Monthly Archives: April 2008

Allegiant Gets No Respect

Every so often when an airline goes out of business (or nowadays, roughly every 20 minutes) the airline message boards fill up with people trying to predict the next airline to shutter.  Without fail, Allegiant is mentioned.  Those people are idiots.

Allegiant announced their results late Monday night and they don’t resemble any other airline in the US.   Last quarter they earned 47 cents a share.  Even those who don’t follow the industry will note that they didn’t lose 6 billion dollars.  They earned more than $25 a passenger from ancillary (non-ticket) revenues, a 35% increase over Q1 last year.  Their cost per available seat mile jumped 25% because of fuel, yet they managed to increase revenue per available seat mile by 16%.  Sure their fuel costs went up (they don’t hedge), but they focused on those ancillary revenues, and it paid off.

Articles about Allegiant typically note their fuel-thirsty old MD-80s that they fly, but they’ve made the (correct, apparently) decision that the extremely low aircraft costs outweigh the increased fuel consumption.  That move is completely against the conventional wisdom of buying new planes to save on fuel.  And it was the right decision for them.

But their smartest decision has to do with their route map, which takes passengers a couple of times a week from tertiary cities to Vegas, Phoenix, Fort Lauderdale, Orlando and Tampa (primarily) .  They used to rely on Vegas more heavily, but they’ve diversified a bit to alleviate some risk.  Great call.  They are also very willing to drop cities that aren’t working, much to the chagrin of the small airports losing service.  But most importantly, on something like 90% of their routes they have no nonstop competition.  They are basically a monopoly carrier on every route they fly, allowing them to charge, perhaps, more than they would have with competition (though their fares are certainly low) and earn more on top of that with ancillary sales.

Perhaps the problem, then, with the airline industry is not fuel, it’s pricing.  Allegiant needs fuel — and uses more than similarly sized airlines because of their old planes, yet they’re very profitable because they have focused on the revenue part of the equation (and their route structure) far more than any other airline out there.   They get roughly zero credit for this, but that’s just fine as long as they stay the hell out of everyone’s way.  Well done.

(For full disclosure, as a mention every time I write about Allegiant, I own a small number of shares in the company.  I obviously can’t affect the share price, but I think it’s only fair that I disclose that…)

You Will Have SilverJet to Kick Around Anymore (Probably)

(Thanks to Sean for the heads up…)

Silverjet, which many predicted would be shutting down shortly, says that they have signed an agreement for a $100 million investment ($25 million now, $75 million later) from an unnamed source in the United Arab Emirates (the UAE is so flush with cash that people there think it’s a great idea to throw $100 million at the airline industry right now).  I’m guessing that Silverjet’s finances look something like Eos’ finances before their shutdown, so that $25 million will last them through, oh, the end of the summer.

Unlike its previous pronouncements that everything is just perfectly A-OK, their chief executive admitted that they were running out of cash and that if this deal falls through they would need to seek “alternative means of funding as a matter of urgency” (ie, we have no money.)

A Final Word about Eos

A bit of a post-mortem on Eos:

Most of the articles about the bankruptcy have mentioned either oil prices or something related to the credit meltdown (Eos had additional financing lined up, but it fell through), but to suggest the airline failed because of either of those things is missing a far larger issue: Eos was never, ever, ever close to succeeding.

Sure, the airline put out announcements about how great everything was going, including this now-laughable note after MAXjet went under: “Industry failures, rising oil prices, a weakened economy and planned reductions in corporate travel have neither diminished travelers’ enthusiasm for Eos … nor hindered the company’s march toward becoming an unqualified business success…” Right.

And various media continued to print that type of nonsense without bothering to do the small amount of online research necessary to see that they were burning through cash at an impressive rate. As I wrote back in January, under all the hype lay an operation that was burning through about $5 million in cash each month. They hit investors up for more cash a few times (in total for about $200 million), but each $50 million infusion would last less than a year — and that cash burn never really diminished. They were down to $9 million in cash midway through last year before they received $50 million from investors. The business was never close to succeeding.

Why? Let me throw a few reasons out there:

– An all-business class airline that flies between New York and London has a major drawback: during a sizable chunk of the year, traffic falls off a cliff. Wayyyyy off a cliff. And with no coach (or premium economy seats) to offer, those 48 cushy lie-flat seats aren’t very attractive to leisure travelers. And in the airline industry, especially as a start-up, you can’t afford the cash drop off that comes with slow business travel periods. No cash means your fixed costs are burning through that $50 million investment.

– They were never able to get fares close to where they needed to be to succeed. Even before American Airlines introduced their purely evil JFK-Stansted service, Eos couldn’t get fares high enough. Once AA came along (and everyone else lowered their business class fares), they had no chance. Their business plan did not allow them to sell 40 seats at $1200 each way. Yet that’s what they were left with. With AA’s flight it was all over.

– The New York to London market looks incredibly attractive for startups (ie, MAXjet and SilverJet) because it’s the largest international business class market. So every start up will make the point that if they only generate 2% market share, they’ll be profitable, blah blah blah. If only it were that simple. So much of that traffic is locked up in corporate deals that the huge New York-London pie is more crumbs than pie. Eos didn’t make inroads in the corporate market (in part because they shunned travel agents at first) and in part because they underestimated the difficulty of getting people to switch due to their frequent flyer affinity.  Those corporate deals are also at fares well below where the airline needed to be to make any money.

– I know they tried very, very hard to market their product, but they never succeeded: they never managed to explain how Eos differed from flying first class on BA or Upper Class on Virgin. In fact, that was an interesting problem from the start: consumers are pretty happy with BA and Virgin’s business class products. How do you convince people that they really aren’t happy with it and that they should try a new service? One way you do that is by not going through advertising agencies like Spinal Tap through drummers. Another is by having marketing staff actually flies the airline once in a while. Et cetera. If the company could never succinctly tell the story of why they were better, they had no chance of convincing people to switch.

And on and on. There’s so much more here — maybe this won’t be my last post on the subject.

In short, fares that are too low + marketing that is too weak + competition that is too brutal = disaster.

On a final note, after Skybus shut down I wrote a little blurb about SourceSpeed, the small company that ran the airline’s website and how they were owed $250,000 at the time of the shutdown. I knew them because they also ran Eos’ website and were a great group of guys. Sadly, they were listed as creditors for $127,000 in Eos’ bankruptcy filing. This is a brutal industry, and today I thought a lot about the 450 people out of work and how Geoff from Sourcespeed will absorb $375,000 in unpaid invoices. It’s still going to get worse before it gets better.

Hawaiian Picks Up Oakland – Honolulu

It’s not big news, but Hawaiian will launch Oakland-Honolulu service that was lost when ATA and Aloha shut down.  I only bring this up to point out a fallacy in the airline consolidation strategy:  while this won’t happen on every route that disappears, the consolidation argument assumes that no other airline will fill an abandoned route.  That simply isn’t the case.  As we see here, airlines disappeared but the capacity returns.  Keep this in mind every time you read about consolidation removing capacity from the market.  Sure, some will disappear, but other airlines are always willing to grab routes where they see opportunity.

Continental: United Will Only Divide Us

Continental Airlines gets all the credit in the world for their announcement yesterday that they will not continue their merger talks with United Airlines, instead they will persue some sort of vague alliance involving American Airlines and British Airways.  Until that’s a done deal, it’s not really worth speculating about (you can find that elsewhere), but just know that an alliance is a much better call than a merger.

Unlike the bullshit-filled nonsense that Delta & Northwest emailed out when they announced their link-up, Continental sent out a note that may or may not have been bullshit but had one of the most insightful sentences I’ve seen written by an airline exec:  “We have significant cultural, operational and financial strengths compared to the rest of the industry, and we want to protect and enhance those strengths — which we believe would be placed at risk in a merger with another carrier in today’s environment. ”  Imagine that – in this environment, an airline executive talking about all the great things about their airline, and how those things need to be protected.  Crazy.

In the meantime, United and US Airways may end up back together and the success of that merger will rest in large part on who is going to run the combined operation (hint: let’s hope they’re in Phoenix).  The two airlines have a past history together, which should alleviate some of the pains of combining the carriers.  We’ll see…

Eos Airlines Shuts Down

I’ll have more about this on Monday, but Eos Airlines will shut down today (Sunday) after filing for bankruptcy on Saturday.  The investment they announced last week didn’t close and, hence, they ran out of cash.  If you have tickets booked on Eos in the future, ask your credit card issuer for a refund.

ExpressJet Rejects SkyWest’s $3.50/share Offer

ExpressJet, which used to fly for Continental as a regional partner before an ill-fated venture as a freestanding carrier, rejected an unsolicited offer from SkyWest to be purchased for $3.50 (in case you were wondering, and you weren’t, SkyWest joins Allegiant and US Airways as the three airlines I think have the most underrated management teams.)  In its press release ExpressJet says that it is exploring other options including:

— Talking to Continental about working with them again (hahahahahaha)

— Finding another interested party (hahahahahahaha.  Perhaps Mesa would’ve been interested before their absolutely unbelievable freefall over the past year or two).

— Asking SkyWest for more money (bingo!)

It appears that ExpressJet has two options:  hope that SkyWest offers a few pennies more, or accept SkyWest’s current offer.  Or shut down.  Their call.

Pilot Ordered to Reimburse Airline After Quitting

Nutty little story out of China:  A China Eastern pilot who quit his job with the airline was ordered by a Chinese court to reimburse the airline for training fees.  The pilot will repay about $200,000 in training fees, as well as about $10,000 in salary he received after he had quit.  The airline had requested that he not be allowed to work in the airline industry again (a little harsh, no?) but the court did not allow it.

EasyJet: We Expect All But 4 European Budget Airlines to Fail

The head of EasyJet’s French operation made headlines by saying that having 50 budget airlines in Europe is “absurd” and that he expects only about 4 to survive (he cited Ryanair, EasyJet, one of the German low-costs, and an unspecified other in Europe as the survivors).  He added that if he were to increase fares by 10%, load factors would drop by 25%.

Just wanted to pass this along to remind us that airlines around the world are feeling the same pain.

Delta: Oh, There’s, Like, Totally More Synergies Than We Thought

One interesting note from yesterday’s news about Delta’s earnings:  Their CEO said that the $1 billion in annual revenue and cost synergies fromthe merger are “really conservative.” As they delve further into the merger, they expect that “significantly more [cost/revenue synergy] opportunities” to be found.

Which is to say, “We have no idea what’s going to happen, but we’re sure we’ll magically make more money.”  Never believe the synergy hype.