WEEKLY REFLECTIONS WITH RON KUHLMANN & THE CENTRE. The second quarter data, recently released by the US Bureau of Transportation Statistics (BTS) provides some interesting insight as to the drift of US aviation in the current environment. While statistics often fail to reveal subtleties, they can shed light on generally observed trends and in that function, prove useful macroeconomic tools.
This time last year fuel cost was the issue front and center. Chart 1 shows that this was warranted, with the cost of fuel for network carriers having risen 270% in 4 years. No business, whatever its nature, can withstand that kind of cost increase for a primary input without severe implications.
Those 2008 costs have seen a 43% reduction over the course of a year. Nonetheless, five years out, the cost of fuel is still more than one and a half times greater than in 2004. While huge increases are not foreseen, neither is the possibility of substantial reduction.
The low cost airline group, with fewer overall operational costs, continues to spend the largest percentage of total operating cost on this resource and the regionals, while having had the biggest increase, are the closest to their 2004 cost.
Chart 1 - Passenger Airline System* Fuel Costs Per Available Seat-Mile
|Q2 2004||Q2 2008||Q2 2009||% of Op Cost for Fuel|
|21 Carrier Total||5.04||2.86||22.8|
Amongst the network carriers, Delta pays the most as a percentage of overall operating cost at 25.2% - up from 14.3% in 2004 and United devotes the least, 17.3, which is identical to the percentage spent in 2004.
With fuel being a greater percentage of total operating costs, all the low cost carriers have fuel representing higher percentages of total operational cost. Virgin America has the lowest at 25.2% and Allegiant with its aged fleet the highest at 38.5%. Southwest, which buys over half of the fuel consumed by this group, shells out 29.1% of its total cost per ASM, up from 17.8% five years ago.
Fuel, though a substantial factor, is far from the only substantial input cost and these are shown, by operating group, in Chart 2. The BTS does not categorize the unit costs for 2004 in this report but the Q2 2008 figures aptly reflect the cost bounce caused by the fuel spike. By Q1 2009, unit costs had declined across the board with further reductions in the second quarter of the year.
Chart 2 - Passenger Airline System* Unit Costs
|Q2 2008||Q1 2009||Q2 2009||Q2 Op Expenses $Millions|
|21 Carrier Total||15.6||13||12.6||28994|
For the network group, Delta continues to hold the top spot with unit costs of 15.3 cents per ASM - twice that of Allegiant. United, with 12.2 cents per ASM is the low cost leader in this segment. Interestingly, US Airways with the fifth position in fuel expense rises to number two in the overall unit cost ranking, indicating that US Air has been far less successful in reducing its general costs than many of its competitors.
Amongst the low cost players, Southwest at 9.7 cents per ASM leads the pack while Allegiant with 7.6 cents is the low low cost champ.
This clearly appears to vindicate Allegiant's unique strategy, minimising capital costs, to an extent which even provides a reasonable buffer as fuel prices rise for its thirsty old aircraft.
However, even at 9.7 cents, Southwest enjoys a significant advantage on United at 12.2 cents, the lowest of the network carriers. AirTran, Delta’s major competitor in Atlanta, sports a 9.0 cent cost against Delta’s 15.3 cents. Gives one pause for thought and explains Delta’s pell-mell rush into the international sector over the past few years, which is no longer the Golden goose that it once was (although the recent slump in the US dollar will magnify the value of overseas sales).
Finally, in Chart 3, we look at the passenger yield in cents per revenue passenger mile, and corporate results that have been posted recently come into clear definition. The low cost and regional carriers, as groups, collect more than they spend. This is far from true with the network group that fails to cover its ASM cost.
Chart 3 Airline System* Passenger Revenue Yield
|Q2 2008||Q1 2009||Q2 2009||Q2 Pax Rev $Millions|
|21 Carrier Total||14.0||12.4||11.5||21641|
Looking at specific network airlines, Alaska leads the pack with a yield of 12.6 cents, actually alone in being up from Q1 2009 at 12.4 cents. Meanwhile Delta, which took in 11.6 cents in Q1 2009, has dropped to 10.7 cents in Q2 while its new sidekick, Northwest, saw an even greater decline from 12.2 cents to 10.6 cents. Perhaps we will have to wait a bit longer for the merger synergies to kick in?
The entire low cost group also saw yield decline from Q1 to Q2 but Southwest with a Q2 yield of 12.3 cents continues to collect more than it spends which is always a positive outcome. And AirTran, set against Delta in Atlanta, has a yield of 11.2 cents, higher than Delta and with lower cost. In Denver, the bad news for United is that both Southwest and Frontier have cost and revenue advantages.
The US industry continues to struggle and no one appears to be on the verge of a magnificent recovery, despite capacity cutbacks. The winter season is upon us and the competition for those travelers still able to afford a trip to warmer climes has intensified. There is no walk in the park ahead and anyone in that park may find a mugger behind every tree.
But, unlike swine flu that threatens the younger generation, the US industry is more prone to traditional flu this winter that will hit hardest at the old and infirm – in this case the legacy group. Despite various “green shoot” sightings, the network carriers continue to spend more and earn less as a group - that continues to bode ill for the carriers in that sector.
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