient with a target float of $1.2b, but debt is fast reaching levels of serious concern.

Outlook : The operational side of the house is a textbook case on how to run an airline well, but the books are in a mess thanks to the debt. The pilot contract will likely add a fair chunk to the CASM, meaning that this quarter's positive spread may be a one-time deal for now. As long as the operational side stays solid, they will continue to motor along albeit slightly bruised.

Q2 Grade : B

DAL (Delta Air Lines)

Overview : DAL's operating numbers were the most pleasant surprise of Q2. Whatever secret ingredient they add to the water on Virginia Avenue, they need to keep doing that 'cos its working bigtime. Healthy increase in RASM was accompanied by a nice chunk of CASM reduction. Load factors were up by 5 points to a strong 73.4% on a breakeven of 75.8%. Operational margin improved almost 9 points to just around -3%. Liquidity is comfortably strong and debt is very manageable.

Outlook : DAL is the first of the majors to redefine their target revenue model away from yield and it seems to have worked for now. With a little fine tuning and marketing, there is no reason to doubt the eventual success of this model, possibly even as soon as Q3. If Fred Reid can continue to maintain this pace of improvement, DAL will be poised to become the dominant carrier in the near future.

Q2 Grade : A

NWAC (Northwest Airlines)

Overview : Solid is the best way to describe NWAC's Q2 performance. Small but steady improvements in every major area contributed to a satisfactory overall performance. Interestingly, NWAC was able to show an IMPROVEMENT in BOTH yield AND load factor from Q1 to Q2. Operating spread came oh-so-close to positive territory, but wound up just short at -1.4%. Cash position is a monstrously strong $2.8b, giving them either a war chest for a shopping spree or a savings account for a rainy day.

Outlook : If I had to pick one airline that is perfectly poised today, it would be NWAC. The combination of stong operational performance, coupled with cash in hand as well as the prospect of further operational streamlining as the fleet renewal program continues gives them an enviable position. Ironically, their moves in early Q3 last year gave them the perfect headstart over the competition when 9/11 came along and they were able to capitalize on that. Richard Anderson has the patience to wait for the right time before making any moves with his cash, whether that may be through acquisition or growth or simply a buffer.

Q2 Grade : A

U (US Airways)

Overview : David Siegel delivered some very healthy improvements in his first quarter on the job. CASM is down and RASM is up, which shows a healthy focus on fundamentals. Load factor jumped almost 7 points over Q1 to 75.1%, but breakeven remains an impossible 87.8%. Operating margin also improved 8 points, but isn't yet out of danger at -10.5%. Cash position is poor, but not a major concern because of the ATSB approval.

Outlook : Siegel turned CAL around with his operational genius and seems to have started on the right foot here as well. Yields continue to outstrip everyone else, meaning that a focus on higher load factors coupled with CASM control is the path to recovery. If the unions play ball and the ATSB guarantees produce no pitfalls, we just might see another miracle. I'm more optimistic now than I was 6 months ago, so let's wait and see.

Q2 Grade : B

UAL (United Airlines)

Overview : Baby steps in the right direction helped UAL slightly in Q2, but there is still an uphill climb to recovery. Yield showed surprising improvement to 11.36, as did load factor to 74.4%. However, breakeven is still out of reach at 87%. Operating margins improved slightly, but still runs almost -13%. CASM was down fractionally over Q1, but is still higher year-on-year. The once proud cash position has been eroded to the point of almost vulnerability, and debt is also beginning to mount.

Outlook : Rono Dutta continues to focus on the traditional yield-driven revenue model rather than adopt the changes made by DAL and NWAC. The jury is out on whether this will work in the long run or not, but in the short term the focus must be on CASM reductions. So far its been too little, and I hope for UAL's sake that it doesn't get too late.

Q2 Grade : B-


19 replies: All unread, jump to last
 
User currently offlineSingapore_Air From United Kingdom, joined Nov 2000, 13745 posts, RR: 19
Reply 1, posted (12 years 5 months 1 week 4 days 9 hours ago) and read 1393 times:

Finally someone who is interested in the business side as well!

Good for you Big grin



Anyone can fly, only the best Soar.
User currently offlineKeesje From , joined Dec 1969, posts, RR:
Reply 2, posted (12 years 5 months 1 week 4 days 8 hours ago) and read 1370 times:

thank you !

clear

keesje


User currently offlineSAS23 From , joined Dec 1969, posts, RR:
Reply 3, posted (12 years 5 months 1 week 4 days 8 hours ago) and read 1367 times:

Sean, I'm surprised you gave US Airways a B rating as their losses for the quarter increase tenfold (to US$248m from $24m) and unless they get agreement from their unions to substantial pay and employee cuts, they will probably have to declare bankruptcy.

Operating revenues declined 23.7% to US$1.9 billion in the quarter while operating expenses fell 16% to $2.08 billion. Operating loss totaled US$175 million compared to an operating profit of US$20 million in the 2001 quarter. Passenger traffic plunged 18.6% and passenger RASM dropped 10.4% to 9.84 cents. Cost per ASM rose 1% year-over-year, or 5.1% on a fuel-neutral basis, to 12.25 cents. The airline had US$602 million in cash at the end of the quarter and burned through US$1 million per day during the period.


User currently offlineDesertJets From United States of America, joined Feb 2000, 7811 posts, RR: 16
Reply 4, posted (12 years 5 months 1 week 4 days 8 hours ago) and read 1361 times:

Sean,

I am somewhat curious as to how you worked out the letter grades. And could you explain a bit more what operating margin means.


BTW- I appreciate you posting this. A lot of us here are interested in the business side of airlines, but simply lack expertise.



Stop drop and roll will not save you in hell. --- seen on a church marque in rural Virginia
User currently offlineLadevale From , joined Dec 1969, posts, RR:
Reply 5, posted (12 years 5 months 1 week 4 days 7 hours ago) and read 1358 times:

While I think 747-437b does a good job of reading the numbers, he fails to account for some of the stories behind the numbers.

For example, AA is pursuing a different strategy than Delta at the moment. Delta has been battening down the proverbial hatches. What else explains pulling out of all US-Tokyo markets, except Atlanta. On the other hand, AA has been engaged in a battle on many fronts, forcing JetBlue to expand at LGB beyond its means, forcing United to increase capacity out of Chicago beyond its current means, driving Midway into shutting down, punishing Northwest from time to time for its failure to go along with certain fair hikes, and finally taking it to Delta and US Airways by initiating its own Shuttle Service. If US Airways or United are severely damaged going forward, even to the point of Chapter 11, Delta will have AA to thank. AA clearly has determined that it can sustain its current losses if it means increasing its viability and competitiveness in the long run against United, US Airways, and Delta. That is really the story behind AA's numbers.

Despite all of these initiatives, AA ended up with more cash and more unencumbered assets at the end of this quarter than Delta. 747-437b can you explain this? Plus, I also think you overestimate the increase in AA's CASM year over year. It was only half a percentage point. Plus, something not covered in your analysis at all is that AA reached a point last quarter where its capacity reductions matched its loss in traffic. A good sign, so much so that the financial analysts at "Aviation Week" (owned incidentally by the same people who own S&P) thought fit to point it out in a recent issue.

I agree with you that Delta's operational performance over the last quarter was quite admirable. But, they did nothing more for their long term prospects than secure their Atlanta hub. How Delta is going to parley that into becoming the dominant carrier in the future, in your own words, has yet to be explained? I suspect your own bias played a part in coming to this conclusion.

The reality of this business, as you well know, is that if US Airways gets the ATSB loan and United hobbles along with ATSB or private financing nothing much has changed in this business. The situation is striklingly reminscent to what happens in the game of Monopoly when no one has a monopoly and the person with the weaker cash position owns Boardwalk or Park Place. In the airline business, Boardwalk/Park Place could either be routes to LHR, routes from Miami to Latin Am., or routes to Asia.

It should be sobering to Delta, in fact, that American has decided to throw all caution to the wind and enter the Shuttle market during this volatile time. Will this bankrupt American? Hardly. After all, it is deploying Eagle against two higher-cost operations. Why would it be doing this now? Though this has been in the works for sometime, ever since they acquired TWA's cache of slots at LGA - something I might add which you failed to recognize when you claimed on this board that AA's move was in retaliation to Delta's announcement to fly ORD-DFW 5 daily on RJ's, AA is going ahead with the move now because they smell blood in the water. If AA succeeds and one has to believe that they will because they have specifically targeted corporate contract passengers that they share with US Airways, Delta will now face a stronger and more global carrier in this market than they ever had to face in US Airways. The ultimte effects of AA's strategic initiative could have been stymied by Delta if hadn't dropped some of its global initiatives in some of these markets. But, in retrenching to fortress hub Atlanta, delaying its terminal projects at JFK, vacating the rights to fly JFK-Narita, and pulling out of the Boston/London market, it has essentially done nothing to dampen the network effects that AA can realize from entering the Shuttle market. (Sorry, but Skyteam isn't going to help Delta there.)

Frankly, AA's operational loss didn't surprise me given all the fights they have been picking lately. What did surprise me is how much cash on hand they had and how many unencumbered planes they had despite some continuing heavy commitments to particular capital improvements projects, such as the JFK mega-terminal and the retrofitting of TWA's planes.

So, there are always stories behind the numbers and sometimes those stories are more important, expecially when in the best of times the operating margins of most major carriers are no better than +5 percent. There is a story behind that too, but I'll leave that for another day.


User currently offlineNa From Germany, joined Dec 1999, 10818 posts, RR: 9
Reply 6, posted (12 years 5 months 1 week 4 days 7 hours ago) and read 1343 times:

Thanks for posting the figures and even more for your analysis. Its rare to find this. Surprising to see how differently the major US airlines are recovering - or not.

User currently offlineB747-437B From , joined Dec 1969, posts, RR:
Reply 7, posted (12 years 5 months 1 week 4 days 2 hours ago) and read 1309 times:

I'm surprised you gave US Airways a B rating as their losses for the quarter increase tenfold (to US$248m from $24m) and unless they get agreement from their unions to substantial pay and employee cuts, they will probably have to declare bankruptcy.

Neil - please don't think for one moment that I believe US Airways is out of the water. Far from it. They are still the weakest of the big 6 by a long way. However, I gave them a B grade for the work in Q2 by virtue of the fact that they made large strides in the right direction - the ATSB loan guarantee to solve short-term liquidity (which was a major concern after Q1's cash position), labor-trimming programs to cut CASM and a very healthy rise in load factor. I know that the year-on-year absolute numbers are still piss-poor, but they are faced with the need to overhaul BOTH the revenue model and cost structure - which never lends itself well to year-on-year comparison in the early stages. Yes, they have a very long way to go, but if they continue to improve at this rate, they just might pull it off.


User currently offlineB747-437B From , joined Dec 1969, posts, RR:
Reply 8, posted (12 years 5 months 1 week 4 days 1 hour ago) and read 1294 times:

Despite all of these initiatives, AA ended up with more cash and more unencumbered assets at the end of this quarter than Delta. 747-437b can you explain this? Plus, I also think you overestimate the increase in AA's CASM year over year. It was only half a percentage point. Plus, something not covered in your analysis at all is that AA reached a point last quarter where its capacity reductions matched its loss in traffic.

I don't believe that AA is anywhere near to failing or even showing vulnerability, but what concerns me is that while all the other majors are tweaking their business models to reflect the new economy AMR has pretty much stood pat and allowed status quo to continue. Well, looking at the results, status quo isn't pretty!

How did AMR end up with more cash and assets? Simple. They started with more cash and assets. They are also losing money at a much faster rate than anyone else, which means that sooner or later this won't be the case any more if allowed to continue unchecked.

I've followed AMR's moves closely, and from a strategic planning standpoint I think they are doing a great job capitalizing on their opportunities while everyone else retreats into their core markets. I'm well aware that the AMR Shuttle move was planned in advance - if anyone knows the value of TWA's *hidden assets* it is I - besides you can't throw together a schedule like that in 2 hrs - but the announcement was definitely moved up a few days to counter Delta.

Even on the labor front, all is not peachy in Casa Carty with APA/ALPA skirmishing on the RJ issues, plus an open pilot contract to negotiate. CASM doesn't look like its coming down significantly, and RASM is going the wrong way (down from 8.69 to 8.52). You can tweak capacity all you want, but as long as each ASM offered is losing money, that is not the solution to the problem. AA can expand into any market they choose, including the Northeast, but unless the spread improves what does that accomplish?

Why do I think Delta will be dominant? Because Delta is the only one of the big 3 (DAL, UAL, AMR) that has actually made progress towards succesfully redefining their business model, as well as having strong liquidity and market share. NWAC is even better poised than DAL on my list, and the only disadvantage they have is that their current market share is significantly lower.

Am I worried about AMR right now? No. Carty is too smart to be doing nothing. However, another abysmal quarter like this will definitely start to sow the seeds of doubt in my mind. Of course, your mileAAge may vary!  Big grin


User currently offlineB747-437B From , joined Dec 1969, posts, RR:
Reply 9, posted (12 years 5 months 1 week 4 days 1 hour ago) and read 1283 times:

I am somewhat curious as to how you worked out the letter grades. And could you explain a bit more what operating margin means.

Letter grades were assigned based entirely upon my subjective analysis of each airline's performance.

Operating margin reflects the comparison of each airline's operational profits to its operating revenue. Operating spread reflects the comparison of operational revenue to operational costs. I have a bad habit of using the two interchangeably, even though that is not always accurate!  Smile


User currently offlineFlyPNS1 From United States of America, joined Nov 1999, 6733 posts, RR: 24
Reply 10, posted (12 years 5 months 1 week 3 days 21 hours ago) and read 1238 times:

Overall, I would say a pretty good analysis of the financials. I too was a little surprised by the grade you gave USAirways...but I think you have since justified it.

I definitely agree that NW is really well positioned and that CO (minus debt and upcoming contracts) is also well set.

DL's financials are indeed strong but I'm not as confident in DL only because a few changes in the next months could really impact DL. First, DL seems to be struggling with BOS and JFK. AMR seems ready to attack and a codesharing U/UAL could make things even worse in both markets. Overall, a U/UAL codeshare could make life a nightmare for DL.

DL's RJ strategy has paid off so far and it's definitely helping the hubs, but how long can DL rely on the RJ's especially in markets where lowfare carriers are appearing? Which brings me to the last point, how will DL fend off the lowfare carriers? They have some kind of plan in the works but I have real doubts about the viability of DL trying to take on JB,WN and FL.


User currently offlineSTT757 From United States of America, joined Mar 2000, 16908 posts, RR: 51
Reply 11, posted (12 years 5 months 1 week 3 days 20 hours ago) and read 1216 times:

Would any else agree with me when I say AA needs to yank the MRTC, to lower the break even load factors and raise their yields.

To quote Gordon Bethune when he was asked about offering a more room product, "we offer more room, it's called First Class".




Eastern Air lines flt # 701, EWR-MCO Boeing 757
User currently offlinePadcrasher From , joined Dec 1969, posts, RR:
Reply 12, posted (12 years 5 months 1 week 3 days 20 hours ago) and read 1205 times:

Oh Ladevale!!! You're killing me!!...lol

DL has a lot to worry about an airline losing 450 Million a quarter! Check their estimated losses for the 2nd half of the year..600 Million.

"Doctor", I'm waiting for your explanation on why the "done deal" of BA/AA did not happen. Also, what about your predictions on MRTC? You can see why I would be skeptical of your advice right?

You've managed another rambling post of pure B.S. Which can be summed up as, "The fact that AA is losing a lot of money and is continuing to pursue market share proves they're a strong airline" Wonderful professor. I look forward to pointing out another totally off base prediction....lol

Lavedale writes

"It should be sobering to Delta, in fact, that American has decided to throw all caution to the wind and enter the Shuttle market during this volatile time"'

No Lavdale, it's just further proof that AA does not have what it takes to prevent further huge losses.






User currently offlinePadcrasher From , joined Dec 1969, posts, RR:
Reply 13, posted (12 years 5 months 1 week 3 days 19 hours ago) and read 1174 times:

B747

DL's RASM was down slightly less than 2%. I do not believe it increased.
Of course AA with MRTC saw a 10% drop in RASM...yikes...but this is a good
thing (Right Ladevale?) because it shows they can lose a lot of money and still stay in business fighting all these other airlines.





User currently offlineB747-437B From , joined Dec 1969, posts, RR:
Reply 14, posted (12 years 5 months 1 week 3 days 18 hours ago) and read 1150 times:

DL's RASM was down slightly less than 2%. I do not believe it increased.

RASM showed a decrease year-on-year but an increase from Q1 2002 to Q2 2002.


User currently offlinePadcrasher From , joined Dec 1969, posts, RR:
Reply 15, posted (12 years 5 months 1 week 3 days 18 hours ago) and read 1142 times:

DELTA AIR LINES, INC.
STATISTICAL SUMMARY
(unaudited)

Three Months Six Months
Ended Ended
June 30, June 30,
2002 2001 2002 2001


Operating Revenue Per
Available Seat Mile (cents) 9.69 9.88 9.45 10.03


User currently offlineB747-437B From , joined Dec 1969, posts, RR:
Reply 16, posted (12 years 5 months 1 week 3 days 18 hours ago) and read 1132 times:

RASM for Q2 2002 : 9.69
RASM for Q1 2002 : 9.20

Hence, there is an INCREASE over Q1 2002 RASM. The numbers you posted are irrelevant to this discussion as they simply show YTD performance and year-on-year performance.


User currently offlineDelta-flyer From United States of America, joined Jul 2001, 2676 posts, RR: 6
Reply 17, posted (12 years 5 months 1 week 3 days 15 hours ago) and read 1094 times:

My remark is directed to Padcrasher.....I guess it was just too much to expect a serious, civilized discussion to last .....

Pete  Sad


User currently offlineOA412 From United States of America, joined exactly 14 years ago today! , 5374 posts, RR: 25
Reply 18, posted (12 years 5 months 1 week 3 days 14 hours ago) and read 1081 times:

How Delta is going to parley that into becoming the dominant carrier in the future, in your own words, has yet to be explained? I suspect your own bias played a part in coming to this conclusion.

How ironic, one of the most, if not the most, biased contributors to this forum calling someone biased. Some people never cease to amaze me. Seriously, do you really believe that AA can do no wrong? Some time ago, you stated that anyone who denigrates (or at least those on flyertalk who sometimes trash AA) AA is simply jealous of their ability to do everything right. Your comment was laced with hyperbole was it not? You can't really believe that AA is as perfect as you make it out to be can you? The fact of the matter remains that MRTC did not produce the stunning results that you had once predicted. Funny how you've been silent on the issue ever since AA pretty much admitted that the program had produced less than stellar results. It's also funny that you were remarkably silent on the failure, yet again, of AA and BA to cement their relationship. This couldn't be because you had, as Padcrasher rightly points out, called the relationship a done deal could it? Just some things to think about. *END CHILDISH RANT*

Seriously now, I do wish to thank Sean for his excellent analysis of the current state of the airline industry. It's especially refreshing to see NW doing so well considering the fact that so many on this site are so quick to berate it. The same goes for DL. It's good to see that some good has come of their new business model. Hopefully the rest can bring themselves out of the rut they are currently in.



Hughes Airwest - Top Banana In The West
User currently offlinePadcrasher From , joined Dec 1969, posts, RR:
Reply 19, posted (12 years 5 months 1 week 3 days 13 hours ago) and read 1063 times:

Pete..The Professor gives as good as he gets. His last post is just a small mild example of his condescending attitude, just one of the many slams this guy puts out on a regular basis. I for one, plan to call him on it each time..so fair warning.

OA412

My feelings exactly. And kudos to Sean for his analysis. Although UA and U deserve an F. You don't get a good grade in business for effort.



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