UNDER MY THUMB …

The iconic Rolling Stones song has many interpretations as to its meaning.  All the way from worshiping the devil, to a role reversal in a male-female relationship, to suppression of individuality according to The Socratic Method.

Over the last day or so I have been thinking about the number of happenings within the U.S. airline industry involving change agents and airlines.  I was thinking about a role reversal and now it seems that change agents/banks have airlines under their thumb.

Today, June 12, 2024, most applications of the bankruptcy code are not the same tools that they were in 2005.  But change agents and courts test the intricate dynamics of power and control within relationships – whether labor, debt/bondholders, to equity holders to name a few.  The role reversal is that the airlines have long held the upper hand in these relationships.  Today, the money that is invested in airlines is saying that changes are needed.  And they are right.

So, if Chapter 11 is not a tool in 2024, what can become the change agent for those airlines that have been slow to accept that today’s environment is just plain different.  Let’s compare 2005 with 2024.

Today, more than 28 percent of the domestic ASMs are under the thumb of debt/bondholders (Spirit), or activist investors (jetBlue and now Southwest).  One could throw in Hawaiian, and we would be at 30 percent of domestic ASMs are somehow under the thumb of something.  Assuming that another airline might be next (follow shares at or around 52-week lows), ASMs under the thumb of something could be more than 45%.  At the end of 2005, 53% of ASMs were operating under the thumb of court assistance.

It is starting to feel like we have been here before.  In 2005, it was Southwest that was the boogeyman that forced the industry to either lower its costs to compete or die.  Today is more about Delta and United being the catalysts for change.  We are not at the point like we were in 2005 where change or die could be stated as fact – as the condition of balance sheets could not sustain more years of deep losses.

Labor should not fear this period like they did in 2005.  This is not about reducing wages as the marketplace will not allow it (at least for some time).  Rather, it is incumbent on labor and management to find more productive ways to work.  Management will pay but there needs to be a serious move to do more with less going forward.  Any productivity metric today is abysmal.

For airports concerned about losing air service, some airlines will need to get smaller before they grow again and that will prove healthy.  But bigger airplanes will still accommodate demand – just at fewer times of the day.

This is 2005 all over again.  Airlines that did not get a court-assisted rinse in 2005 are those that are targets in 2024 – it is just that the rinse will be different and will probably take longer.

 

My comments included in recent articles written by Christine Boynton at Aviation Week/Aviation Daily are below.

Activist Fund Pushes for Change at Southwest, As Newest Large Investor

CHRISTINE BOYNTON, christine.boynton@aviationweek.com

An activist fund that is now one of Southwest Airlines’ largest investors is pushing for new leadership at the Dallas-based carrier’s Board and C-suite level, change it deems necessary for the airline to better compete and improve its performance.

A $1.9 billion investment was publicly disclosed by Elliott Investment Management L.P. on June 10, releasing a letter to the airline’s board of directors alongside a 51-page presentation outlining the company’s vision. Describing the carrier’s Executive Chairman and CEO as having “presided over a period of severe underperformance,” the fund said Southwest is “the most compelling airline turnaround opportunity in the last two decades,” and retains “the fundamental attributes necessary to restore its industry-leading position.”

With new management in place, the carrier would next need to conduct a comprehensive business review, the investment group said, closely examining Southwest’s operations with fresh perspective. Together, Southwest CEO Bob Jordan and Executive Chairman Gary Kelly have spent a combined 74 years at the company, the fund notes.

“We look forward to collaborating with Southwest to restore accountability and best-in-class financial performance,” Elliott’s letter to the airline Board concludes.

In response, Southwest said it was first contacted by Elliott on June 9, and “look[s] forward to better understanding their views on our company.”

Noting Board confidence in its CEO and management’s ability to execute and drive long-term value, an airline spokesperson said, “We maintain an open dialogue with our shareholders and value their perspectives.”

Southwest returned to a post-pandemic profit of $977 million in 2021, a figure that has declined year by year. In 2022, it reported net profit of $539 million, slipping to $498 million for the full year 2023. In the most recent quarter ended March 31, the airline posted a net loss of $231 million, widened from a $159 million net loss in the first quarter of 2023.

Southwest is facing cost pressure from higher labor and maintenance expenses as it contends with Boeing delivery delays that have prompted capacity cuts and a hiring freeze. The airline is making network adjustments, tightening aircraft turn times, and planning for future red-eye flying, as it works to bolster revenues. It is also in the midst of cabin modifications featuring larger bins, in-seat power, and an overhaul of its Wi-Fi product.

A current growth strategy focused on capacity expansion rather than on product innovation “appears to have driven substantial unnecessary losses” at Southwest, the fund says, calling recent airline initiatives “incrementalism,” and not enough to drive transformation.

Elliott’s investment followed 18 months of “intensive re-search,” the company said, a timeline that appears to date back to the carrier’s December 2022 meltdown. In listing its positive attributes, the fund notes Southwest’s cost-efficient single fleet type, lucrative loyalty program, dominant market share and unlevered balance sheet.

“We believe Southwest’s stock can achieve $49 per share within 12 months, representing a highly attractive 77% return during the period,” the letter to Southwest’s board states.

Scrutiny of the airline’s Board is “long overdue,” the Swelbar-Zhong Consultancy states in an analysis, pointing to under-performance and cost issues predating recent labor contracts.

“This is an action that should have been taken even before the pandemic,” writes William Swelbar, the consultancy’s chief industry analyst, in reaction to the fund’s investment. Short-term fixes, he projects, will be revenue-focused measures such as charging for seats and bags—changes he expects will take time, hampered by the airline’s current technology.

“The problems at Southwest run much deeper than fleet,” Swelbar says. “I can easily argue that Boeing is doing them a favor by limiting the number of seats they can deploy profitably. The network is broken—even more than other ULCCs.”

However, he notes, “What they have that gives the company—and any change agent—time, is a balance sheet with ample liquidity.”

 

 

Spirit Airlines Not Evaluating Chapter 11, Encouraged by Steps Taken

CHRISTINE BOYNTON, christine.boynton@aviationweek.com

Spirit Airlines is not currently evaluating a plan for bankruptcy, its CEO confirms, describing progress on efforts being made to return to profitability.

“We are proudly executing our plan as we’ve exited the merger agreement with JetBlue [Airways] and are encouraged by the initial results of our standalone plan,” CEO Ted Christie told shareholders in a June 7 update. “We are not evaluating a Chapter 11 at this time.”

Following the merger termination, the ULCC has sought to re-pair its balance sheet, having last reported a full year net income in 2019.

As it works to boost liquidity, the ULCC has finalized a compensation agreement with Pratt & Whitney for geared turbofan-related groundings, and deferred Airbus deliveries. The airline also intends to furlough roughly 7% of its pilots in September.

Spirit expects the compensation, deferrals and cost savings will improve its cash levels by $450-$550 million in 2024, it said in early May. The carrier is also negotiating with bondholders on debt coming due in 2025 and 2026, anticipating resolutions this summer.

Supporting its efforts to turn things around are network adjustments, and a response to shifts in consumer preferences.

“Eventually [we will make] a pivot of the company’s approach to the market, which means we have to reevaluate the products we sell, how we sell them, our network, the cost structure that we have today, and all of that is underway,” Christie told shareholders during the June call. Recent changes include the elimination of change or cancel fees, and a higher checked bag weight allowance. Elements of its “revised approach to the market” have previously been teased for rollout between May and August.

“More changes, exciting changes, are to come,” Christie added. The South Florida-based airline reported a net loss of $142.6 million in the first quarter, widened from a net loss of $103.9 million in the 2023 first quarter, results it said were affected by adverse weather, air traffic control related delays, and civil unrest in Haiti.

Chapter 11 is not the only option for a struggling business should it fail to turn things around.

As recent analysis from The Swelbar-Zhong Consultancy has noted, Chapter 7 could be a more attractive option for shareholders of a U.S. ULCC—should it come to that point, though it could also exacerbate concerns around industry concentration.

“Chapter 11 will not produce the outcome produced in the past,” says William Swelbar, the consultancy’s chief industry analyst. “Shareholders might benefit more from the sale of aircraft, airport real estate, and a ready pool of labor … You can fix areas that are problematic in bankruptcy like high operating or financial costs, you cannot use the court to fix a broken model.”

He adds, “The other issue is in Chapter 11, the company can quickly lose control of its exclusive right to file a plan of reorganization. In effect, negotiations taking place will need a plan where the debt/bond holders agree on a going forward plan, as they would likely hold the vast majority—or maybe all—of the equity in a recapitalized and smaller Spirit.”

 

Only fair that you understand my public stance.

More to come,