Last year, major US airlines reported the highest profits in over a decade from the 2nd highest operating revenues in airline history. Every major airline except for American had a profit for 2010.
Two years after the Delta and Northwest merger, United and Continental merged in October 2010. Southwest and Air Tran will have their merger approved over the next few months.
As typically seems to be the case for the airlines, just when it looks like the industry is turning things around and making badly needed profits, along comes the mid-east/Africa problems which drive the price of jet fuel up by 40%. To add a little more challenge, Japan gets devastated by earth quakes, tsunamis and potential radiation tragedies.
The always ongoing question for the airline industry is what happens next? Or more importantly, what should happen next to turn the US airline industry into a strong global competitor?
What continues to get ignored by politicians, missed by the media and unrecognized by the consumer is:
· The US airline industry was never meant to be a low-cost mass transit system.
· The airline industry is made up of for profit publicly owned corporations which have a fiduciary responsibility to earn profits for their investors and share-holders.
· Airlines require $billions of needed profits to shore up balance sheets that were and still are devastated by the 911 aftermath.
· Hundreds of old fuel inefficient aircraft need to be replaced.
· A large percentage of airline employees are currently working for pay rates and work rules from 20 years ago.
The only “fix” to the US airline industry is high enough air fares to cover the rising and often unpredictable increase in every airline’s fixed and variable costs.
There are three parts to this in depth analysis:
Part One: Summary of the industry with noted strength and weakness for each airline
Part Two: Detailed key metrics for each airline
Part Three: Three year history of industry key metrics with airline-to-airline comparisons
The “industry”, for this analysis, considers the eight largest US airlines: United (UAL), Delta (DAL), American (AMR), Southwest (LUV), US Airways (LCC), JetBlue (JBLU), Alaska (ALK), and Air Tran (AAI). Except where noted all data includes regional/affiliate partners. Delta/Northwest and United/Continental data is reported pro forma.
Collectively, these airlines and their affiliate partners carry over 88% of the US domestic passenger market share.
Part One:
Summary of industry key metrics. Time period is for full year or year ending December 31.
Industry (eight largest airlines and affiliates) [2009 data in brackets]
2010 Operating Revenue [1] = $122.2 billion [$106.7 billion]
2010 Operating Expense [2] = $112.3 billion [$106.1 billion]
2010 Operating income/loss and margin [8] = $9.88 billion / 8.08% [$662 million / .62%]
Cash & ratio of 2010 Operating Expense [3] = $24.8 billion / 22.1% [$21.9 billion / 20.7%]
Advance revenue liability & ratio of 2010 passenger revenue [4] = $17.5 billion / 16.3% [$15.9 billion / 16.8%]
Net Long-Term Debt & ratio of 2010 revenue [5] = $22.02 billion / 18.0% [$30.07 billion / 28.2%]
Assets (total) = $136 billion [$136.6 billion]
Market Cap (total for 8 airlines) (Q4 2009 median) = $38.4 billion [$25 billion]
2010 EBITDAR (total for 8 airlines) [6] = $16.9 billion [$9.7 billion]
2010 passenger traffic miles (total for 8 airlines) [7] = 756.3 billion [731.2 billion]
2010 interest paid (total for 8 airlines) = $3.50 billion [$3.16 billion]
Strengths and weaknesses for each specific airline:
United (UAL) – 27.8% of system market share - Star Alliance
Strengths: Largest US airline with strong global network strengthened with the merger of Continental - relatively low debt
Weaknesses: Relatively low market cap - potential labor issues with most union contracts being negotiated - high debt load - large number of old fuel inefficient aircraft - potential merger issues
Delta (DAL) – 25.5% of system market share - Sky Team Alliance
Strengths: Strong global network - positive labor relations - industry’s best operating margins in 2010 -
Weaknesses: Weakest cash ratio - high debt load - large number of old fuel inefficient aircraft
American (AMR) – 17.8% of system market share - One World Alliance
Strengths: Strong yield management with industry’s highest revenue performance - recent approval for joint business venture with British Air, Iberia and JAL - industry’s highest advance revenue bookings
Weaknesses: Industry’s lowest operating margins and weakest EBITDAR - highest interest cost and weakest market cap - several years of ongoing contentious labor relations with all union contracts being negotiated and under control of the National Mediation Board (NMB) - poor customer service ratings - industry’s highest unit labor costs - pension obligation doubled to over $7 billion in last three years
US Airways (LCC) – 9.2% of system market share - Star Alliance
Strengths: Younger fuel efficient fleet - relatively low labor costs - high yield markets
Weaknesses: Industry’s weakest asset ratio with lowest advance booking revenue - high unit costs ex fuel and labor - relatively weak market cap - integration of 2005 merger with America West still not complete
Southwest (LUV) – 10.3% of system market share
Strengths: Industry’s highest market cap - lowest debt ratio and lowest interest payments - high cash ratio - positive employee labor relations with industry’s most productive labor force - acquisition/merger of Air Tran will add several high yield east coast markets plus access to close in international destinations
Weaknesses: Relatively high labor costs and relatively weak advance bookings - future growth opportunities will lead to international operations which increases costs
JetBlue (JBLU) – 3.7% of system market share
Strengths: Good employee relations - low operating costs - good customer service - new fuel efficient fleet - financial investment from Lufthansa - major carrier in JFK and BOS - strong interline agreements
Weaknesses: Industry’s highest debt ratio - high interest payments - low yields require high load factor to maintain positive cash flow
Alaska (ALK) – 3.0% of system market share
Strengths: Good customer service - high yield markets - good employee relations - high operating margins - low debt - high cash ratio - low interest payments - industry’s best EBITDAR ratio
Weaknesses: Relatively low advance bookings
Air Tran Airways (AAI) – 2.6% of system market share
Strengths: Low costs - young fuel efficient fleet - merging with southwest
Weaknesses: Low advance bookings
Outlook –
You have better odds of picking the correct color on the next roulette table spin in the casino than you do of predicting what an airline’s profit/loss will be by the end of the year.
On the revenue side, it doesn’t take much of a terrorist threat, global health event or weakness in the economy to see revenue for airlines drop off a cliff. On the cost side, the drastic volatility of oil prices can easily add billions of (unexpected) additional expense to an airline’s income statement.
Until the airline industry understands they must adjust capacity in order to price their product (passenger seats) high enough to cover both the expected and some level of unexpected future events, the airline industry will always be on the edge of failing.
Part Two:
Detailed key metrics for each airline.
United (UAL) – Star Alliance
2010 Operating Revenue / ratio of industry [1] = $34.01 billion / 27.8%.
2010 Operating Expense / ratio of industry [2] = $31.48 billion / 28.0%.
2010 Operating income/loss and margin ratio [8] = $2.53 billion / 7.45%.
Cash / ratio of 2010 Operating Expense [3] = $8.68 billion / 27.6%.
Advance revenue liability / ratio of 2010 passenger revenue [4] = $5.58 billion / 18.7%.
Net Long-Term Debt / ratio of 2010 revenue [5] = $12.47 billion /11.1%.
Net Long-Term Debt ratio of industry net debt [5] = 17.2%.
Assets / ratio of industry = $39.60 billion / 27.3%.
Market Cap / ratio of industry (Q4 2010 median) = $8.68 billion /22.6%.
2010 EBITDAR / ratio of industry EBITDAR [6] = $5.18 billion / 30.6%.
2010 passenger traffic / ratio of industry traffic [7] = 210.54 billion / 27.8%.
2010 interest / ratio of industry interest = $993 million / 28.4%.
Delta (DAL) - Sky Team Alliance
2010 Operating Revenue / ratio of industry [1] = $31.76 billion / 26.0%.
2010 Operating Expense / ratio of industry [2] = $27.44 billion / 24.4%.
2010 Operating income/loss and margin ratio [8] = $4.31 billion / 13.58%.
Cash / ratio of 2010 Operating Expense [3] = $3.61 billion / 13.2%.
Advance revenue liability / ratio of 2010 passenger revenue [4] = $4.50 billion / 18.3%.
Net Long-Term Debt / ratio of 2010 revenue [5] = $9.57 billion /30.1%.
Net Long-Term Debt ratio of industry net debt [5] = 43.5%.
Assets / ratio of industry = $43.19 billion / 29.8%.
Market Cap / ratio of industry (Q4 2010 median) = $10.64 billion / 27.7%.
2010 EBITDAR / ratio of industry EBITDAR [6] = $4.33 billion / 25.6%.
2010 passenger traffic / ratio of industry traffic [7] = 193.17 billion / 25.5%.
2010 interest / ratio of industry interest = $969 million / 27.7%.
American (AMR) – One World Alliance
2010 Operating Revenue / ratio of industry [1] = $22.17 billion / 18.1%.
2010 Operating Expense / ratio of industry [2] = $21.86 billion / 19.5%.
2010 Operating income/loss and margin ratio [8] = $308 million / 1.39%.
Cash / ratio of 2010 Operating Expense [3] = $4.5 billion / 20.6%.
Advance revenue liability / ratio of 2010 passenger revenue [4] = $3.66 billion / 19.2%.
Net Long-Term Debt / ratio of 2010 revenue [5] = $4.76 billion /21.5%.
Net Long-Term Debt ratio of industry net debt [5] = 21.6%.
Assets / ratio of industry = $25.09 billion / 17.3%.
Market Cap / ratio of industry (Q4 2010 median) = $2.47 billion / 6.4%.
2010 EBITDAR / ratio of industry EBITDAR [6] = $2.02 billion / 11.9%.
2010 passenger traffic / ratio of industry traffic [7] = 134.30 billion / 17.8%.
2010 interest / ratio of industry interest = $766 million / 21.9%.
US Airways (LCC) - Star Alliance
2010 Operating Revenue / ratio of industry [1] = $11.91 billion / 9.7%.
2010 Operating Expense / ratio of industry [2] = $11.12 billion / 9.9%.
2010 Operating income/loss and margin ratio [8] = $786 million / 6.6%.
Cash / ratio of 2010 Operating Expense [3] = $1.86 billion / 16.7%.
Advance revenue liability / ratio of 2010 passenger revenue [4] = $861 million / 8.2%.
Net Long-Term Debt / ratio of 2010 revenue [5] = $2.14 billion /18.0%.
Net Long-Term Debt ratio of industry net debt [5] = 9.72%.
Assets / ratio of industry = $7.82 billion / 5.4%.
Market Cap / ratio of industry (Q4 2010 median) = $1.72 billion / 4.5%.
2010 EBITDAR / ratio of industry EBITDAR [6] = $1.64 billion / 9.7%.
2010 passenger traffic / ratio of industry traffic [7] = 69.59 billion / 9.2%.
2010 interest / ratio of industry interest = $316 million / 9.0%.
Southwest (LUV) -
2010 Operating Revenue / ratio of industry [1] = $12.10 billion / 9.9%.
2010 Operating Expense / ratio of industry [2] = $11.12 billion / 9.9%.
2010 Operating income/loss and margin ratio [8] = $988 million / 8.16%.
Cash / ratio of 2010 Operating Expense [3] = $3.54 billion / 31.8%.
Advance revenue liability / ratio of 2010 passenger revenue [4] = $1.2 billion / 10.4%.
Net Long-Term Debt / ratio of 2010 revenue [5] = $-633 million / -5.5%.
Net Long-Term Debt ratio of industry net debt [5] = -3.0%.
Assets / ratio of industry = $15.46 billion / 10.7%.
Market Cap / ratio of industry (Q4 2010 median) = $9.95 billion / 25.9%.
2010 EBITDAR / ratio of industry EBITDAR [6] = $1.78 billion / 10.5%.
2010 passenger traffic / ratio of industry traffic [7] = 78.05 billion / 10.3%.
2010 interest / ratio of industry interest = $137 million / 3.9%.
JetBlue (JBLU) -
2010 Operating Revenue / ratio of industry [1] = $3.78 billion / 3.1%.
2010 Operating Expense / ratio of industry [2] = $3.45 billion / 3.1%.
2010 Operating income/loss and margin ratio [8] = $333 million / 8.81%.
Cash / ratio of 2010 Operating Expense [3] = $960 million / 27.9%.
Advance revenue liability / ratio of 2010 passenger revenue [4] = $514 Million / 15.1%.
Net Long-Term Debt / ratio of 2010 revenue [5] = $1.89 billion / 50.0%.
Net Long-Term Debt ratio of industry net debt [5] = 8.6%.
Assets / ratio of industry = $6.59 billion / 4.5%.
Market Cap / ratio of industry (Q4 2010 median) = $2.05 billion / 5.3%.
2010 EBITDAR / ratio of industry EBITDAR [6] = $679 million / 4.0%.
2010 passenger traffic / ratio of industry traffic [7] = 28.28 billion / 3.7%.
2010 interest / ratio of industry interest = $172 million / 4.9%.
Alaska (ALK) -
2010 Operating Revenue / ratio of industry [1] = $3.83 billion / 3.1%.
2010 Operating Expense / ratio of industry [2] = $3.35 billion / 3.0%.
2010 Operating income/loss and margin ratio [8] = $485 million / 12.65%.
Cash / ratio of 2010 Operating Expense [3] = $1.21 billion / 36.1%.
Advance revenue liability / ratio of 2010 passenger revenue [4] = $422 million / 12.2%.
Net Long-Term Debt / ratio of 2010 revenue [5] = $105 million / 2.7%.
Net Long-Term Debt ratio of industry net debt [5] = .5%.
Assets / ratio of industry = $5.02 billion / 3.5%.
Market Cap / ratio of industry (Q4 2010 median) = $1.87 billion / 4.9%.
2010 EBITDAR / ratio of industry EBITDAR [6] = $859 million / 5.1%.
2010 passenger traffic / ratio of industry traffic [7] = 20.35 billion / 3.0%.
2010 interest / ratio of industry interest = $73 million / 2.1%.
Air Tran Airways (AAI) -
2010 Operating Revenue / ratio of industry [1] = $2.62 billion / 2.1%.
2010 Operating Expense / ratio of industry [2] = $2.49 billion / 2.2%.
2010 Operating income/loss and margin ratio [8] = $128 million / 4.89%.
Cash / ratio of 2010 Operating Expense [3] = $454 million / 18.2%.
Advance revenue liability / ratio of 2010 passenger revenue [4] = $252 million / 10.7%.
Net Long-Term Debt / ratio of 2010 revenue [5] = $423 million / 16.2%.
Net Long-Term Debt ratio of industry net debt [5] = 1.9%.
Assets / ratio of industry = $2.18 billion / 1.5%.
Market Cap / ratio of industry (Q4 2010 median) = $1.01 billion / 2.6%.
2010 EBITDAR / ratio of industry EBITDAR [6] = $449 million / 2.7%.
2010 passenger traffic / ratio of industry traffic [7] = 19.58 billion / 2.6%.
2010 interest / ratio of industry interest = $77 million / 2.2%.
Notes:
[1] Operating revenue includes affiliates.
[2] Operating expense does not include one-time/special charges.
[3] Cash/equivalent includes unrestricted cash and short-term investments.
[4] Advance revenue is “Air Traffic Liability” for future travel.
[5] Net LT Debt is Long-term debt less current maturities plus capital leases less unrestricted cash and short-term investments..
[6] EBITDAR is a recognized term which calculates operating income after excluding interest, taxes, depreciation, amortization and aircraft rent.
[7] Passenger traffic is for consolidated operation and includes affiliates. RPM is passenger revenue miles and commonly referred to as market share.
[8] Operating income/loss includes affiliate impact and excludes special items.
Part Three:
Three year history of industry key metrics with airline-to-airline comparisons
Operating Revenue (total of eight airlines)-
2008 = $126.2 billion
2009 = $106.7 billion
2010 = $122.2 billion
When comparing 2010 with 2009, every airline had an increase in operating revenue. In general, the larger the airline, the larger the increase in revenue.
Operating Income/loss and margins (total of eight airlines) -
2008 = -$4.33 billion
2009 = +$662 million
2010 = +$9.88 billion
Operating income is the difference between total operating revenue and operating expenses. Note: For this analysis, recognized one-time and special charges were removed from operating expenses.
2010 was the first year since 2007 that every airline had positive operating income. Delta had the highest operating income at $4.3 billion and the highest margin at 13.58%.
Southwest and JetBlue were the only two airlines to have positive operating income for the last three years.
Net Long-Term Debt (total of eight airlines) -
2008 = $32.08 billion (25.4% of total operating revenue)
2009 = $30.07 billion (28.2% of total operating revenue)
2010 = $22.02 billion (18.0% of total operating revenue)
2010 Net Long-Term Debt compared to year 2009, was reduced significantly for the largest airlines. As a ratio of total operating revenue, Net LT Debt for the industry decreased by 36% over year 2009. For this analysis, Net Long-Term Debt is LT-Debt less current maturities plus capital leases less cash and equivalents.
Cash liquidity (total of eight airlines) -
2008 = $17.3 billion (13.2% of total operating expenses)
2009 = $21.9 billion (20.7% of total operating expenses)
2010 = $24.8 billion (22.1% of total operating expenses)
Cash liquidity for 2010 compared with 2009 increased significantly for United and Southwest and decreased significantly for JetBlue and Air Tran. For this analysis, cash includes unrestricted cash and short-term investments.
Stock market capitalization (total of eight airlines) -
2008 = $25.1 billion (Q4 median)
2009 = $25 billion (Q4 median)
2010 = $38.4 billion (Q4 median)
Market capitalization is the Q4 median stock-share price times the outstanding shares. Delta, Southwest and United have significantly higher market caps than all of the other airlines. Every airline had a 2010 year-over-year increase in market cap.
Market share of passenger miles (total of eight airlines, includes regional affiliates) -
2008 = 768.6 billion passenger miles
2009 = 730.7 billion passenger miles
2010 = 756.3 billion passenger miles
Each airline’s percentage of 2010 passenger traffic was little changed when compared with 2009.
Regional affiliate impact to market share (total of five airlines) -
2008 = 68.8 billion (regional affiliate passenger miles)
2009 = 69 billion (regional affiliate passenger miles)
2010 = 72.8 billion (regional affiliate passenger miles)
There was very little year-over-year change in total regional/affiliate passenger traffic miles. For 2010, excluding American, the other four airlines with regional/affiliate partners all increased net market share after including their regional/affiliate traffic.
EBITDAR and margin (total of eight airlines) -
2008 = $5.5 billion
2009 = $9.7 billion
2010 = $16.9 billion
EBITDAR is a recognized financial term used to measure a corporation’s operating earnings before including interest, taxes, depreciation, amortization, and aircraft rent. The following chart shows the EBITDAR ratio of operating revenue for each airline.
Delta and American were the only two airlines to increase EBITDAR margins over 2009.
Interest Expense (total of eight airlines) -
2008 = $2.48 billion
2009 = $3.16 billion
2010 = $3.50 billion
Interest expense has increased each of the last three years for the large legacy carriers.
Advance ticket sales (total of eight airlines) -
2008 = $16.3 billion (14.4% of 2008 passenger revenue)
2009 = $15.9 billion (16.8% of 2009 passenger revenue)
2010 = $17.5 billion (16.3% of 2010 passenger revenue)
Each quarter, airlines report the amount of passenger revenue collected for future travel (ATL). The above chart shows each airline’s Air Traffic Liability as a percentage of the previous 12 months’ passenger revenue. For this analysis, FF miles expected to be used in the next 12 months may be included as ATL.
Year ending 2010 data suggests the larger legacy airlines have higher future passenger bookings than the smaller carriers. Strong advance bookings should push air fare yields and revenues higher in 2011 than they were in 2010.
Conclusion: For year 2011, it is our opinion that all airlines noted above will see double digit year-over-year increases in top line revenues. Based on an average crude oil price of $100/barrel, and all other costs remaining similar to 2010, the eight airlines above will have to accumulate 10% additional revenues to break-even for the year.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: The above opinions and comments should not be used to determine the worth of any stock or investment. At the time of writing, the author and his family did not hold stock and/or derivative positions in any of the airlines covered in this article.
