10.8.2007 « Musings and Meanderings Over the Past Week »
Over the past week or so, it seems like the news about the airline industry is getting even more interesting. On Thursday, October 4, US Airways click here actually increased its order for new narrowbody equipment – yes, a net increase in new narrowbody aircraft. The next day, Glenn Tilton, UAL CEO, speaking in a taped message to employees, actually talked openly about increasing non-aircraft capital expenditures click here – yes, an increase in the airline business itself. And for United, this represents a significant increase.
Then over the weekend, Dave Koenig of the Associated Press wrote a story on American’s labor situation click here predicting a tough road there as the company engages in negotiations with its pilots and other work groups. Today the Wall Street Journal carried one story by by Melanie Trottman who issued a warning on American’s stock price click here, and another quoting Tilton on the divestiture of assets and consolidation – areas where he is often the lone voice in the industry click here.
So in a span of a few days the industry chatter veered from a new round of investments on one front to speculation about divestitures and consolidation on another. Together, the news coverage makes clear that there is no clear path to success for the major carriers, not with – no compelling investment thesis and the on again, off again desire of some airlines to “go it alone.” There is ample reason for all the carriers to fear the next round of labor negotiations with unions itching for a fight. Add to that fuel nearing $80 per barrel and heading higher, little fat left on the bones of the operation and an infrastructure that is certain to stand in the way of efficiency gains. And with a revenue environment totally influenced by a hyper-competitive industry, pricing decisions are left almost entirely to market forces, giving airline management teams little room to maneuver.
Some want to believe that the cost cutting is done. It is not. Some want to believe that it cannot get worse and it likely will . . . at least for some carriers. The low hanging fruit has been picked from the expense tree which only means that the hardest work is still ahead.
Over the next 2-3 years the winners of this war of attrition will begin to emerge. I am not alone in my belief that there are simply too many airlines– mainline and regional -- too many hubs and too many parochial interests among the stakeholders to make this market work for everyone.
Reader Comments (3)
It seems that Tilton has been jabbering about mergers, spinoffs, and crazy talk for the past few years. Is he just trying to play the "look at me" game to get investors cash?
I also agree that there are way too many carriers of all types, but how can this be reduced when there is always a startup(ie: skybus, virgin america) waiting to jump into the game? Are the regulatory hurdles for consolidation greater than the barriers of entry for newcomers?
Great blog, I definitely enjoy the perspective and knowledge you offer.
Recently "discovered" your blog, thanks to PlaneBuzz, and enjoy your more technical approach to the industry.
In the past week, United has been the subject of several stories saying that the company is "In a jam", that they need to merge. Do you agree, or are you in agreement that a company with more than $5 billion in cash can't be in too big of a jam?
Dear dbrg909
First let me reiterate that I am a shareholder in United, a point made elsewhere on this blog. Also, I am granted options as "at risk" compensation for my work as a board member at Hawaiian Airlines.
First I do not believe that United is in a "jam" at all. Nearly every carrier in the US industry is undervalued relative to historic valuations because there is no compelling investment thesis to "buy into" the US industry.
Consolidation is the best answer to the industry's increasing need to shed fixed costs as there is not much more from labor - other than to try to become more productive; not much more in savings from distribution costs; outsourcing may or may not be an answer and time will tell; oil prices are an uncontrollable expense.....therein lies my concern over a compelling investment thesis in this industry absent structural change.
With respect to the cash, all US carriers have more cash relative to revenue - or any other measure -therefore I believe that is not a significant issue other than to provide a source of capital to live and see another day.