Victor Cook

U.S. Airline Stocks: Bargain-Hunters' Dream or Falling Knife?

Interesting article, Mark. The price/revenue ratio is a great metric -- simple to compute with powerful implications.

To place this metric in perspective you might what to see my paper "The Value/Revenue Ratio." In it I track that ratio over 56 years for all public companies. The long run expectation is about 1.0, but the semi-long run swings are even more interesting. See papers.ssrn.com/sol3/p...

Vic

Luggage Forward Flying: How to Restore Passenger Confidence and Carrier Profitability

Concerned Traveler,

Thanks for your tip on Baggage Quest (BQ). Since I was not aware of this option I checked out their website. I noticed that both services are private companies looking for investors.

The front page of BQ looks just like Luggage Forward’s (LF). But, as you say, there are some important differences. For this reply to your comment I priced a one-way trip from ZIP 10023 to 33464 on April 30, 2008.

Like you, I found the LF pricing screen confusing. I think the main reason for the confusion is that it gives me more options. BQ has no detailed pricing screen. They specify a Platinum Service next-day delivery date -- without a pick-up time -- for $280. On the other hand the Express Service in LF’s pricing screen lets you select between a standard two hour pick-up time (i.e. 1:00-3:00) for $259. In addition you can specify an exact time (i.e. 1:00) on pick-up date for an additional $45 – or a total of $296 .

Currently both services are pretty pricey – several hundred bucks for same-day pick-up and next-day delivery. I’m sure these prices are a result of their relatively small scale of operations. See my latest SA post for a take on what next day service might cost in a large scale operation based on partnering with one or more major carriers.

~V

Luggage Forward Flying: How to Restore Passenger Confidence and Carrier Profitability

real_world,

Somehow you missed the underlying meaning of the LESS is more concept. And in doing so gave me an opportunity to clarify the issues. I’ll try to explain by beginning with the statement in JC’s book that jump-started this entire line of thinking about creating ‘power offers’ in air travel:

”For [passengers], less should mean that they get exactly what they need and nothing more, with no superfluous elements that create complexity and could destroy value (p.27).”

Checking baggage is one of the “superfluous” elements in air travel that “creates complexity” through check-in and pick-up and “destroys value” through mishandling and loss. The passenger benefits of not checking baggage are outlined on the Luggage Forward website in the section titled …why forward luggage?

… avoid carrying your luggage or sports equipment to and from the airport

… bypass long check-in lines

… don't pay excess baggage fees

… eliminate the possibility of the airline losing your luggage

… skip the wait at baggage claim

… have your luggage waiting for you at your destination

In a trip between Houston and Dallas these activities easily consume more time that the flight itself. Not to mention the hassles involved. By the way, if a Luggage Forward passenger's baggage shipped “within the United States is delayed, Luggage Forward will provide reimbursement of expenses of up to $200.00 per day per Item until the day the delayed Item arrives.” With this kind of luggage performance standard you can bet that very few LES travelers would be left “waiting for it” at their destination.

Your comments skip right over these passenger benefits. It appears you want to make the reader believe the idea that “parallel” flights by an express shipper are both ridiculous and unnecessary. It’s not. In fact it’s one of the subtle virtues of the LES option: the specialization of labor kicks in.

The shipment of packages compared with people make dramatically different demands on the carriers. FedEx, UPS and DHL specialize in packages. It’s obvious that package shipping is both easier to manage and more profitable than the shipping of people. A telling statistic is that in 2007 these top three express shippers generated $122.7 million in revenues per aircraft per year compared with nine air carriers’ $35.5 million. That’s 3.5 times more revenue for express shippers per plane per year. And packages are never “unhappy” about how tightly they are packed into the aircraft!

On the other hand, airlines are in the business of moving people, not bags. According to the DOT scheduled U.S. airlines flew 18.7 million hours in 2007 with no passenger fatalities, but they mishandled more than 5.1 million bags.

Finally, suppose your assertion that express shippers “currently rely on the airlines to support their overnight service …so, the luggage would wind up right back on the airline's planes” is correct. Here again, your comment overlooks a fundamental benefit of the LES is more option. That baggage winds up on the airlines’ planes as cargo, generating revenue at market rates based on weight and distance traveled.

Even if your assertion is correct, passengers are free from the curse of checked baggage and the carrier earns money on the shipment! Actually, I suspect the top three express shippers use passenger carriers to supplement their own fleets only when capacity is pushed to the limit, as may be true during holidays. If you have data to the contrary, please post it your reply.

Thanks for your comments.

~V

'Power Offers' in Air Travel: Should Continental Partner with the TSA?

RG,

Your comment is a welcome voice for change in replies to recent posts in my series on improving the air travel experience. I was beginning to think I was the only one who believes that most of the hassle of flying occurs on the ground. And more important, that removing those hassles would create a “power offer” that would be far more appealing than frequent flyer miles.

It also came as a surprise to me that none of the domestic legacy carriers are involved in the TSA Registered Traveler program. So I thought they must be in process. Apparently not. I just searched for the phrase “Registered Traveler” in the Q3 and Q4 07 earnings call transcripts on Seeking Alpha for CAL, DAL and UAUA. Guess what? Not a single mention of this TSA program in any of them. These being three of the biggest domestic carriers in competition with Virgin Atlantic, BA and Air France you would think they might be exploring this option.

Right now I’m working on the next post in this series for Sunday April 13, 2008. It takes the notion of a “power offer” to the next level by reviewing two privately held companies that offer supporting ground services in cooperation with the TSA. It turns out that Virgin Atlantic, BA and Air France already have partnered with one of the as well. But not CAL, DAL or UAUA. I guess merger mania has blinded senior management of these carriers to even the possibility of offering a more appealing and profitable service. I also wonder why we don’t hear more from the pilots on this possibility. They have as big a vested interest in more appealing and profitable air travel experiences as anyone else.

Thanks for your thoughtful comment.

~V

'Power Offers' in Air Travel: Should Continental Partner with the TSA?

Feedback on my error,

I apologize to the shareholders and employees of AirTran Airways for my error. I also apologize to SA readers. If I had cross-checked The New York Times report on the bankruptcy of ATA Airlines (www.ata.com/) more carefully I would have discovered it was not AirTran Airways, a subsidiary of AirTran Holdings (NYSE: AAI), (www.airtran.com/Home.a...).

The SA editors have removed the incorrect references from this post. Thank you for your prompt feedback on my error.

By the way, I searched the AirTran website for information on their TSA Registered Traveler service and found no reference to it. Do you know anything about availability of this service to AirTran passengers?

Should I stick to financial reporting? Maybe I should. It's sure is a lot easier to find errors in a financial analysis of historical data than in the complex issues associated with redesigning an unprofitable business model.

~V

Why Airline Mergers Don't Work

Tim,

Chart 3 in my previous post “Fixing the Airlines: Reconfigure or Regulate” shows a 55 quarter time series of Southwest’s risk-adjusted differentials. Its RADs peaked at +3.5 in March, 2003 and closed at +1.2 in December, 2007. Or, the company’s risk-adjusted share of value fell from 3.5 to 1.2 standard deviations above the expectation. Over the same period Southwest’s enterprise marketing risk was 21.2 compared with a large-sample, cross-industry mean of 6.6.

In short, LUV’s risk-adjusted value shares dropped by nearly two-thirds in a period when its risk was three times greater than expectations. LUV’s share price peaked at $19.40 on October 27, 2003 and closed at $12.75 on March 31, 2008.

If Southwest’s management applied accounting "shenanigans" to its financial statements over the years, investors seem already to have factored them into its share price. It appears you have identified two of them. Of course, there were other powerful forces at work in their competition for customers and capital that had a huge effect on their stock price. Among them was the “financial cleansing” of competitors’ balance sheets by the bankruptcy courts.

Taking all this into consideration don’t you think it’s okay to compare Southwest’s success/failure with that of competitors who have used their own accounting ”shenanigans” to distort the full picture? While markets are far from perfectly efficient, investors like you clearly know who to find the peas under the mattress.

Thanks for your comments.

~V

Creating 'Power Offers' in Air Travel

Doc,

Your two cents are worth at least a buck! A 'distributed clothes cache' is the whole idea behind the ‘Certified Airtravel Valise.’ And now that I’ve learned from the comment by Rich (above) that pre-screening won’t be allowed by the TSA, that name has to be changed. Maybe your Distributed Clothes Cache [DCC] is a better name. Not only does it get away from the pre-screening function, it’s a more appealing phrase.

Your comment also adds another dimension to this service that makes it even more seductive: the option of creating new ‘stashes’ while visiting exotic destinations. There is no reason to restrict the creation of DCCs to the home base. In fact, there is every reason for the airline to encourage it. The more deeply the carrier becomes involved in making air travel an exciting and pleasurable experience, the more committed passengers become. In Professor Larreche’s words, they begin to experience vibrant satisfaction! As a result they constantly are telling others about the service. Which is a fundamental force driving the momentum effect. Word-of-mouth costs nothing -- and it’s far more effective than advertising.

Thank you for your insights.

~V

Creating 'Power Offers' in Air Travel

Rich,

You’re right. I know little about airline operations and nothing about TSA policies. A colleague who knows a lot about both reviewed this article before I posted it and warned me about the TSA roadblock. In an email yesterday he said that:

“Inspection is not an airline function – it’s a TSA thing. So your CAV idea really should be sold to TSA. TSA has developed a verified traveler program which you may have heard of. Unfortunately TSA is a power to itself and cares not one whit for inconvenience to anyone but itself. It’s almost as if it answers to no one.”

This is pretty much what you said in your comment. As a result of his comment yesterday I added this to my post:

“The security must be such that the TSA will approve CAVs as pre-inspected baggage. Securing TSA approval would require careful planning of security safe-guards by the airline.”

It’s clear from your comment that “careful planning of security safe-guards” requires inspection of all CAVs by TSA agents to ensure against the very dangers you cite. I hadn’t thought about the (now obvious) security risks of entrusting a personal valet to pack the valise. Clearly, pre-screening is not an option. So, the airline must feed the packed CAVs through the regular TSA screening process. That’s something that can be built into the program – even if an airline employee has to walk the baggage through the regular inspection line.

Thanks for tipping me off about why my suitcase always gets the full inspection. I had no idea it was the computer that motivated the special treatment. But, just to correct one misimpression you took away from my post, I already carry an HP laptop in a shoulder bag. With my books and papers it weighs about 10 pounds. Guess I better take along another carry-on for the MacBook … or leave it at home.

Thanks for you comments. This is just the kind of informed feedback I need to figure out if a “personal valet service” is even possible, never mind whether it could succeed if offered.

~V

Why Airline Mergers Don't Work

Roman,

You’re right, my analysis “doesn't account for the network re-alignment and capacity management.” Even if I had access to the necessary data, I’m not qualified to do that analysis without the help of airline specialists. But, there’s another way in which my analysis may not “fully reflect the advantages of larger share of market capacity.” It is a static, single period analysis. If the air travel market were growing at a fast clip, the results could be quite different.

Thanks for your comments.

~V

Why Airline Mergers Don't Work

johnk,

Fuel hedging is not the only reason makes money. See my response to the comments of "analysisguy" at the beginning of this series. I also would note the comment directly above by User 167840: "... Southwest employees are valued and respected!"

Why Airline Mergers Don't Work

Airline Guy,

Thanks for reminding me Herb Kelleher no longer is the sitting CEO. I expect he always will be their CEO in spirit, even as he continues to serve as Board Chairman.

~V

Why Airline Mergers Don't Work

cmj862,

Exactly. Creating new ways to make more money so your profit margin goes up is what Professor Larreche's book on "The Momentum Effect" is all about.

Thanks for your comment.

~V

Why Airline Mergers Don't Work

Analysis Guy,

I agree with most of what you say in this comment. Though I don’t understand why you add such a negative twist to the way you say it.

For example, saying that “Southwest runs the airline like a vulture” seems to be condemning management for “only operating on profitable routes.” If the another airline did build up the route, why did they sell it? You make it sound like being successful is a shame.

And when you say “If Southwest did not have their fuel hedged, you would see them posting loss …” you speak without full knowledge of the facts. For example, here are the results of their fuel hedging program in the last two years. The gains from hedging totaled $1,260 million. The Before Tax net totaled $1,848 million.

LUV Gains BT Net Difference
2007 $ 585 $1,058 $473
2006 $ 675 $ 790 $115
Totals $1,260 $1,848 $588

The difference of $588 million would have been realized without the hedging gains. Though this would have been a real drag on their earnings.

Even if it were true that fuel hedging was the only reason for their profitability, you're taking a pretty narrow view of their overall operations. For example, if they didn’t have a strong balance sheet they couldn’t run the hedging program. Isn’t that why the other carriers fail to hedge?

Finally, my analysis isn’t about why Southwest turns a profit. It’s about why a Delta/Northwest merger won’t work. And it seems to me that question does require a complex business analysis.

Thanks for you comments,

~V