Air Transport World

North America.(WORLD AIRLINE REPORT)(Delta Air Lines Inc. is restructuring)(ABX Air signs agreement with DHLs US express operations)(Air Canada restrutures)


The Wilmington, Ohio-based cargo carrier has been attempting to expand beyond its primary role as the largest airline supporting DHLs US express operations. It took a big step in that regard in May when it signed a two-year agreement to operate two 767-200 freighters to support ANAs cargo operations in Japan, China and Thailand. The deal is expected to generate $22 million in annual revenue. "This agreement underscores ABXs commitment to grow its presence as an international provider of aircraft and aircraft-related services," President and CEO Joe Hete said.


The airline has 35 767Fs in service, including 29 for DHL. All but $15.1 million of its first-quarter revenue was generated by DHL contracts. It reported first-quarter net income of $4.3 million, down 46.9%, on a 22% drop in revenue to $288.1 million. It said the declines were "expected as a result of DHL assuming management of its line-haul trucking operations from ABX Air in May of last year." Revenue from the charter segment increased 83% in the quarter to $7 million and the company plans "to deploy additional aircraft into its charter segment . . . giving ABX the opportunity to further diversify its customer base and grow earnings," Hete said. Touting international expansion, he noted that ABX is "the first non-Japanese carrier approved to conduct air cargo operations on behalf of a Japanese airline."


When Air Canada entered bankruptcy in 2003, it was a standalone shareholder company with integrated regional airline, MRO and frequent-flier divisions. When it emerged in 2005, it was part of a holding company formed during the reorganization, ACE Aviation Holdings. Last November, it came full circle when ACE launched an IPO of the airline that raised C$525 million in proceeds.

ACs stock is trading again, under the ticker symbol AC. But it is a much leaner organization, focused on its core competency. Jazz, its former regional subsidiary, is a standalone company, as are Aeroplan, its loyalty program, and Air Canada Technical Services, the MRO arm. All of them are still controlled by ACE. The creation of the separate structures permitted ACE "to unlock the value of its assets," according to Chairman and CEO Robert Milton.

ACs strategy continues to focus on "leveraging its innovative customer-driven revenue model" that contributed to its receiving ATWs Market Leadership Award this year. Branded fares, "ala carte" pricing on its website that allows passengers to choose the attributes they want in a ticket and the development of travel pass products are all aspects of this (ATW, 2/07, p. 30). Revenues from pass products, which are sold to both business and leisure travelers, more than doubled in the first quarter. The rollout of the Web-based Polaris reservations and airport customer service system beginning late in 2007 should enable it to differentiate and streamline its product offerings further and drive even more traffic to its website, which generated more than 60% of domestic sales in the first quarter.

While it does all this, it is renewing its fleet, replacing A330s, A340s and 767s with 777s and 787s. The first 777-300 arrived in April; eight will be in service by year end and a further nine arrive next year. It holds orders for 37 787s that start delivering in 2010. It is also a major customer for the E-190 and expects to operate 45 by early next year. It claims the 190 provides a 20% DOC savings over the A319 on a per-trip basis and permits it to serve long, thin routes with better frequency.

Special charges and a reduction in revenue related to Aeroplan redemption caused AC to report a loss of C$74 million in 2006, deepened from C$20 million in 2005, and operating profit declined to C$114 million from C$191 million on a 8% rise in sales to C$10.2 billion. Excluding the impact of these items, however, operating income rose to C$236 million. For the traditionally unprofitable first quarter, AC reduced its net loss to C$34 million from C$126 million.


ACE Aviation, parent of Air Canada, owns 80% of Jazz while the remaining 20% is owned by Jazz Air Income Fund and traded on the Toronto Stock Exchange. Nearly all of its flying is done under a capacity purchase agreement using the AC code. It represents about 36% of AC's domestic capacity and about 30% of its transborder capacity. In 2006, Jazz carried 8.7 million passengers. As of Feb. 1, it operated some 802 daily departures to 56 destinations in Canada and 29 in the US with a fleet of CRJs and Dash 8s. Over the past year it completed installation of inflight entertainment systems on its 15 CRJ705s, which are used on longer routes.

For 2006, Jazz reported earnings of C$140 million ($120.1 million), up 18.8%, on a 35% increase in operating revenue to $1.2 billion. It reported net income of C$35.3 million for the 2007 first quarter, up 5.5%. Company officials attributed the robust performance in part to the addition of nine new aircraft and a 12.1% increase in block hours flown.


By the time this appears, AirTran may have succeeded in dragging a reluctant Midwest Airlines to the altar and the only two US carriers that operate 717s will be one. If not, it won't be for lack of trying. The Orlando-based LCC with its hub in Atlanta has been pursuing Milwaukee-based Midwest since last fall, citing more than $60 million in fleet and network synergies that justify a $389 million purchase offer.

Yet even if the marriage fails, AirTran is an attractive groom. Excluding special items and fuel, it has reduced its unit costs in every year since 2001. In fact, it claims that its 2007 CASM will be only 4%-5% higher than Southwest Airlines' on a stagelength-adjusted basis, while nonfuel CASM actually will be lower.

More importantly, AirTran says its CASM was 34% lower than Delta Air Lines' in 2006, good news since the two share a hub in Atlanta and DL recently emerged from bankruptcy touting $3 billion in financial improvements, although it still lost money in the first quarter. AirTran, by contrast, earned $2.4 million, much improved over a loss of $8.8 million in 2006. Revenues soared 21% to $504 million on a 19% rise in RPMs as it maintained the aggressive growth path of the past six years. For 2006, earnings were $15 million, 92% up on 2005 on a 31% boost in revenues to $1.9 billion.

To get a sense of the carrier's meteoric rise, consider that in August 2000 it served 31 cities with 38 routes. Virtually every route touched Atlanta and it had no transcon flights. As of August 2007, it will serve 56 cities--seven of them added this year--with 129 routes, 23% of them transcon. And it has reduced its dependence on Atlanta from around 90% of operations in December 2001 to 66% today.

To maintain that growth, it recently ordered 15 more 737-700s, bringing its backlog to 85 as of early May. All of which raises the question: Why is AirTran in such a hurry to get hitched?


As it celebrates its 75th year of operation, the carrier also is immersed in Alaska 2010, a transformative plan aimed at creating a "virtuous cycle" of profits and growth (ATW, 1/07, p. 44). Executives target being in a position where the airline can grow 8%-10% annually and achieve a 10% pre-tax margin. To get there, they believe nonfuel unit cost needs to drop to 7.25 cents or lower. On a nonfuel basis excluding special items, CASM fell from 8.73 cents in 2001 to 7.81 cents last year.

Although parent Alaska Air Group reported a loss of $52.6 million in 2006, this was owing to a number of special items, including the decision to speed the transition to an all-737 fleet by phasing out MD-80s ahead of schedule, resulting in estimated annual savings of $115 million when the transition is completed next year. Excluding special items, AAG's 2006 net income would have been $137.7 million while Alaska Airlines pre-tax profit would have been $200. …

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