Below is an article that appeared in today's Atlanta paper.
This was my FAVORITE quote from the article
"The loss represents a temporary subsidy to U.S. air travelers, which will only be withheld when carriers come to their senses and raise prices," Andrew Schiff, a strategist with Euro Pacific Capital, Inc. said Wednesday.
As posters on here keep pointing out, the low fares we have been seeing are not a sustainable way to do business!
Higher ticket prices likely as Delta, others report losses
By JIM THARPE
The Atlanta Journal-Constitution
Published on: 04/23/08
Bad financial news from the U.S. airline industry will almost certainly mean higher ticket prices for passengers soon.
Delta and Northwest airlines on Wednesday became the last of the five biggest domestic carriers to report first-quarter losses -- deficits that airline executives and analysts blame on fuel that costs too much and tickets that sell for too little.
"You'll have higher fares," said Vaughn Cordle, a Washington-based analyst for AirlineForecast. "It's an ugly picture out there."
Atlanta-based Delta lost $274 million, or 69 cents a share, in the three-month period that just ended, while Eagan, Minn.-based Northwest lost $191 million, or 73 cents a share.
AirTran Airways, which uses Atlanta as its main hub, a day earlier reported a $35 million quarterly loss, or 38 cents a share.
Some analysts say AirTran and other low-cost carriers, stung by the impact of high fuel costs, will have a more difficult time than major carriers weathering the pressures. They are likely to raise ticket prices and some may even fold, the analysts say.
Delta and Northwest, which have announced plans to merge their carriers into a single mega-airline to cut costs, have both complained in recent days that ticket prices no longer cover soaring fuel prices, which are the carriers' biggest cost. Delta CEO Richard Anderson told reporters in Washington earlier this week that ticket prices would have to increase by 15 percent for the carrier to break even at current fuel prices.
"Ticket prices need to rise to cover the cost of fuel," Delta President Ed Bastian said in an interview Wednesday with The Atlanta Journal-Constitution. "You can't operate a service or have a legitimate business model if you cannot price for the cost of delivering the product."
Airlines are not permitted by law to signal fare increases in advance, but executives have become adamant in recent days that $120-a-barrel oil has dramatically changed the landscape for the nation's carriers. A year ago, oil was about $65 per barrel.
One way airlines will boost prices is to cut the number of seats available, analysts say. They already have increased other fees, such as charging for a second bag and charging more for last-minute itinerary changes.
"The thing that has been the most difficult for us is not just the rise in fuel costs, but the sudden rise in fuel costs," Bastian said. "Should fuel levels hold at this level, and should economic activity continue to show some signs of softening, it's quite possible we'll need to reduce our flying levels further."
Cordle said that if airlines simply increase ticket prices, they risk cutting demand, which would also hurt their bottom lines. By parking planes -- mostly regional and older, narrow-bodied jets -- and reducing the number of available seats, the carriers can charge more for the seats that remain.
"They have to stem the gushing red ink," Cordle said. "And they have to increase pricing power by pulling down capacity."
Delta has previously announced plans to cut domestic capacity by 10 percent for 2008 and have hinted that further cuts could be in the offing.
Delta and Northwest on Wednesday reported "non-cash" write-downs of a whopping $10 billion in their combined values, a figure based on the decline in their market capitalization since they emerged from bankruptcy a year ago. Some analysts considered the initial post-bankruptcy valuations of the two carriers ridiculously high; on a conference call with executives Wednesday, analysts did not even mention the devaluation.
However, the day-to-day losses are very real, analysts say, and will continue if fuel remains near current, record levels.
"The loss represents a temporary subsidy to U.S. air travelers, which will only be withheld when carriers come to their senses and raise prices," Andrew Schiff, a strategist with Euro Pacific Capital, Inc. said Wednesday.
The top 10 U.S. carriers spent about $29 billion on fuel last year, Cordle said. That figure could rise to $47 billion this year. The top six carriers have reported day-to-day operating losses of $1.4 billion for the just-ended first quarter.
Cordle said he thinks the big carriers, like Delta and Northwest, will weather the storm. But many of the low-cost airlines -- the guys who tout $69 trips to Florida -- could soon be gone, he said. Five U.S. discount carriers have either declared bankruptcy or gone out of business in the last two months: Frontier, Aloha, Skybus, Champion and ATA, a unit of Peachtree City-based Global Aero Logistics.
"We've got a major shake-out in progress," Cordle said. "The low-cost carriers are not viable in this environment. They will run out of cash."
Delta executives told analysts Wednesday the company could actually post a "modest" profit in the second quarter, but they were unsure if the company would be profitable for the year. Delta is actually doing well on its international routes, which saw a 13 percent jump in revenue. International routes, which have less competition, will account for 40 percent of Delta's revenues by summer, Bastian said.
"Our international business is profitable even at current fuel levels," Bastian said. "Domestic is where we are losing money."
Bastian said Delta will have $3.6 billion in cash reserves by the end of the year even though the airline will likely have to cover $2 billion in increased fuel costs.
Delta and Northwest executives have said the two carriers will have about $7 billion in cash reserves if their merger is completed by the end of the year. The merger still must be approved by shareholders and by federal regulators.
Delta's CEO, meanwhile, assured industry analysts during Wednesday's conference call that the combined airline will look for innovative ways to trim costs.
"We haven't plumbed the depths of the cost synergies we can wring out of the combined airline," Anderson said.
This was my FAVORITE quote from the article
"The loss represents a temporary subsidy to U.S. air travelers, which will only be withheld when carriers come to their senses and raise prices," Andrew Schiff, a strategist with Euro Pacific Capital, Inc. said Wednesday.
As posters on here keep pointing out, the low fares we have been seeing are not a sustainable way to do business!
Higher ticket prices likely as Delta, others report losses
By JIM THARPE
The Atlanta Journal-Constitution
Published on: 04/23/08
Bad financial news from the U.S. airline industry will almost certainly mean higher ticket prices for passengers soon.
Delta and Northwest airlines on Wednesday became the last of the five biggest domestic carriers to report first-quarter losses -- deficits that airline executives and analysts blame on fuel that costs too much and tickets that sell for too little.
"You'll have higher fares," said Vaughn Cordle, a Washington-based analyst for AirlineForecast. "It's an ugly picture out there."
Atlanta-based Delta lost $274 million, or 69 cents a share, in the three-month period that just ended, while Eagan, Minn.-based Northwest lost $191 million, or 73 cents a share.
AirTran Airways, which uses Atlanta as its main hub, a day earlier reported a $35 million quarterly loss, or 38 cents a share.
Some analysts say AirTran and other low-cost carriers, stung by the impact of high fuel costs, will have a more difficult time than major carriers weathering the pressures. They are likely to raise ticket prices and some may even fold, the analysts say.
Delta and Northwest, which have announced plans to merge their carriers into a single mega-airline to cut costs, have both complained in recent days that ticket prices no longer cover soaring fuel prices, which are the carriers' biggest cost. Delta CEO Richard Anderson told reporters in Washington earlier this week that ticket prices would have to increase by 15 percent for the carrier to break even at current fuel prices.
"Ticket prices need to rise to cover the cost of fuel," Delta President Ed Bastian said in an interview Wednesday with The Atlanta Journal-Constitution. "You can't operate a service or have a legitimate business model if you cannot price for the cost of delivering the product."
Airlines are not permitted by law to signal fare increases in advance, but executives have become adamant in recent days that $120-a-barrel oil has dramatically changed the landscape for the nation's carriers. A year ago, oil was about $65 per barrel.
One way airlines will boost prices is to cut the number of seats available, analysts say. They already have increased other fees, such as charging for a second bag and charging more for last-minute itinerary changes.
"The thing that has been the most difficult for us is not just the rise in fuel costs, but the sudden rise in fuel costs," Bastian said. "Should fuel levels hold at this level, and should economic activity continue to show some signs of softening, it's quite possible we'll need to reduce our flying levels further."
Cordle said that if airlines simply increase ticket prices, they risk cutting demand, which would also hurt their bottom lines. By parking planes -- mostly regional and older, narrow-bodied jets -- and reducing the number of available seats, the carriers can charge more for the seats that remain.
"They have to stem the gushing red ink," Cordle said. "And they have to increase pricing power by pulling down capacity."
Delta has previously announced plans to cut domestic capacity by 10 percent for 2008 and have hinted that further cuts could be in the offing.
Delta and Northwest on Wednesday reported "non-cash" write-downs of a whopping $10 billion in their combined values, a figure based on the decline in their market capitalization since they emerged from bankruptcy a year ago. Some analysts considered the initial post-bankruptcy valuations of the two carriers ridiculously high; on a conference call with executives Wednesday, analysts did not even mention the devaluation.
However, the day-to-day losses are very real, analysts say, and will continue if fuel remains near current, record levels.
"The loss represents a temporary subsidy to U.S. air travelers, which will only be withheld when carriers come to their senses and raise prices," Andrew Schiff, a strategist with Euro Pacific Capital, Inc. said Wednesday.
The top 10 U.S. carriers spent about $29 billion on fuel last year, Cordle said. That figure could rise to $47 billion this year. The top six carriers have reported day-to-day operating losses of $1.4 billion for the just-ended first quarter.
Cordle said he thinks the big carriers, like Delta and Northwest, will weather the storm. But many of the low-cost airlines -- the guys who tout $69 trips to Florida -- could soon be gone, he said. Five U.S. discount carriers have either declared bankruptcy or gone out of business in the last two months: Frontier, Aloha, Skybus, Champion and ATA, a unit of Peachtree City-based Global Aero Logistics.
"We've got a major shake-out in progress," Cordle said. "The low-cost carriers are not viable in this environment. They will run out of cash."
Delta executives told analysts Wednesday the company could actually post a "modest" profit in the second quarter, but they were unsure if the company would be profitable for the year. Delta is actually doing well on its international routes, which saw a 13 percent jump in revenue. International routes, which have less competition, will account for 40 percent of Delta's revenues by summer, Bastian said.
"Our international business is profitable even at current fuel levels," Bastian said. "Domestic is where we are losing money."
Bastian said Delta will have $3.6 billion in cash reserves by the end of the year even though the airline will likely have to cover $2 billion in increased fuel costs.
Delta and Northwest executives have said the two carriers will have about $7 billion in cash reserves if their merger is completed by the end of the year. The merger still must be approved by shareholders and by federal regulators.
Delta's CEO, meanwhile, assured industry analysts during Wednesday's conference call that the combined airline will look for innovative ways to trim costs.
"We haven't plumbed the depths of the cost synergies we can wring out of the combined airline," Anderson said.
