Summary
American's $92 million loss in the first quarter is essentailly a huge achievement, one that AA's press releases have down played. Against $5.3 billion in revenue, and a $300+ million increase in year over year fuel expense, the indications are that the carrier is fundamentally headed in the right direction. The fact is that the key indicator is the $115 million operating profit shows that the carrier has turned around. This is likely going to be indicated in coming 1Q results from other legacy carriers.
Analysis
The Boyd Group has forecast since the beginning of 2005 that the real growth and strength in the airline industry will be in the "legacy" segment, and not in the "low cost" segment. The reason is that the revenue streams and revenue opportunities for legacies on a going-forward basis are far stronger and more robust than those facing low-cost carriers. Combined with aggressive (and, only partially complete) cost reductions at legacies, the trend is now clear: legacies have the future, low-cost carriers are facing tough times.
Skyrocketing fuel costs in the last 18 months tended to mask this. Now, however, with 1Q reports from American, Continental, and Southwest, are bearing our forecast out. The Southwest model, with that carrier's high labor costs and within the current pricing structure, simply does not fundamenally make money. Without fuel hedges (which were a well-placed bet, but one that subsidized all-up market costs) Southwest would have lost around a net $50 millon in the first quarter, and somewhere near $16 million on an operating basis.
American, had an all-up $115 operating profit. Had they been paying for fuel at the "retail" of just a year ago (which were still higher than what Southwest was paying at the time) would have recorded a profit in excess of $200 million.
Continental also just reported an operating profit.
The point is this: the low-cost carrier model, as it stands today, is hamstrung by its inablity to fully access the true growth streams, which are at expanding mid-size markets too small for the 100 - 150 seat aircraft they typically fly, and at long-haul Asian markets, which are too long for such fleets.
While this runs counter to media stories, The Boyd Group would suggest caution. On one hand, the major LCCs are not generating the revenues they need, and with huge numbers of new aircraft coming on-line at these carriers, the LCC capacity glut will increase. On the other hand, changes are always in play. In that regard, it is highly likely we will see fundamental operational and strategic shifts, particularly at Southwest, in the next 12 months.
