Press Release
On January 1, 2010 Larry Kellner will turn over control of the fifth largest airline in the world to Jeff Smisek, when he will return to the financial industry to lead a new private investment firm in Houston named Emerald Creek Group. Mr. Kellner has been the Chairman and CEO of Continental for the past five years. He took over for Gordon Bethune. Mr. Kellner has been a great leader through some very difficult times for the company. Since Mr. Kellner came from a financial background, he leaves behind a financially sound corporation. It is one of the best capitalized and most liquid airlines in the world.
Overall Continental is set up for success, and Jeff Smisek is set up to take Continental to the next level. He has great management skills and knows the industry inside and out. He has proven to be a great asset to the company since he came on board in 1995. With his operations background he is the perfect person to help the company reduce their operating costs and bring their Cost per Available Seat Mile (CASM) in line with the other airlines in the United States.
The CASM problem Continental has is rooted mostly in their over reliance on Regional Jets. Continental currently has 251 Regional Jets under contract with ExpressJet and Chautauqua Airlines. They operate 234 ERJ-145 and 17 CRJ-200 aircraft on behalf of Continental. (Continental Fleet Page).
How do Continental and Jeff Smisek solve this problem?
The first step is to find a way to remove some of the Regional Jet flying. Continental currently operates 14 Bombadier Q-400's, which are based at their hub in Newark. These airplanes are much more economical than Regional Jets since they have turbo-prop engines. They also have a total capacity of 74 passengers, which is 24 more than that of the Regional Jets Continental contracts. The Q-400's offer Continental reduced CASM due to the added capacity and more efficient engines.
Continental should deploy additional planes on all routes within approximately 600 miles from each of their hubs. By flying these planes to close in destinations from Houston, Newark and Cleveland, Continental will be able to remove some Regional Jets from service. Although there is a speed advantage, of almost 100 miles per hour, with the Regional Jets when compared with the Q-400's the shorter flights are approximately the same block time. This is because the Regional Jet gets its advantage at cruise speed and altitude. Shorter flights spend most of their time in assent and descent. This cancels any speed advantage the Regional Jet might obtain through its faster speed during cruise. These Q-400's are also able to operate from shorter runways, and can help reduce delays at the nation's conjested airports.
The other way to replace Regional Jets is to purchase jets in the 90-110 seat range. These could take the form of the Embraer 195's. The difficult part of this is that these planes would have to be flown with mainline crews because of the scope clause in the pilot contract at Continental. While this would increase the operational cost of the airplane, Continental would gain a huge benefit. They would be able to replace Regional Jet flying to destinations that are not large enough for their smallest mainline plane, the 114 seat 737-500. Continental is currently in the process of retiring their classic 737 fleet. Once this happens, and the 737-300/-500's are all retired the smallest plane in the fleet will be the 124 seat 737-700. By taking on planes in the 90-110 seat range, Continental will be able to right size markets and reduce some redundancy in service. This will help Continental save some of the additional cost of the mainline crews.
Continental can significantly reduce their CASM and increase the benefit to their bottom line by making these two moves. It is not an easy sell, and will not be an easy transition, but the faster Continental moves away from more expensive Regional Jet flying the sooner they will reduce their cost structure.
Overall Continental is a solid airline with sound financials. With a few small changes at the start of Jeff Smisek's induction as Chairman and Cheif Executive. With Mr. Smisek's solid operational background and knowledge of industry forces Continental should be poised to make a solid leap forward. Through the continuation of Gordon Bethune's "Go Forward Plan" Continental will continue to prosper for many years to come.
Showing posts with label Airlines. Show all posts
Showing posts with label Airlines. Show all posts
Thursday, July 16, 2009
Tuesday, June 23, 2009
Republic Airways on a shopping spree
http://phx.corporate-ir.net/phoenix.zhtml?c=131107&p=irol-newsArticle&ID=1301620&highlight=
http://phx.corporate-ir.net/phoenix.zhtml?c=131107&p=irol-newsArticle&ID=1301191&highlight=
Introduction
Republic Airways is led by a talented group of executives. Within the past week they have purchased Midwest and Frontier Airlines. The Frontier deal still needs approval from the Bankruptcy court where their case has been filed. There does not appear to be any other bidders for Frontier in this deal. Frontier declared bankruptcy over a year ago. They have done a remarkable job turning their operation around and are now profitable. That says a lot about an operation when facing stiff competition on their home turf. Denver has three dominant carriers, Frontier, United, and Southwest. This is the smallest market to have three airlines hubbed at its airport. JFK, in New York City, has Delta, JetBlue and American. LAX, in Los Angeles, has American, United and Southwest.
Republic will be forced to operate Frontier and Midwest on a separate certificate to avoid scope clauses in their contracts with other major airlines. Republic now has some serious questions to answer.
Risks:
This is a large integration and a risky venture. Besides taking on a lot of new headaches (mergers are never easy, just ask Doug Parker at US Airways) Republic risks angering their partners. When contracts come up for renewal a major carrier like Continental may choose not to renew their regional flying with Republic because they are now competing on a larger scale with the same company. This could cause Republic some growing pains until the operation is large enough to sustain itself. If these contracts are not renewed it is possible that Republic will be left paying a lot of expensive leases on planes they are unable to fly. This cost can add up fast and may force the company into bankruptcy. Excessive debt is another problem. As we have seen with Mesa Airlines in the past year excessive debt could really down a company fast. If payments can not be made Republic may be forced to settle with the debt holders and risks angering their stock holders.
Mitigating that risk
Republic is in a unique situation. Midwest was already being wound down and was planning on removing their 717's before this deal. Midwest had become a shell of its former self. There are very few people left on staff, so integration should be rather simple from a human resources point of view. Frontier already has the authority to do all the flying Republic will require, so it should be almost as simple as relocating some mainline flying to cover the largest markets Midwest currently serves. In the event that contracts are not renewed Republic has a few places it can place airplanes. Its joint venture in Hawaii is one place they can go besides the new integrated Frontier/Midwest operation. These two options should allow enough growth to mitigate any risk Republic will run by angering their other partners.
What do you do with the Midwest operation?
The 717's are all leaving, to be replaced by Republic EMB-190's. Midwest was on path to become a shell for Republic to deploy some assets as they came off contract from other carriers. Regional Jets are at a cost disadvantage when compared to the other airlines' larger, mainline fleets. Southwest is moving into Milwaukee and will pose formidable competition for Midwest.
What do you do with the Frontier operation?
Frontier has a lot of competition in Denver, which is their only hub. Southwest has grown exponentially since entering the market, and United is still a formidable opponent that will continue to defend their turf. Frontier has turned their operation around in the past year, and is currently making a profit. They have taken some great steps with ancillary revenue and have a strong management team in place.
My expectations
If I was in charge of this integration I would take the following steps:
1) Execute an immediate code-sharing agreement between Midwest and Frontier. Use this to cross promote flights and market services for both airlines across the newly formed system.
2) Distribute the larger aircraft (A320 Series) to biggest markets. This will ensure the best return for the airline and will help Republic begin to grow and integrate the network. While redistributing the A320 series planes, reduce unprofitable service from Denver, Milwaukee, and Kansas City. Use this opportunity to right size the fleet and services. There is a possibility here of reducing Kansas City to a focus city or just a spoke.
3) Merge the airlines under one brand. Use one certificate to manage all of this flying and use the extra certificate to obtain new code-share agreements with other airlines. This will help them avoid more scope clause issues and put more planes into service. Use this time to implement the best features from the separate airlines across the system, while getting rid of the worst attributes. This will help the new airline gain notoriety as customer focused and a good value for the customers money. It will also help the new airline be profitable and compete successfully in a difficult market.
4) Introduce new flights to destinations already served by either airline. This will increase productivity and open new markets for both airlines. Also be sure to increase service between hubs in order to increase connectivity.
5) Grow the Denver and Milwaukee market to obtain proper economies of scale in order to better compete with the major airlines. Use this opportunity to open new markets and solidify their position in their current markets. This is a perfect time to create good connectivity from between the coasts. With two well positioned hubs, in Denver and Milwaukee, the new airline should be able to compete with the other majors.
6) Open a new hub on the East Coast to grow their operation and become a national airline. As the airline becomes larger it will be less susceptible to competition from new entrants in a market. It will also give them the economics to reduce their Cost per Available Seat Mile. By spreading their fixed costs across more seats and more markets the airline will be profitable at lower prices and be able to gain market share with reduced prices.
Conclusions
This plan will take many years to implement and it will not be an easy road. Republic is in a unique position to capitalize on a down market. They are getting two airlines at fantastic prices because of the economic troubles in the world. If Republic commits to their plan (whichever plan they choose) and it works the company stands to make a great deal of profit. If the new airline can remain profitable for a short time Republic might even be able to spin them off in an IPO and make some serious cash in a short amount of time.
Republic is one of the largest and best run regional airlines in the country. I am very excited to see how they compete with the majors. These large, national airlines will defend turf harshly. They do not want new entrants making inroads to their markets. We have entered a new era of aviation, where regional airlines are expanding their reach and operations. Republic is on the leading edge of the market and will be the guinea pig for the new airline industry.
http://phx.corporate-ir.net/phoenix.zhtml?c=131107&p=irol-newsArticle&ID=1301191&highlight=
Introduction
Republic Airways is led by a talented group of executives. Within the past week they have purchased Midwest and Frontier Airlines. The Frontier deal still needs approval from the Bankruptcy court where their case has been filed. There does not appear to be any other bidders for Frontier in this deal. Frontier declared bankruptcy over a year ago. They have done a remarkable job turning their operation around and are now profitable. That says a lot about an operation when facing stiff competition on their home turf. Denver has three dominant carriers, Frontier, United, and Southwest. This is the smallest market to have three airlines hubbed at its airport. JFK, in New York City, has Delta, JetBlue and American. LAX, in Los Angeles, has American, United and Southwest.
Republic will be forced to operate Frontier and Midwest on a separate certificate to avoid scope clauses in their contracts with other major airlines. Republic now has some serious questions to answer.
Risks:
This is a large integration and a risky venture. Besides taking on a lot of new headaches (mergers are never easy, just ask Doug Parker at US Airways) Republic risks angering their partners. When contracts come up for renewal a major carrier like Continental may choose not to renew their regional flying with Republic because they are now competing on a larger scale with the same company. This could cause Republic some growing pains until the operation is large enough to sustain itself. If these contracts are not renewed it is possible that Republic will be left paying a lot of expensive leases on planes they are unable to fly. This cost can add up fast and may force the company into bankruptcy. Excessive debt is another problem. As we have seen with Mesa Airlines in the past year excessive debt could really down a company fast. If payments can not be made Republic may be forced to settle with the debt holders and risks angering their stock holders.
Mitigating that risk
Republic is in a unique situation. Midwest was already being wound down and was planning on removing their 717's before this deal. Midwest had become a shell of its former self. There are very few people left on staff, so integration should be rather simple from a human resources point of view. Frontier already has the authority to do all the flying Republic will require, so it should be almost as simple as relocating some mainline flying to cover the largest markets Midwest currently serves. In the event that contracts are not renewed Republic has a few places it can place airplanes. Its joint venture in Hawaii is one place they can go besides the new integrated Frontier/Midwest operation. These two options should allow enough growth to mitigate any risk Republic will run by angering their other partners.
What do you do with the Midwest operation?
The 717's are all leaving, to be replaced by Republic EMB-190's. Midwest was on path to become a shell for Republic to deploy some assets as they came off contract from other carriers. Regional Jets are at a cost disadvantage when compared to the other airlines' larger, mainline fleets. Southwest is moving into Milwaukee and will pose formidable competition for Midwest.
What do you do with the Frontier operation?
Frontier has a lot of competition in Denver, which is their only hub. Southwest has grown exponentially since entering the market, and United is still a formidable opponent that will continue to defend their turf. Frontier has turned their operation around in the past year, and is currently making a profit. They have taken some great steps with ancillary revenue and have a strong management team in place.
My expectations
If I was in charge of this integration I would take the following steps:
1) Execute an immediate code-sharing agreement between Midwest and Frontier. Use this to cross promote flights and market services for both airlines across the newly formed system.
2) Distribute the larger aircraft (A320 Series) to biggest markets. This will ensure the best return for the airline and will help Republic begin to grow and integrate the network. While redistributing the A320 series planes, reduce unprofitable service from Denver, Milwaukee, and Kansas City. Use this opportunity to right size the fleet and services. There is a possibility here of reducing Kansas City to a focus city or just a spoke.
3) Merge the airlines under one brand. Use one certificate to manage all of this flying and use the extra certificate to obtain new code-share agreements with other airlines. This will help them avoid more scope clause issues and put more planes into service. Use this time to implement the best features from the separate airlines across the system, while getting rid of the worst attributes. This will help the new airline gain notoriety as customer focused and a good value for the customers money. It will also help the new airline be profitable and compete successfully in a difficult market.
4) Introduce new flights to destinations already served by either airline. This will increase productivity and open new markets for both airlines. Also be sure to increase service between hubs in order to increase connectivity.
5) Grow the Denver and Milwaukee market to obtain proper economies of scale in order to better compete with the major airlines. Use this opportunity to open new markets and solidify their position in their current markets. This is a perfect time to create good connectivity from between the coasts. With two well positioned hubs, in Denver and Milwaukee, the new airline should be able to compete with the other majors.
6) Open a new hub on the East Coast to grow their operation and become a national airline. As the airline becomes larger it will be less susceptible to competition from new entrants in a market. It will also give them the economics to reduce their Cost per Available Seat Mile. By spreading their fixed costs across more seats and more markets the airline will be profitable at lower prices and be able to gain market share with reduced prices.
Conclusions
This plan will take many years to implement and it will not be an easy road. Republic is in a unique position to capitalize on a down market. They are getting two airlines at fantastic prices because of the economic troubles in the world. If Republic commits to their plan (whichever plan they choose) and it works the company stands to make a great deal of profit. If the new airline can remain profitable for a short time Republic might even be able to spin them off in an IPO and make some serious cash in a short amount of time.
Republic is one of the largest and best run regional airlines in the country. I am very excited to see how they compete with the majors. These large, national airlines will defend turf harshly. They do not want new entrants making inroads to their markets. We have entered a new era of aviation, where regional airlines are expanding their reach and operations. Republic is on the leading edge of the market and will be the guinea pig for the new airline industry.
Subscribe to:
Posts (Atom)
