Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

US Airways Group, Inc. (LCC)

November 16, 2011 10:15 am ET

Executives

Derek J. Kerr - Chief Financial officer, Chief Financial officer of America West Airlines Inc, Executive Vice President and Principal Accounting officer

Analysts

Will Randow - Citigroup Inc, Research Division

Unknown Analyst -

Will Randow - Citigroup Inc, Research Division

Thank you for coming. Today, we have U.S. Airways Group. With us today is Derek Kerr, EVP and CFO; and down here in the front row is Dan Cravens, Head of Investor Relations. And with that, I'm going to turn it over to Derek for a quick presentation followed with some Q&A.

Derek J. Kerr

Thank you. All right. Good morning, everybody. Thanks for having me. I'm not going to read this but I'm told by my legal team that I have to read some language, so I'll do that.

Our slide on Page 2 highlights that this presentation contains forward-looking statements. As you know, our actual results could differ material from the statements we make in this presentation, both because of market conditions and other factors. We refer you to the 10-K and 10-Q filings which contain additional information, cautionary statements and various risk factors that you need to consider.

So sorry about that, but we'll get on with the presentation. What I want to talk about here is, I'll spend a little bit of time talking about the industry and I got a couple of questions today as why is the industry doing well. I think there are 3 main reasons why the industry is doing well. The consolidation that has happened over the last 5 years, capacity discipline and also, the a la carte revenues that have been put in place over the last, last few years which we were forced to do through 2008 and 2009 with the fuel price spike in 2008 and the economy issues in 2009. We have also, because of all of these things, have been able to almost pass-through all of the increases in fuel prices that we've had this year. And so I'll show you the difference of 2008 versus 2011 and what that impact has had.

The first thing that I want to talk about is consolidation. We went from 12 major airlines in 2005, airlines that have had more than 1% market share, and we're now down to 7 airlines. So you've had the mergers with Northwest and Delta, United Continental; us, America West and U.S. Airways; and now Southwest and AirTran, all significant events within the industry driving down capacity and consolidating the industry. I think that we're not done. I think there are still opportunities for more consolidation within the industry, but this is Step 1 to the industry becoming more like other industries in our environment.

We go to capacity discipline. This is another thing that has happened. Because of the mergers and because of everybody pulling out aircraft and taking out aircraft, we have reduced our capacity by over 18% since 2005. That's really due to the merger. We put the 2 airlines together and had overlap and we were been able to take out the airplanes. We took out over 50 aircraft from our merger. The network carriers are down over 17% in this time period, and that's all due to the mergers that have happened, and I still believe there's more consolidation or capacity discipline coming as we have, throughout this year, seen that capacity has stayed down in 2011 and early part of 2012, which I'll show you a little bit later, capacity is going to remain out of the industry. The low-cost carriers are still growing, but they're a small part of the industry. That has JetBlue, Virgin, Spirit in there. But overall, the industry over the last 6 years is down over 6% which has allowed us to price our product a little bit better where we have -- to help us increase our profits.

A la carte revenues has been another significant thing for the industry. For us, it's worth $500 million, mostly baggage fees. People continue to ask whether this is going away, it's not going away. It's a $6 billion to $7 billion revenue for the entire industry if we take it across every airline. So this is not going away. I think the biggest thing is baggage and the fees that we have on bags. The second thing that is going on right now is just the choice. We call it Choice Seats or buying premium seats, and the expansion of that product as we move through the next few years. Expanding that product is the next step in a la carte revenues. That's a small portion for us. We can only sell it on our website, so we only sell about 17% of our seats on most of our flights and expanding that to a broader range of distribution channels, number one, and also seats, number two. That's in the future, but that takes a lot of technology and is coming down the road. Everything else is minimal, Gogo Inflight Wi-Fi, we are about to -- we will announce probably by the end of the year, either going with Gogo or Row 44 to expand our in-flight entertainment and have Wi-Fi on all of our aircraft by the end of the year. That hasn't been determined of who yet, but I think the entire industry is going in that direction. If you do not have that product on your planes, I think you'll be left behind. So we will -- we're looking at that product and looking at with Row 44 and Gogo to see how our expansion -- today, we have it on all of our A321 aircraft and we plan to expand it to our entire domestic fleet within the next couple of years.

With all of these things that have happened, the biggest thing, fuel prices stayed about the same. So if you look at 2008 versus 2011, fuel price is almost exactly the same, about $3.12 in our forecast this year. In 2008, it was $3.18. We just got there in a different way. Big major spike up in the middle of the year, dropped down by the of the year, but we still had the same amount of fuel price. You can see what's happened because of the consolidation, because of the capacity discipline and because of the a la carte revenues that have been put in place, we've been able to increase TRASM, which is total revenue per ASM by over 10%. Almost 10% each quarter going throughout the year versus 2008. So we've been able to pass on or increase revenues in this environment, where back in 2008 we weren't able to increase revenues in that environment.

Now we, as an industry, should have been able to do this at any point in time. So I think we've been pricing our product wrong for a long period of time. And now we're just getting there and it's driven by this fuel prices, the higher fuel prices, and the fact that we have to live in this environment of higher fuel prices and always look at things that way. So instead of -- in 2008, when the entire industry lost $4.5 billion, forecasted analyst expectations for the year-end 2011 is to make $2.2 billion. So a significant change in the industry and a significant change in the thought process of how things are done. The management teams are all different so you have consolidation, the a la carte revenues consolidation and management teams that are really focused on trying to bring a return back to the shareholders and increase profits.

For us, for the third quarter, really good revenue performance. RASM was up 10.2%. The entire industry, really good revenue performance. In the third quarter, international tends to play a bigger role than in any of the other quarters. We are not as -- we have about 20% international versus other airlines being more 50% international. So I think, from a domestic standpoint, really good revenue performance if you compare us versus more domestic airlines of Alaska, JetBlue and Southwest, about a 3-point increase there. So really good performance and great work by our revenue management team.

From a cabin perspective, we've talked about this a lot. And you guys all know that our key strategic advantages are our cost structure. We need to keep that strategic advantage and grow that strategic advantage. In the third quarter, we were only up 0.7% on a CASM, x fuel and special items. For the year, we are right around flat, and the guidance for the year is to be up 0% to 2%. So maintaining that cost advantage is key and we need to do that as we work through all of our contracts and labor contracts, the pilot, supplies and contracts that are still under negotiations today.

One of the thing that I always get questions about is fuel hedging and what is the right methodology. We have not hedged for the last 3 years. We continue to not hedge. We have been #1 in 5 of the last 8 quarters as the lowest fuel price out there. This quarter, we were, without any hedges in place, you can see we were third, even in an environment where fuel price went up 51%. The significance there is hedging is so expensive at this point in time. By putting in the hedges, you can see back 1 year ago, third quarter 2010 on the far right hand of the slide, that fuel was very high for the other airlines because of hedge losses that were put in place at that point in time. So there's a year-over-year change in the third quarter 2011. We went up about 44% in our fuel price increases versus everybody else going up about 30%. So that affected our margins a little bit.

But we continue to believe that this is the right answer, to not hedge. We have not gone back in into the market, and don't believe at this time, we will. It's not to say we will never hedge again, but we believe the cost of hedging and the cost of the insurance is too high at this point in time and we're not going to go in. But this is just an example of -- I think what you also see from last year to this year is nobody really has any big hedge advantage. I think the hedges that are in place are all right around where the cost of fuel is today. So there's no real gains or huge losses in hedges for anybody in the industry.

From a pretax margin basis, we were down at 2.8%. This is really due to the year-over-year increase -- that we had no fuel hedges in place. And so our fuel price went up about 44%. That impact, if we had average fuel price the same as last year, we would have -- it was $360 million more year-over-year in fuel cost to us from that perspective, from the higher fuel price and it affected our margins about 1% to 2%. And then the international footprint, our third quarter is always a little bit lower than everybody else just due to our international footprint being smaller than that.

From a cash perspective, really good cash. We continue to build, this is our highest third quarter cash balance since 2007. Always, we'd like higher cash but I think cash is holding up in a relatively strong position versus where we have been over the last 3 or 4 years. This is due really to some of the financings that we completed in 2011. We raised almost $1 billion of financing, most of that prior to June, so we did this all in the first half of the year. We had the 12 aircraft that we had delivering this year. We raised the 2011 EETC and the mixed market and sale-leaseback transactions. We're financing those 12 deliveries. We were able to go back in the market and do a C-tranche on a 2010 offering that we did, which hadn't been done in a long time. I think it's been years since a C-tranche has been done, and we were also able to attach a C-tranche under the 2011 EETC also. And we completed PDP financing and simulator financing. So we were able to go out in the markets and raise a good amount of money and finance all of the planes that were being delivered this year.

Looking forward, we do have 12 aircraft to be delivered in 2012. We currently have 2 of those completed and financed. All of these have backstop financing, so all of the 12 in 2012 and the 16 in 2013 all have at least backstop financing from our manufacturer. The A330s start to come in 2013 and we have a few more in 2014, which will be our wide-body fleet growth, or we could retire some 767s at that point in time. So we have flexibility with those aircraft coming in. The A320 family aircraft are all replacement aircraft. They're all coming in to replace 737-300 and 737-400. All of the 737-300s are gone on the old America West fleet, and they're going to start to be retired on the old U.S. Airways fleet starting next year.

So some deliveries are coming and all of them from a narrow-body basis of finance. The key thing out there for us is that the term loan, I mean it's out there until 2014. We have $1.1 billion left on that. We paid a little bit down. Very good pricing, LIBOR plus 250. And I won't go through everything on the chart. But this is the one thing -- for us, this is our major debt. Out of all of our debt, this is the major one, but it's not up until 2014. But we won't wait until 2014 to do something. We'll start looking at it a little bit earlier, but I think we're in very good shape on this loan.

Going forward, I mean the key is, and the question I get all the time, are people going to keep the capacity discipline that is in place today? This just shows, by quarter, what we know from all of the data that's out there today. So if you look at the fourth quarter numbers, capacity is going to be down year-over-year in the fourth quarter. We're going to be down almost 2%, almost all of the other airlines are going to be down. Low-cost carriers are still up but under 5%. And as you look into the first quarter 2012 and second quarter of 2012, everybody is going to be down. A little bit of growth in Europe in the second quarter, but pretty much down across the board. And every announcement I have seen from a capacity perspective is down or minimal growth in 2012, which is key for the industry that everybody is keeping the capacity discipline that we need to continue to make the industry profitable.

RASM environment, we have not seen any weakness at all. We have continued to see strong bookings. Not only bookings, but yields. I think the loads are kind of where they're going to be, so most of this is all driven by yields. You can see we have announced for October, we were at 10%. We have said through -- we believe we would be 10% for the entire quarter, is what we announced on our third quarter earnings call. Year-to-date average is almost 9%. So there's been a couple of dips back in April and June, but really continued strength in revenue and we don't see anything looking forward that this is not going to continue.

So it's not the same industry that we've had in the past. There's been a lot of things going on since 2008. We've been forced as an industry to change. The consolidation has forced a lot of that. Capacity discipline, which we're going to maintain that capacity discipline that looks through 2012. And I don't see any huge aircraft orders on the books for anybody to continue to grow. The a la carte revenues are going to stay. Southwest will stay with their method and not put them in place, but I think for an industry, we are where we are and those revenues are going to be in place. We've been able to pass on the prices because of all of this, and I think we're well positioned as an airline in this environment to continue to strive.

One of the things that I do want to touch on is for all investors out there, we've been, the whole industry is, let's say, not under attack. But Washington -- and one of the things that we have to deal with, we've gone and tried to fix ourselves. But what we need to do is we need to work with the government to try to get the regulation off. I think we are the highest taxed industry out there. We're one of the least profitable industries if you look at the ranking of industries that contribute to GDP. We're third behind energy and farming, but we're the least profitable of them all, and it's because we're the highest taxed. So what they're trying to do, I think, is raise taxes, $100 per flight per departure, tripling the security tax. I mean, this is like $36 billion in the industry or $3.6 billion a year that they're trying to add in cost to the industry. Which to us, would be about $350 million a year. And a lot of these taxes aren't even going to aviation. They're going to pay down the deficit.

So for those of you investing in airlines and would like to help out, I think, there's a lot of push out there. It's bad for the industry. The added cost on the industry will force us probably to reduce more capacity, lose jobs, lose service to some areas. So it's just one of the things we're pretty passionate about, and I think the whole industry's passionate about to try to work with the government, to try to grow the industry and not try not to force the industry to shrink through higher taxes, so just advertising for that. With that, any other questions?

Question-and-Answer Session

Unknown Analyst -

In terms of the demand environment, I know you mentioned it's relatively strong. What are your thoughts in terms of your network as your more levered to secondary cities? What are you seeing differently than some of other carriers, if anything? And when do you think you have a better feel for 2012, call it, corporate travel environment?

Derek J. Kerr

I think it's all across the board. I think from a demand perspective, we're not seeing any city better than any other city. So I think from a demand perspective, I think it is across the industry and I think people are buying tickets and I think there's no specific business versus leisure. Leisure is actually very strong. As we look out in bookings at Thanksgiving and Christmas time, leisure is very strong. And the second question?

Unknown Analyst -

[indiscernible]

Derek J. Kerr

Yes. Okay. We won't know, I mean, we have not gotten any indication from any of our corporate travels that anything is going to change. That normally shows up in January, if anybody has changed. But we have gotten no indications from any of our corporate travel people, and we stay in touch with them all the time that any -- that there's going to be any decline in corporate travel.

Unknown Analyst -

Can you talk about the slot swap? If you think that'll go through the timing? And the proceeds, who received the proceeds from the auctions of the slots and will those prices be disclosed?

Derek J. Kerr

Okay. Slot swap, the question is on the slot swap. Where we are right now is, between Delta and us, we have approval from the DOT. Where we're at in this step now is the auctions have just kicked off. I think that kicked off yesterday. There's going to be 8 slots at DCA and 16 slots at LaGuardia, and those will be auctioned off. All of those slots are coming from Delta and all of the proceeds from those slots will go to Delta in the transaction. That we will know, hopefully, before Thanksgiving or just after Thanksgiving. And once we get that complete, we need to get approval from the port authority to approve the transaction. And then we need approval from DOJ to finalize their approval. They have approved the Delta side of the transaction or the New York side of the transaction, and they're still looking at the D.C. side of the transaction and we're working hard with them to try to complete that so that we have approval for both of those as soon as possible. The other proceeds, which for us is the $66.5 million that we will receive from Delta in the transaction, that will be used to either -- it will be part of the Citi loan. It'll be used to buy collateral to replenish in the Citi loan if we need to, or it'll be used after a year's time frame to pay down. So I have a year to either buy more collateral or pay down the loan. Did that answer your question, Mary [ph]? Thanks.

Unknown Analyst -

Can you just go back to the demand question? When you say corporate and leisure are both strong, can you kind of break that down a little? Are they both strong in the similar way from the perspective of yield and traffic?

Derek J. Kerr

Yes. I mean, we don't have -- right now, there's no big difference between the 2. They're both strong. Corporate is still flying and yield is -- I mean, yield we know right in the next few months because of the holidays, and both holidays are very strong. But as you guys know, we don't know. Our information is 2, 3 months out and not any farther than that. So in the short window, both leisure and corporate are strong and yields are strong on both cases.

Unknown Analyst -

So it's not like corporate customers are bearing the brunt of price increases?

Derek J. Kerr

No. I don't think so. I think they're across the board.

Unknown Analyst -

You had mentioned the potential for increased consolidation. Would you say that's among the top 7 market share players? And if so, do you have any comments on what type of consolidation would make sense?

Derek J. Kerr

You say what further consolidation could make sense?

Unknown Analyst -

Yes.

Derek J. Kerr

Well, I think if you look at that chart there is, I think, we believe that in the end it would come down to 3 major carriers. So could there be more consolidation? Yes. I mean is it going to happen anytime soon? I don't know. All we have said is that if there's an opportunity for us and for consolidation, we would be interested as we have been throughout this whole time period. As you know, we did the America West, U.S. Airways-America West transaction and then looked at Delta and looked at United. So we've been a proponent of it the whole time and believe that if there is another opportunity out there, that we could be in the mix.

Unknown Analyst -

Great. If we could just go back to the slot swap. You kind of stepped away from the pack in a sense that everybody's spoken about how important the market, or the New York market is, particularly, the premium business traffic. Can you walk through the rationale on why you're pulling back from the pack? And really what the benefit you guys are going to receive in the D.C. market?

Derek J. Kerr

Okay. Well for us, it's kind of a simple equation. We don't make money in New York. We make money in D.C. We do better in D.C. So we're just taking assets that are underperforming assets and trading them for assets that we believe are going to perform. The problem in New York is the fragmentation in New York. We weren't big enough in New York and being the fourth or fifth player in a market is just -- you can't make money and you can't control your own destiny. So I think as we look at it, if you're not #1 in your market or a strong #2 in your market, you're going to lose money in those markets. And I think we have decided that when we're not 1 or 2 in a market, we're going to get out of that market and we're going to consolidate back to our core. So we've been focusing over the last couple of years as part of our consolidation, is focusing on Charlotte, Philly, DCA and Phoenix. We have 99% of our flying going out of one those cities. When we did the merger, we had 90% of our flying going out of those cities. So what it is, is really getting back to what our core is and getting out of unprofitable flying. And for us, New York was unprofitable flying just because of our size. And to compete against the other airlines in New York, we just couldn't do it because of our size.

Unknown Analyst -

And at the beginning of your comments, you mentioned that 20% about your business is international. What are your plans to grow international and what do you think the right mix of domestic-international should be going forward?

Derek J. Kerr

Well, we'll continue to grow, I think, but it takes aircraft to grow. When the A330s come in, we'll have a decision to make of growing internationally or retiring 76 aircraft -- older 767 aircraft. Right now, we started our first route down to Brazil from Charlotte. In the slot swap transaction, we do get another route down to Brazil. We've also -- so we planned to start flying down to São Paulo sometime in the 2012. That's taken us a while to get through the government regulations and to start that, but that will be our next flight. And then it's kind of playing out the map in Europe, I think. We don't have any plans right now to go to Asia or there, but we plan on going into Europe. We'll just see -- we have the flexibility, so if we want to grow, we can grow by taking on the A330s and growing. But we also have the flexibility that if things haven't gotten any better or the economy in Europe is not there, that we'll be able to retire aircraft and keep the fleet where we're at.

Unknown Analyst -

And then just as far as capacity goes, in the event that corporate bookings are not strong next year and the economy dips down a little bit, what flexibility do you guys have either within in your pilot contracts or within the system to pull out capacity?

Derek J. Kerr

Yes. We don't have a lot of flexibility to pull out capacity because we have fleet minimums in our pilot contracts. We have a U.S. Airways or East fleet minimum, and we have an America West, West fleet minimum. But we're pretty close to that number today. We do have 15 Embraer 190s that are not part of that fleet minimum that we could reduce if we needed to. It will be about 1%, 1.5% of capacity and we can always pull back some utilization. So we do have a utilization minimum. So we could pull back capacity if it got back maybe 2% to 3%, but we don't have a lot of flexibility to pull back due to our pilot scope clause.

Unknown Analyst -

Derek, in terms of normalized non-aircraft CapEx, what do you think the cadence is going forward? And on the aircraft CapEx side, can you talk about what the gross level looks like over the next few years and how much of that is financed with non-backstop financing?

Derek J. Kerr

Okay. Our normal non-aircraft CapEx, with this year, we're going to spend about $180 million. I think the forecast next year will be for about $170 million, $175 million. So the run rate, we've been at about $150 million run rate, but we're doing some interior refurbishments on our A330 aircraft and we're putting first class seats on our larger CRJ aircraft. So that's bumping up a little bit. So I think the run rate, we use $170 million to $175 million rate in that territory. From an aircraft CapEx, we have 12 deliveries we showed. We have another 60 -- so over the next 4 years, we have somewhere between 12 and 18 deliveries. So there's a fair amount of deliveries over the next 4 years and then it drops off until 2017 or 2018. Almost all of the narrow bodies -- from a backstop financing perspective, all of the narrow bodies are backstop financed, but the wide bodies aren't. So the A330s don't have the backstop financing. But we were able to, in the earlier deliveries of A330s, move the backstop financing onto those aircraft. So I don't have that, that's not complete, but that could be done. Of all of the deliveries that are left -- the rest of this year are all fully financed. Next year, just 2 of the 12 are complete. The rest of them, we're still working on. So last year, we did a mixture of WTC [ph] transactions, mixed market transactions with the banks and sale leaseback transactions, and we'll probably go down that route. None of the deliveries start coming in until later in the year, so we're in the negotiating process right now to finance all the 2012 planes.

Unknown Analyst -

Appreciate that. And in terms of a follow-up, obviously, with your A350 order a ways out, likely to get pushed out. If you need flexibility to, call it, reduce orders because the economy does tighten up, do you have that flexibility? Or do you believe you have the flexibility, is probably a better question?

Derek J. Kerr

Do we have flexibility to reduce the A350 order?

Unknown Analyst -

No, no. The A320 orders coming up near-term given the A350's slipping.

Derek J. Kerr

No, we don't. Those are not tied together. But just to that, we have pushed this deliveries off. So if there was a situation where we needed to push deliveries off, and I don't want to say we want to at all, I'm just saying we have negotiated. That A350 order was coming in, in 2015. And as part of our liquidity efforts, we pushed it to 2017. So there is always conversations going on with Airbus, and we're, by no means, want to push any aircraft. But if that became a situation where we had to, we would negotiate with them.

Unknown Analyst -

Okay. Last question from me. Can you just explain for us how you think about tail risk for oil prices since you don't hedge. How do you guys think about that or plan for that?

Derek J. Kerr

How we worry about tail risk?

Unknown Analyst -

Yes, yes.

Derek J. Kerr

I think none of the hedging programs that are in place today can cover you for the long term of tail risk and fuel price skyrocketing to $150 a barrel. Most of the airlines are hedged 6 months out at 50%, and they just kind of layer in the hedges. And that doesn't protect you for fuel price at $150 a barrel at the end of next year because you can't put the hedge in place for that. So we believe that there's a natural hedge in place right now. It's being proven out by where their revenue is going. We've been able to raise, prices, from a revenue perspective to cover the fuel increase. And we believe that's the right method to use as you go forward and not put hedges in place. I mean, the problem is it's too expensive. It's not that it may not be a smart thing to do at the right cost, but for us, the cost benefit analysis of putting hedges in place just doesn't make any sense to us. And I think that's proven out over the last 3 years.

Unknown Analyst -

[indiscernible]

Derek J. Kerr

Okay. Thank you very much, appreciate it.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: US Airways Group, Inc. Presents at Citigroup 2011 North American Credit Conference, Nov-16-2011 10:15 AM
This Transcript
All Transcripts