PNAA conference, Pt 1: Traffic data; AA-US merger thoughts, 787

Each airline region of the world is different and many going through transitions US went through previously, says Bob McAdoo, the airline analyst for Imperial Capital (a boutique investment banking company in California).

McAdoo is speaking at the Pacific Northwest Aerospace Alliance conference in suburban Seattle today. Highlights:

  • IATA traffic data doesn’t make a lot of sense any more. I can always get traffic–all I have to do is charge $19. Without knowing the data behind the numbers, traffic data is meaningless. People say US isn’t a growth market, but it’s making money.
  • American Airlines-US Airways: Turn back clock to 2005/6: America West took over US Airways and in less than a year had best profit margins in the industry. Boeing is on AA creditors committee and I think there will be MD-80s coming out sooner and these guys (Doug Parker) will run it like a business. These guys will look at a route structure and say what works and won’t work,  not a route planning department that likes the look on a map. I think you will see a lot of markets shut down.
  • These guys have been in the top one or two in profit margin. US carries more people out of Philly than AA does out of New to Europe.
  • This is a non-growth world in many respects.
  • McAdoo recalls when he was at Texas International and his job was to put Southwest out of business. “I wasn’t very good at that.”
  • Allegiant and Spirit are, in effect, next Southwest. Tells a story of a friend who rode Spirit once and will never ride them again, “but I’ll buy their stock.”
  • 737-400 rent $65,000, 737NG (older) $135,000.

  • In Europe you have Ryanair which nobody likes but it carries more passengers in Europe than any other airline. Michael O’Leary calls it Southwest on steroids.
  • Seeing Emirates Airlines in Seattle or Chicago for example will be major problem for big US carriers, says some. I don’t see it. US carriers don’t carry that much to Middle East.
  • On the other hand if a European carrier, the threat is bigger.
  • Chinese are concerned US carriers will get disproportionate share of market so limits US carrier access.
  • 787: Spent time with some operators–these are 30 year assets and nobody will abandon the airplane. The plane is three years late already, what’s a few more months.
  • This is a bump in the road for 787.
  • I’m not a believer that the A380 will be a great (sales) success over time. To some extent 787 will be that airplane. You don’t need to accumulate 300-400 people in one clump, can do point-to-point.
  • There are places in the world where there is growth. Brazil, China. Not much growth in North America.
  • American Eagle flying at AA at risk after merger, a lot of unnecessary flying to Miami at risk.
  • You have 40-50 cities that feed Charlotte that don’t feed Miami. Can have better connections to Latin America, Caribbean from Charlotte than from Miami.

7 Comments on “PNAA conference, Pt 1: Traffic data; AA-US merger thoughts, 787

  1. What EK does great is “shuttling” pax via one-stop from practically anywhere. I was @SFO this past Sunday purchasing a BA ticket. EK’s check-in counters was completely full. They were basically all Asians (predominantly Indians, but some Pakistanis and other Asians as well). These pax used to fly BA, VS, LH and to a certain extent SQ/CX. Now they fly EK. EK flies SFO-DXB—->KHI/DEL/AMD/KOL/LHE/BOM, etc. Many of these cities have multiple daily frequencies. What other carrier currently can do that via one-stop to all of those cities?

    Regarding US-AA merger:

    This will probably be eventually nothing short of horrible for the Frequent Flyers and for the company.

    Don’t be surprised once the “honeymoon” period between Parker and the various unions are over the unions will want Parker and his management team removed.

    I also see AA probably taking a trip down Chapter 11 again in a few years. I just don’t see how the MASSIVE rise in cost will be offset from the revenues. I will go out on a tangent and say the bondholders, creditors, etc. will possibly lose (again) if they think this is “long-term” positive. Now if they are interested in short-term gains to dispose of their holdings then I do believe this is probably good for them.

    I also feel this has been a great disservice to Tom Horton and his team who have done a tremendous job getting AA “back on its feet”. Lets not forget it was Tom Horton who got AA the blockbuster Boeing 737/737MAX Airbus A32X/A32XNEO deal. While I’m sure Horton will be given a decent package, I’m sure he still would have rather led the carrier.

  2. “I’m not a believer that the A380 will be a great (sales) success over time. To some extent 787 will be that airplane. You don’t need to accumulate 300-400 people in one clump, can do point-to-point.”

    Point-to-Point is a myth. All the Dreamliners fly (when they are not grounded) Hub-to-Hub.

    • To compare the 787 to the A380 is ludicrous. You can compare it to the A350, or even the A330, but to compare it to the A380 is falling victim of the Boeing propaganda.

  3. Tongue in cheek on: Mr. McAdoo seems to make not much of a better fist of analysis than he did of putting Southwest out of business. Tongue in cheek off.

    I’m not even in the aviation industry, but here are my comments.

    1) So the US is making money, which is why all these legacy carriers are in bankruptcy, while Ryanair, who often charge less than USD19, are continuously profitable? I hate flying on them, but not only are they i) cheaper, but they are ii) also very good at point-to-point to places I need to go to (e.g. Perugia, Frankfurt-Hahn)

    http://www.bbc.co.uk/news/business-20202579

    2) On EK, someone should give him a world map with a flag where Dubai is. Since we are into anecdotal evidence, I once talked to a South African living in London, who used to go once a year to Capetown with either BA or SAA. Guess how she’s flying now. Sure it’s longer, but it is also a lot cheaper, and she can do all her Christmas shopping in Dubai.

    3) On 787 – well this deep insight is going to be an enormous relief for the operators. Especially LOT. Oh wait, LOT is going to be the bump in the road, because they are the one who’ll end up under the bus because of this (see WSJ article last Friday).

    4) On HtH vs. PtP – what Normand said, although I guess in fairness Logan probably isn’t a Oneworld hub? Don’t know. Also, see the story of the South African above. I’m sure she’d prefer to go direct on BA, but not at the prices they charge – and on that see point 5) below.

    5) On the A380. You don’t need to put so many people in a plane? Well you don’t need to fly people anywhere, we could all walk or stay at home. But somehow people seem to like it, and if you can offer it to them more cheaply by packing them in, that seems to work (and I would presume the A380 to have lower operating/ownership cost than the 787)? You don’t need to pack 189 seats in a 738 either, but Ryanair does so, and seems to like the result. Does this mean the A380 will be a success? No, Airbus managed to screw it up badly, and so we won’t know if it will ever manage to recover the investment cost, and whether the sales that no doubt were lost pre-crisis to the production issues will ever come back.

  4. Just to add if an analyst tells me ‘I am not a believer…’ I leave the room to go for a coffee. If said analyst were working for me, he or she would get a management meeting after the presentation, on why what he believes is i) irrelevant, and ii) not what people are going to pay for/expect him to present to them, and that he or she needs to sharpen up (in more polite terms). If you are uncertain, use the term ‘I think/I don’t think…’, since it’s your brain capacity that people pay for.

    • Hmm, The US society works to a large part on belief. ( and may be pushing that belief onto others with force )

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