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Sunday, Sep 25, 2022

Not Soaring

Be prepared for packed planes this Thanksgiving holiday as 1.8 million passengers pass through Los Angeles International Airport through next Monday.

But for the regulars on Southwest Flight 667, packed planes are a regular event. The airline’s 1:05 p.m. daily non-stop from LAX to Philadelphia International Airport averages 93 percent capacity giving it the distinction of being the most crammed domestic flight out of Los Angeles.

Typically, it’s not a pretty picture. Southwest’s Boeing 737s are not geared for a 5-hour trip, which means no meals, no movies and limited leg room. Traveling with a baby? Forget about a changing table in the rest room. For entertainment, flight attendants will sometimes organize a game of “pass the toilet paper,” with passengers competing by aisle not always a welcome activity for some fliers.

That’s of little concern if you own stock in Southwest Airlines Co. Being able to fly so full so often helps explain why the Dallas-based carrier has managed to defy the airline industry’s freefall and make money quarter after quarter going back to 1991. That pattern is expected to continue in the current quarter, and it’s a good bet that Flight 667 is a moneymaker.

But what of the 1,800 or so other planes that come in and out of Los Angeles International Airport each day? Determining profit and loss on a flight-by-flight basis is an inexact exercise and reflects a financial hodge-podge of passenger loads, revenue streams and operating costs.

On the surface, the industry would hardly appear to be in poor shape. All told, U.S. airlines are expected to carry 16.3 million passengers during the holiday weekend, up from 15.9 million from a year earlier and on pace to top 685 million for the year. That would beat the record 666 million in 2000.

The problem with those numbers is that airfares have fallen, as have yields. “There are more carriers out there offering great deals,” says Doug Wills, a spokesman for the Air Transport Association.

Determining profitability

Another complication: skyrocketing jet fuel prices that have only now begun to ebb. JetBlue Airways Corp., the low-fare carrier that has been viewed as an archetypical success story as recently as last spring, has been paying up to $1.50 a gallon for fuel, nearly twice the level of a year ago. Every one cent increase in the fuel price has meant $643,000 more per quarter in operating costs. “Fuel costs are largely out of the control of the airlines, being controlled by market forces,” writes Value Line analyst Damon Churchwell.

With all those variables at play, airline consultants say it’s often difficult to single out the particular flights that make money and the ones that don’t.

Some basics to consider about the industry, starting with the most obvious: profit margins, even under the best of circumstances, are typically rail thin no more than 1 percent or 2 percent. That’s why determining when to raise or lower fares becomes critical; all told, more than 90 percent of the tickets sold by U.S. airlines are discounted, with discounts averaging two-thirds of the full fare. That puts pressure to lower fares on all airlines, including the major carriers that are struggling to trim their huge operating costs.

“Now that fares are at all-time low levels and load factors are at some of the highest levels, airlines need to maximize the revenue they get out of each flight,” said Kevin Schorr, research director at Campbell-Hill Aviation Group Inc., an aviation and economic research consultancy in Alexandria, Va. That might not mean dropping routes altogether but reducing the number of flights, using smaller aircraft or putting more emphasis on more profitable international routes.

Whatever the strategy, planes usually have to be full or close to it for the airlines to have a shot at profitability.

Campbell-Hill examined load factors or the percentage of seats that get sold on any particular flight for domestic flights out of LAX through last August and found the Southwest flight to Philadelphia to be at the top, followed by Hawaiian Airlines’ thrice daily flights to Honolulu, with a load factor of 88 percent.

Three other routes averaged 87 percent: Spirit Airlines’ twice daily flight to Detroit on an MD-80; UAL Corp.’s six daily flights to Tucson on 50- and 64-seat United Express jets; and a daily flight to Reno on a 50-seat United Express.

Routes with the lowest load factors from LAX include United Express’ thrice daily flight to Inyokern on a 30-seat plane (38 percent); United Express’ flight to El Centro (39 percent); and ATA Airlines Inc.’s flight to St. Petersburg, Fla. (43 percent, and recently discontinued).

Overall, the industry’s break-even load factor has hovered around 66 percent in recent years, compared with this year’s projection of 75.5 percent, according to Value Line estimates.

Soaking up cash

So why can’t the carriers make money?

The simple explanation is that passenger load alone is only one factor. The onslaught of discount carriers has forced the major lines to lower fares, and while that fills planes, it doesn’t offset massive labor costs. Industry-wide losses are expected to reach $2.1 billion this year that’s on top of almost $3 billion in losses in 2003.

But sometimes, the matter of profit and loss is more complicated than just determining how full a plane might be. United Express’ flights from LAX to places like El Centro and Inyokern would normally be considered money-losers, but the carrier is counting on most passengers to make connections to other, more profitable destinations.

“For individual airlines with a hub-and-spoke system, they’re less interested in trying to maximize profit on an individual route basis, but in maximizing profits for the whole system,” said Dan Kasper, managing director of LECG LLC, an economic and financial consulting firm in Cambridge, Mass.

“The question they have to ask is, if they didn’t have the flight to Oxnard, would these people get on a United flight to go to other places? If the answer is that not all them would, there’s a chance it make sense for United to offer those flights at low load factors.”

Indeed, the metrics that airlines go through in determining which flights stays or goes can be dizzying, which has made the success of Southwest all the more noteworthy. “We will be profitable unless something really bad happens,” Chief Executive Gary Kelly told analysts earlier this month.

The elements of Southwest’s success have been long established: It gets more bang for its buck out of employees, it still sticks to Boeing 737 aircraft, and the airplanes spend less time on the ground than those of other carriers. As for fuel costs, Southwest has been using hedging techniques for years so that it pays at well under the market rate.

The LAX-Philadelphia run, which was launched on July 6, with a second added on Oct. 31, typifies the carrier’s tactic of moving into selected markets. The service was just part of an expansion into Philadelphia, which until then had been the province of US Airways Group Inc., now in bankruptcy protection. “That route for years has been plagued by incredibly high walk-up fares,” said Schorr.

In introducing the route, Southwest offered $99 one-way fares if purchased 14 days in advance (a discount still being offered from time to time). “We have been adding non-stops from L.A. cross-country,” said spokeswoman Whitney Eichinger. “We want to connect our coasts. And Los Angeles is a perfect fit. We had space in the airport to do it.”

Southwest has since added two more gates at Philadelphia for a total of six after US Airways missed an August rent payment. Growth in Philadelphia, Kelly said, “will be a high priority for us in 2005.”

Bloomberg News contributed to this story.


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