Aviation Strategy Issue No: 96 October 2005 Could Chapter 11 solve the US legacy crisis? CONTENTS Analysis he US Chapter 11 process has long been blamed for keeping Texcess airline capacity in the domestic system and for prevent- ing industry consolidation. However, Delta's and Northwest's initial Could Chapter 11 solve moves in bankruptcy and the successful completion of the US the US legacy crisis? 1-3 Airways/America West merger suggest that Chapter 11 may in fact help solve some of the industry's problems. MAXjet and Eos: It is hard for airlines to shrink in size significantly when they are Prospects for the all-business stuck with aircraft (through long-term operating leases or debt class concept 3-6 financing obligations). The Chapter 11 process enables them to get rid of unwanted aircraft, thus facilitating a sizable capacity reduc- tion if desired. Briefing Both Delta and Northwest have moved promptly to cut capacity since their simultaneous Chapter 11 filings in mid-September. This Virgin’s Airlines is perhaps not surprising in light of the current fuel environment, which has forced even a solvent carrier like American to temporar- Virgin Atlantic: ily cancel 15 flights in high-frequency domestic markets this month competition intensifies to save money. However, the scale of the initial domestic "right-siz- Virgin America: ing" announced by Delta and Northwest has impressed many delay after delay industry observers. Virgin Nigeria: Delta is cutting its domestic mainline capacity by 15-20% in brave joint venture 2006. It will right-size domestic hubs and increase point-to-point Virgin Blue: flying. The airline has rejected leases on 40 mainline aircraft and the lost shareholding 7-14 plans to shed an additional 80-plus mainline aircraft by the end of 2006. This will simplify Delta's fleet from 11 to seven mainline Cargo Forecast 15 types. However, Delta still plans to increase its international capacity Databases 16-20 by 25% in 2006 "to pursue routes with greater profit potential". Its winter schedule adds new or expanded service to 41 international Airline traffic and financials destinations. This will include major expansion to Mexico and new Atlanta-Tel Aviv and Atlanta-Copenhagen routes in the spring. Aircraft available Northwest has so far outlined plans to reduce domestic main- line capacity by 10% and international ASMs by 4-5% in the current Regional trends quarter. Additional schedule reductions in January will cut first- quarter system mainline ASMs by 11-13%. The airline has talked about an eventual reduction of 15% or more, which nevertheless would have only minimal impact on the three domestic hubs. PUBLISHER CEO Doug Steenland explained the strategy to the bankruptcy court as follows: "Northwest will become a smaller airline to com- pete successfully in a world where fuel may continue to be priced Aviation Economics at $60 per barrel or more and refining costs are at record levels. James House, LG2, Routes that might have been commercially viable with oil at $40 per barrel are not profitable at $60 per barrel or higher. Moreover, 22/24 Corsham Street a number of aircraft in our fleet have above-market lease rates." London N1 6DR Although specific plans have not yet been disclosed, Northwest Tel: +44 (0) 20 7490 5215 Fax: +44 (0) 20 7490 5218 e-mail: [email protected] www.aviationeconomics.com Aviation Strategy Analysis can be expected to continue to focus on Washington/Dulles (25%) and Dallas Ft. international flying. In the Chapter 11 filing, Worth (12%), reflecting capacity cuts by CFO Neal Cohen described the airline's Independence Air and Delta. Pacific routes as one of its most valuable The combination of reduced capacity and assets. relatively robust demand has led to an Northwest began its fleet restructuring by improved domestic pricing environment - returning seven aircraft, and it has identified something that has been evident since the 100-plus additional aircraft as candidates for spring. If fuel prices remain at the current return. Somewhat surprisingly, that includes levels, further domestic capacity reductions 50 Northwest-owned or leased regional jets are likely - also by the solvent legacy carriers operated by two regional partners. like American and Continental - which would Aviation Strategy Northwest has already notified Pinnacle and further improve the revenue picture. is published 10 times a year Mesaba that it will remove 15 CRJs and 35 The strongest LCCs are, of course, by Aviation Economics at the beginning of AVRO RJ85s from their respective fleets. expected to continue growing as they take the month The airline has told its creditors that it wants advantage of opportunities that arise from to establish a new subsidiary that would the legacies' cutbacks. AirTran anticipates Editor: operate 70-100 seat RJs. growing ASMs by 25% in 2006. JetBlue has Keith McMullan US Airways and America West, which just announced major service expansion [email protected] completed their merger on September 27 from JFK, including plans to introduce the (when US Airways also emerged from its first new 100-seat E190s on the New York- Contributing Editor Heini Nuutinen Chapter 11 reorganisation), are in the Boston route. JetBlue is taking one new process of shrinking their combined mainline E190 every 20 days, plus 16 new A320s in Subscription enquiries: fleet by 59 aircraft. That will constitute a use- 2006. Julian Longin ful 15% capacity reduction. JP Morgan analyst Jamie Baker estimat- [email protected] Furthermore, US Airways (as the combi- ed in an early-October research note that Tel: +44 (0)20 7490 5215 nation is now known) has chosen not to total US domestic industry capacity would have any commitments to grow in the next decline by at least 2% in 2006, driven by a Copyright: couple of years, as the company focuses on 6.6% reduction by the eight largest carriers Aviation Economics integrating the two cultures. and Independence Air. Internationally, All rights reserved Washington/Dulles-based Independence capacity is likely to grow by 6.2%, down only Air, a small carrier that has been highly dis- slightly from 2005's 9%. Aviation Economics Registered No: 2967706 ruptive with its steep price-discounting on In Baker's estimates, thanks to the (England) the East Coast, has announced plans to cut favourable capacity trends, domestic unit a third of its flights by the end of October, in revenue (RASM) growth in 2006 could Registered Office: James an effort to save money and avoid bankrupt- exceed this year's anticipated 6.5% and pos- House, LG 22/24 Corsham St cy. The airline is reducing its daily flights sibly top 10%. The main gains are expected London N1 6DR VAT No: 701780947 from 350 to 230 by eliminating all West to be on the East Coast, driven by estimated Coast destinations except Las Vegas, as capacity declines at Delta (15%), US ISSN 1463-9254 well as six cities in the East. Some 600 of the Airways (5%) and Independence (100%). The opinions expressed in this publica- tion do not necessarily reflect the opin- 3,400 workers will be laid off this month. Baker expects international RASM to be flat- ions of the editors, publisher or contribu- All the indications are that Independence tish next year. tors. Every effort is made to ensure that the information contained in this publica- Air's parent FLYi will run out of cash and file tion is accurate, but no legal reponsibility for Chapter 11 in the current quarter. Unlike is accepted for any errors or omissions. Facilitating mergers ? the legacy carriers, FLYi is probably also The contents of this publication, either in whole or in part, may not be copied, headed for liquidation, which would further stored or reproduced in any format, print- ed or electronic, without the written con- help the capacity situation on the East In addition to the Chapter 11 process sent of the publisher. Coast. helping airlines shed capacity, there is a In its latest global capacity report, OAG school of thought that it will facilitate more noted that US airlines scheduled 2% fewer mergers along the lines of US domestic flights for October than a year ear- Airways/America West. As US Airways’ CEO lier, while international flights rose by 4%. Doug Parker explained at a recent Wings The largest declines are at Club lunch, "the bankruptcy process allows October 2005 2 Aviation Strategy Analysis things to happen that will be friendly to con- must fix themselves and not expect any solidation". more assistance, in the end the regulators As well as removing aircraft and capacity will have little choice but to allow mergers. (to avoid duplication and permit synergies), Merrill Lynch analyst Michael Linenberg Chapter 11 can reduce high legacy labour suggested such a scenario for Delta imme- costs, as happened with US Airways. In diately after its Chapter 11 filing: "We would other words, the Chapter 11 process can be not be surprised if down the road Delta bor- used to prepare and transform a high-cost rows a page from the America West/US legacy carrier into an attractive, or at least Airways playbook and emerges from bank- lower-risk, merger target. ruptcy in the form of a merger. That would be Many people in the industry, including one way of achieving airline consolidation - Parker, are convinced that Washington reg- an objective that has eluded the industry for ulators have "airline fatigue". After telling the years." industry for quite some time that airlines MAXjet and Eos: Prospects for the all-business class concept ompetition in the lucrative and presti- Stansted's improved transport connections Cgious New York-London market is set to and image - the airport has a terminal intensify in the coming weeks, as two new express train connection to the City of cut-price, all-business class carriers enter London (the financial district).