Analysis: Six Key Takeaways From The 2017 JP Morgan Aviation & Industrials Conference
NEW YORK — Four major US airlines made their presentations at the 2017 JP Morgan Aviation, Transportation & Industrials Conference for investors yesterday, publicly providing finance and strategy updates for the first time since they reported earnings in late January.
The three largest full-service US airlines (American, Delta, and United) were joined by hybrid network carrier JetBlue at the conference in New York, and the presentations spanned the day.
Here are my biggest takeaways from their presentations.
American believes that the industry paradigm has shifted away from surviving to thriving
American Airlines CEO Doug Parker kicked off his presentation by presenting a revision to American’s investment thesis, claiming that the old thesis was centered around survival (keeping CASM down, minimizing capital expenditures, and having earnings that were unpredictable), while the new one was focused on thriving (generating higher RASM by investing in product, making investments in the future, and having earnings that are cyclical but predictable).
I’m not quite sure how I feel about this.
One the one hand, I have definitely argued that the US airline industry underwent a paradigm shift after the late 2000s recession, driven by a mix of more disciplined capacity stewards in executive roles and an industry structure that became more oligopolistic with every year that passed.
At the same time, some of the worst habits of the 1987-2007 airline industry paradigm (where airlines could only make money when the broader economy was in excellent shape) have started to re-emerge.
I’ve spent plenty of time railing against the new and rich labor market deals that are being signed by airlines, so instead I’ll point out that there are also some worrisome signs that airlines are falling back into some of the old patterns of unsustainable competition, most recently with American and United bulking up in Chicago.
American’s balance sheet is in worse shape than it claims
American has a much higher debt load than its peer airlines (more than double that of Delta), but it claims that said debt load is offset by the higher value of its owned mainline fleet (also more than double that of Delta). However, that claim is based on current values for newer aircraft.
With the apparent shift towards lower oil and jet fuel prices in the broader market, the valuations on some of the newer aircraft will have to come down, and that will adversely impact the balance between assets and liability for American.
Delta’s Amex Partnership has continued to drive immense value despite supposed devaluations
When it comes to Delta’s SkyMiles program, anyone who reads the online travel and frequent flyer blogosphere tends to come away with the impression that SkyMiles are close to worthless as a mileage currency, and that Delta has a terrible frequent flyer program.
There’s at least a grain of truth to those claims. (SkyMiles is less rewarding and harder to redeem than Mileage Plus and AAdvantage) And yet, SkyMiles continues to mint money for Delta, with incremental revenue growth of $300 million in 2017, and overall scaled growth from $2.0 billion in 2014 to $4.0 billion by 2021. All is proceeding as I have foreseen.
JetBlue is responding aggressively to its revenue challenges
Very quietly, JetBlue has had a rough couple of quarters in terms of its unit revenue performance (PRASM), with an 8-9% drop in January PRASM and a projected 4-5% decline for the first quarter of 2017.
Given Wall Street’s focus on/obsession with PRASM as a metric for judging an airline’s financial performance, this is probably the #1 issue that JetBlue needs to address in 2017.
Luckily, JetBlue laid out a pretty comprehensive plan for how it plans to tackle those PRASM challenges, with a mix of relatively empty (JetBlue plans to “review” its revenue management tools and processes), and highly specific (reducing schedules on off-peak days and weeks) shifts.
In terms of the overall plans, I’m obviously critical of the move to slow 2017 growth by a point, as well as the move to reduce redeye flying (both types of flying are profitable still in the current fuel environment and still well ahead of JetBlue’s cost of capital).
I’m more of a fan of the move to reduce off-peak flying given that JetBlue has such a high proportion of leisure flying in its overall traffic base.
United’s operational reliability has undeniably improved under Oscar Munoz
The numbers speak for themselves. Since 2014, United’s on-time departure percentage has jumped from 56.0% to 63.6%. On-time arrivals have jumped from 76.3% to 81.3%, completion factor has ticked up from 98.6% to 99.0% (and United doesn’t game completion as much as Delta), and the mishandled bag ratio has come way down on 3.67 to 2.6 per 1000 passengers.
I have my reservations about how successful Munoz’s push to improve United’s product will ultimately be (Polaris International Business Class Product is a flashy improvement that really only has a payoff in the form of the Polaris lounges), but at least on operational metrics, he has absolutely delivered on that to date.
Premium Economy is coming for United
Right now, United is leading the pack in terms of stage-length adjusted PRASM amongst its full service airline peers, sitting above American by 12.2% and Delta by 6.2%. It also has by far the highest costs (and thus the lowest margins).
More importantly, PRASM isn’t as high as it could be thanks to United’s over-exposure to international flying, which has suffered from macroeconomic wobbliness around the world and currency weakness in emerging markets.
One way of solving that is for United to add a true premium economy product on long haul flying, joining American and Delta in doing so. United may well be forced into doing so anyway based purely on competitive reasons, but the clear revenue payoff to doing so might be inducement enough.
In the present international market (where the US leisure traveler reigns supreme), true premium economy is one of the only ways for US carriers to improve their PRASM on long haul flying, and United likely can’t ignore that.