Robert Herbst

Airlines: Some Costs They Can't - And Shouldn't - Cut

Ben,

For the most part, what you appear to want is just what is occurring now. i.e., pilot wages unadjusted for inflation are "free market" albeit a ~20 year low hourly pay rate.

The -problem- I attempted to show is a future one. Because the compensation/benefits for the (pilot) profession has deteriorated so much, there is simply no incentive to encourage the type of individual you will want/need and expect to be responsible for what is required to be the pilot of a commercial jet liner.

Currently some of the largest airlines have a majority of their pilots well into their 50's. While I don’t have the data to prove it, I have no doubt the average age of the pilots for most of the legacy carriers has never been as high as it is. Most major/legacy airline pilots of today are too old to just leave and start a new career. To make-up for lost compensation and pensions, more and more pilots are starting side businesses which, is also adding to the fatigue issue.

TODAY, pilot experience for the major/legacy airlines is not an issue. Airline cutbacks caused by the recession forced the furloughs of thousands of airline pilots, many of which are now flying for the smaller regional carriers. In addition, two years ago the mandatory retirement age was increased from 60 to 65. Three years from now those age 65 mandatory retirements will create thousands of pilot vacancies every year for at least the next decade plus.

In the past, well trained military pilots use to fill a high percentage of airline jobs. Retired military pilots are no longer going to the airlines when they can earn so much more in other professions. Because the pilot profession use to have desirable benefits, it attracted the very brightest and most responsible individuals.

This -story- is all about the safety of the future. As the relatively old but very experienced pilots of today retire, what type of qualifications do you -expect- from those who replace them? Flying a jetliner and having the responsibility for hundreds of lives is not as simple as many want to believe.

Robert Herbst
AirlineFinancials.com

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On Nov 01 01:42 PM Ben Simonton wrote:

> Sounds like a stupid question to me. I would like a free market to
> determine how much they are paid, not some opinion held by one or
> more persons. What happened to the free market capitalism that made
> us the most prosperous nation in the world. We are fast losing it
> with these kind of questions.

Airlines: Some Costs They Can't - And Shouldn't - Cut

<IMG class=authors_reply src="static.seekingalpha.co..."> FYI- In order to have less story and more focus on numbers, the article above was edited down from my original story.

If you want the full story which includes more detail on what pilots/employees do? You can read it on the instablog.

seekingalpha.com/insta...

To t-bird-
Lots of wild stories about the airline industry. Factually since 1950 there have only been two time periods where the airlines have lost a lot of money.

(considers US based airlines)
1990-1993 the industry lost $12.8 billion
2001-2005 the industry lost $35.1 billion
1950-2008 the industry has a cumulative net loss of approximately $14 billion.

From 1950 through the 1978 deregulation there were no airline failures with small losses in only 3 years (1961-$38M // 1970 -$201M // 1975 -$84M)

Since the 1978 airline industry deregulation there have been over 200 airline failures in just the United States.

(data source: ATA)

Robert Herbst
AirlineFinancials.com

=======================

On Nov 01 08:37 AM Zenilvana wrote:

> Does the auto pilot at modern day airplanes have anything to do with
> the lower wages? Everything seems automatic. Are they just sitting
> there talking to either passengers or crews, except taking off and
> landing? Sometimes some falls asleep out of sheer boring. I may be
> the least qualified person to ask these questions. I just wonder.
> And then, why do airline executives command so much high compensation
> in contrast, of which question is also beyond reach of my concern.

Airlines: Some Costs They Can't - And Shouldn't - Cut

If you go to the link below- Chart 49 will show the annual change in pilot counts since year 2002.

Charts 62-64 will provide the wage percentage change of passenger fares for pilots, flight attendants and management.

www.airlinefinancials....

Robert Herbst
(author of article above)

On Oct 31 01:39 PM The Geoffster wrote:

> Too many pilots maybe?

Southwest's Failed War of Attrition

Here are a few more comments to Vaughn's accurate summary above:

LUV's market cap dropped by 59% comparing Q2 2000 (quarter prior to 9/11) with the most recent Q2 2009.

Over the same time period, LUV's long term debt increased by 335%. Note: The avg increase for the legacy carriers over the same time period was 15%.

Unit costs (CASM) for the recent Q2 2009 compared to year 2000:

Increased 26% for LUV.

Over the same time period..

AA's CASM increased by 13%.
CAL's CASM increased by 9%
UA's CASM increased by 2%
USAir's CASM decreased by 18%

LUV's labor costs are now the highest in the industry.

Prior to 9/11, LUV had a cost advantage because of their lower labor expense. For the past couple of years, LUV had a huge cost advantage from their fuel hedging. Both of those advantages are now gone. These changes now put SWA on a much more level playing field with the older legacy carriers.

Robert Herbst
AirlineFinancials.com

Jet Blue: Value Buy and Oil Hedge

"CASM" (cost per available seat mile) includes fuel expense. Fuel is an operating expense. The amount is provided in the operating items.

LT Debt is clearly identified in the balance sheet and further described/detailed in the "LT Debt" specifics. (LT Debt is not "Goodwill" and/or intangibles.).

Robert Herbst
AirlineFinancials.com

Jet Blue: Value Buy and Oil Hedge

Mr. Huneycutt,

Respectfully I dispute some of your conclusions from the article above:

"LT Debt"-- Y/E 2008 was ~$2.9 billion as reported in the SEC 10K filing. As a ratio to operating revenue this is not only the highest in the industry (largest 10 airlines) but using this ratio, is nearly twice what any other airline carries. As a percentage of assets, JBLU's LT Debt is at or above the rest of the industry.

"Unrestricted cash" = $571 million. As a ratio to operating revenue, this is about average for the industry and was -propped up- by the infusion of $300 million from Lufthansa which, IMO, was their headway into "Open Skies II".

"CASM" (unit costs) -- Your article states it as 5.94 cents. It is actually 9.87 cents. (source: SEC 10K)

"Industry losses over history" -- While it's true "Net" profits are minimal. Since 1950 and a decade before the first commercial jets, there have been only 2 -relatively- short-term time periods of industry losses;
- 1990-1993 had a net loss of $12.8 billion.
- 2001-2005 had a net loss of $35.1 billion.
- In the last 59 years, 41 had net profits.
- In the last 59 years, 49 had positive operating income.

We (apparently) agree fares need to go up in order to make this very valuable industry stable and as safe as it needs to be.

Robert Herbst
AirlineFinancials.com
(disclosure: Myself and my family hold no equity position in JBLU at this time)

Will These Airlines Face Bankruptcy in 2009?

Some facts for the US airline industry-

In the 30 years since the 1978 US Airline Deregulation.

19 years had positive operating income.

16 years had net profits.

From 1995 - 2000 (6 years) there was $22.9 billion in net profits and nearly double that in operating income.

Since 1950, there have only been two time periods where the airline industry has experienced major losses (1990-1993 and 2001-2005)

Source: ATA

Robert Herbst
Airline Financials.com

How Is Southwest Airlines Performing?

JB-

I'll attempt to explain this one last time.

There is no confusion on my part regarding "Special Items/charges" or your accounting summary above.

But that is not what I commented about in my original article.

My comment was -specifically- in reference to "Special Items".

I fully agree airlines, including LUV, provide accounting for the hedge/derivative impact in their SEC 10Q/K filings.

LUV clearly identifies the hedging losses -specifically- as a "Special Item" in the Q3 & Q4 press release. An additional note is added that when excluding the "Special Item/charge", LUV met or exceeded analyst projections.

LUV does not identify -gains- from the exact same hedging/derivatives as a "Special Item" in pre Q3 8K filings (please note reference to term: "Special Item").

May I suggest you read the top couple of paragraphs for LUV press releases for Q1 - Q4 '08. My comments regarding "Special Items/charges" are clearly noted in Q3 & Q4 but are not there for many pre Q3 '08 press releases.

Regards,

Bob H

How Is Southwest Airlines Performing?

JB,

If you look at the Q3 and Q4 2008 press release you will see SWA clearly states the loss came from "Special Items" as noted from fuel hedging/derivatives.

"Special Items" work both ways. They can be the cause of a (net) profit -OR- loss.

If you look back at the press releases for time periods prior to Q3 '08, while the savings from fuel hedging/derivatives is noted as you suggest. Those savings are not -labeled- as "Special Items" even though it was those savings which provided the (net) profits.

In fact; SWA adds further that they met or exceeded analyst's EPS profit projections for Q3 & Q4 '08 after discounting "Special Items"

Regards,

Robert Herbst
AirlineFinancials.com

How Did Airlines Do in 2008?

In order to recognize the different methods airlines used to account for fuel hedging derivatives Q1-Q3, I am making the following are updates to the data table above:

Year 2008 estimates - (in millions)

Delta .. Revenue = $34,860 Net loss = ($462)

United .. Net loss = ($1,470)

Continental .. Net loss = ($409)

Southwest .. Net profit = $314

US Airways .. Net loss = ($805)


Total 2008 Revenue (estimate) = $121,099
Total 2008 Net loss (estimate) = ($3,972)

----------------------...

Q4 2008 updated estimates (in millions)

Delta .. Net loss = ($299)

United .. Net loss = ($530)

Continental .. Net loss = ($181)

Southwest .. Net profit = $16

Total Q4 Net loss (estimate) = ($1,370)


Regards

Robert Herbst
AirlineFinancials.com

Pair Trading the Friendly Skies

Sean,

While what you state above is technically correct. You have left out that ~$2.5 billion of UAUA's (2008) net loss was due to Goodwill & Other Intangible write downs that were written up when UAL came out of bankruptcy.

I would also suggest when looking at LT Debt in the airline industry, it should be compared as a ratio to TTM revenue and current assets.

Specific to LT Debt and Capital Leases, CAL is more negative than UAL when comparing those metrics to TTM revenue.

Note: Cash and equivalent for airlines has a large variance from quarter to quarter. As such, cash ratios should not be used to draw many conclusions beyond short-term liquidity.

Robert Herbst
AirlineFinancials.com

Why Airline Stocks Are So Often Bad Investments

To Burned Investor-

I wonder if you (or others) would share your opinion of what you believe is a reasonable annual salary for a ~25+ year seniority airline captain in command of and responsible for a large wide body aircraft (~225 passengers).

I'll make the following notes:

* It takes several years of experience in the military or/and civilian flying jobs to gain the experience to even get hired by a major airline.

* Right or wrong, airlines use a seniority based system for all pilot job advancements. (i.e. If you leave one airline for another either by choice or due to the failure of an airline, you start over at the beginning of your airline career.)

* While it's true excluding SWA, UPS and FedEx, the AA & CAL pilots compensation package are somewhat better than airlines that have reorganized through the bankruptcy process. It is also true the AA pilots wages adjusted for simple CPI (inflation) are about what they were 15 years ago.

Due to concessions, current hourly rates for UAL, NWA, DAL and USAir pilots are 40-50% less than what they were scheduled to be from their 2000 contracts.

* Airline pilots are required to take FAA flight physicals every 6 months. FAA mandated recurrent training and check-rides every 6-9 months. Unannounced check-rides from the FAA and company check pilots without notice. Failing any of these could end your career. In fact, due to medical issues a large number of pilots never make it to retirement age as a pilot.

* While you will never hear about it; Each and every day there will be some pilots that have used their training and experience to turn what could have easily been a disaster into a non-event for the news media.

* The majority of airline accidents prove to be the fault of pilots. Obviously pilots assume considerable responsibility for the hundreds of lives sitting behind them and the $tens of millions in property each and every time they close their cockpit door.

None of the above is meant to minimize the important work all airline employees are responsible for each and every time an airliner makes a routine flight from point A to B.

Regards,

Robert Herbst
AirlineFinancials.com

Why Airline Stocks Are So Often Bad Investments

L&G-

The comment by Chris B above (last paragraph), is incorrect.

Passenger and freight airlines pay $billions in taxes and fees for the support system required to operate this Nations air transportation system.

Approximately 30% of each passenger fare goes -directly- to pay government taxes and fees (these costs are frequently broken out on your airline ticket).

In addition to the taxes and fees noted on most airline tickets, air carriers all pay significant amounts for airport landing fees, terminal rents, fuel taxes etc.etc.

You can do your own research to verify what I've stated by searching "transportation excise taxes", "Aviation Trust Fund" or check the ATA and FAA websites for specific information and data.

Regards,

Robert Herbst
AirlineFinancials.com

The Airlines' Recent Death Defying Actions

For some clarification-

Perhaps you are reading more into the short article and cash projections than what is written?

I am in no way -suggesting- any stock long or short. I frequently trade (not invest) in airline stocks. At the time I submitted this article I held a long position in AMR and disclosed this per the editor's disclosure requirement.

As for other applicable metrics for the airlines noted above. There are many. My website provides very detailed current and historical data far beyond what could be included in a short article here.

Specific to the comments above regarding Long-Term Debt/Capital leases the following is derived from the recent 2nd quarter (6/30/2008) SEC filings.

..... LT Debt .. (Debt ratio of Op Rev) .. ( Debt ratio of assets)
(in billions) (revenue is 4 x 2nd quarter)

AA ..... $6.926 ....... (31.6%) ....... (26.7%)
UAL .... $7.190 ....... (39.3%) ........ (33.7%)
DAL .... $8.338 ....... (47.9%) ........ (30.2%)
CAL..... $5.323 ....... (39.4%) ........ (38.5%)
NWA ... $6.849 ....... (50.9%) ........ (32.8%)
SWA ... $2.590 ....... (22.6%) ........ (11.1%)
USAir .. $3.205 ....... (32.6%) ........ (39.7%)
JBLU ... $2.936 ....... (85.4%) ........ (45.4%)

Please draw your own conclusions regarding debt/equity value as it relates to the projected cash positions.

Regards,

Bob Herbst
AirlineFinancials.com

What's Really Wrong With The Airline Industry - And Can It Be Fixed?

Bio Investor-

While some of your comments can be argued you are wrong in your conclusion that SWA fuel hedging cannot be reconciled (due to speculation).

Each airline reports somewhat detailed fuel and derivative information via SEC filings.

Here is a quick summary of each airlines 1st qtr 2008 average fuel cost per gallon and gallons used: (gallons are in millions)

AA.. 680 gallons at $2.732/gallon.
UAL.. 556 gallons at $2.833/gallon.
DAL.. 500 gallons at $2.85/gallon.
CAL.. 375 gallons at $2.7965/gallon.
NWA.. 367 gallons at $2.7974/gallon.
JBLU.. 117 gallons at $2.65/gallon.

SWA.. 373 gallons at $2.01/gallon.

Without their aggressive and very successful fuel hedging, SWA would have paid at least .75 cents more per gallon (see other airlines fuel cost noted above);

Without fuel hedging, SWA would have increased 1st qtr fuel expense by at least ~$280 million.

That ~$280 million -fuel hedge savings- was considerably more than SWA's 1st qtr 2008 Operating Income of $88 million or the $34 million in net profit.

Regarding the "drama" of the industry; I'd like to point out there is virtually no industry I am aware of that by it's very operation has such potential for risk (I.e., hundreds of thousands of human beings being carried at high altitude at hundreds of miles per hour in a very complicated man-made machine completely under the control of just two individuals albeit they are well trained Captains and Co-Pilots.)

I can assure you on a daily basis there are a number of in flight emergencies that you will never hear about only because airline employees on those aircraft have used their experience and training to land that aircraft somewhere safely.

Regards,

Robert Herbst
AirlineFinancials.com