spin88

This is just wrong. It is accepted by everyone that adding capacity puts pressure on PRASM. This is why United cuts capacity whenever it has PRASM issues. This allows the base traffic (hub captive, elite, corporate accounts) to fill more seats which requires less price competition to attract "unmanaged" traffic to fill the plane. Adding new flights spreads this base traffic out, and requires attracting new higher yield traffic to keep up PRASM. When this base high yield traffic decreases, an airline either accepts lower PRASM, or cuts capacity. Delta's results show a much healthier airline. We can debate the reason for this (my opinion is that Delta is attracting new high value traffic, and United is not) but we can't debate what the numbers mean.

p.s. I ran the numbers based upon the guidance, and determined UAL would have had another $717 in revenue this quarter if it had matched DAL's PRASM growth since 2011. http://www.flyertalk.com/forum/26903585-post8.html

When I have time I'll update this based upon UAL's announced figures.

This is not correct, UAL further deteriorated in PRASM as to DAL, and also in yield (which does not consider load, and therefore is less impacted by capacity increases/decreases) where UAL's yield fell 6.1% and Delta's fell 4.7%. Given that Delta grew its capacity 3.2% and United only grew it's by .1%, the results are very bad for United.

I am certainly not smarter but this is clearly correct.

sinoflyer

Academically, this is incorrect.

Change in PRASM already means "change in unit revenue per unit change in capacity." It is analogous to a car's velocity--To compare how fast the cars are going, you determine their velocities. For the airlines, DL has slowed 4.9% while UA has slowed 6.6%.

Some, dissatisfied that PRASM numbers no longer illustrate a more negative narrative on UA, now want to invent a new metric by re-inserting "change in capacity" into the equation for a second time. But to do that, they can't re-use "change in unit revenue per unit change in capacity." Rather, they need to create a new factor called "change in change in unit revenue per unit change in capacity" and compare it back to "change in capacity." (This sounds ridiculous, and it is. ) This would be analogous to a car's acceleration, but you can't compare how fast the cars are going by looking at their accelerations. You still need to know their velocities.

Stay simpleminded and stick with PRASM, the most basic metric for airline performance.

spin88

First your analogy is not correct. A better analogy is two trucks, one has a ton of gavel dumped in its bed and its velocity falls by 4.9%, the other truck has no more weight added, but falls by 6.6%. We would note the extra weight (or seats) impacts how we look at the headline numbers.

I - and others - have been making this point for now 4 years, putting PRASM into the context of capacity cuts/raises, so your claim people are trying to make UA look bad is just wrong.

WineCountryUA

Moderator Note

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WineCountryUA
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minnyfly

Ceteris paribus, yes. But the airline world isn't ceteris paribus. There's factors outside the airline's control, such as the local economy, global economy, and competition that affect each carrier differently when it comes to capacity. Your arguments don't address this. The blanket argument that product=revenue doesn't work in the real airline world.

I would expect airlines like DL and WN to have a much easier time with revenue control since they are far less affected by competition and/or global macroeconomic factors than UA. You see, the big factors are everything. When you don't have market power, you're at the mercy of others. UA can't just increase capacity in a highly competitive route without taking a big hit in revenue. It just can't. It also can't just magically make the make the global economy, foreign currency, and oil revenue challenges go away. On the hand, when you do have market power, when you've restricted capacity far below equilibrium, you can. You even might be able to raise your PRASM, since what you've added might be in a high revenue market. So with that, DL's revenue numbers aren't good either. In ways they are worse, since they have much greater market power.

As another example, I don't find the news surprising that IAH is performing well among the hubs. It is arguably UA's best hub for market power. Now that the oil revenue losses have slowed, the capacity cuts have done the job and boosted the PRASM. That's what market power allows you to do.

If you take the same airline and place them in the different markets, such as UA and DL are in, you might get the same result over time. That figure is meaningless outside ceteris paribus.

Good point. To put it simply, DL lost 70 cents of unit revenue, and UA lost 89 cents.

Trying to add capacity into the mix is completely flawed. We don't know where the capacity increases/decreases are going into--a strong PRASM area or a weak one. If DL was adding into a high PRASM area and subtracting in low PRASM markets, then it would be a bad sign, not a good one. And vice versa. The same goes for UA.

sinoflyer

Those numbers above come directly from the respective airlines.

In actuality, you misunderstood "revenues" for PRASM. PRASM came into this discussion only later on, when another poster tried to apply the comparison above (actual revenue to capacity) to compare PRASM to capacity. It's meaningless to compare PRASM to capacity--PRASM is based on capacity.

AAExPlat

I understand your thought process, but it is inaccurate...reread everything that has been written on this thread. Capacity is part of PRASM. Nobody disputes that. But when comparing PRASM across airlines, one needs to account for recent changes in ASMs....

If one airline doubled its ASMs at the beginning of the quarter and the other airline kept ASMs exactly the same, PRASM would plummet for the first airline since they would be unable to sell new seats at the same price as prior marginal seats on short notice.

It is a qualifier for PRASM performance if you will. You can certainly continue to argue the opposite, but at this point, you are going to embarrass yourself for the sake of wanting to be correct.

nunusguy

In a note to employees Wednesday, Munoz said the company will examine the mission of its hubs and smaller “spoke” airports while also seeking ways to modernize operations and information technology. United, which is trying to become as profitable as other major U.S. airlines, announced a strategy last month to create or save an extra $3.1 billion by 2018 through selling more premium-cabin seats, using larger jets and other measures.

“I think there’s this perception that if they close a hub, it’s going to be good,” Janus Capital Management analyst Kris Kelley said in an interview. “I’m encouraged by the thought that he’s willing to explore everything.”
http://www.bloomberg.com/news/articl...ome-weak-fares
******
So the Bloomberg guy thinks that Munoz has everything on the table including the elimination of a hub/smaller spoke and/or addition of same to improve profitabililty.

Kacee

+1

If I'm considering buying an airline stock, I am definitely going to view it as a negative if one had a decline in PRASM on neutral capacity vs. one that had a decline while increasing capacity. It's not going to be the only consideration, but it is definitely a negative because of what it indicates in terms of revenue trends and strength.

And to respond to another comment, it is absolutely sometimes relevant to measure the change in a change . . . rates of positive or negative change are indicators of trends which may well impact future performance.

sinoflyer

... and folks, this is how some people invent a new metric in order to convince themselves that what they are seeing isn't really true.

It started with the unwillingness to accept that DL and UA are both facing a tough revenue environment right now:

DL in 2Q saw both actual revenues and unit revenue decline in spite of added capacity. UA also experienced declines in both actual revenues and unit revenue, but capacity changed little. Some people saw this difference as a way to suggest that DL's revenue declines are actually better because DL has more "relative capacity changes."

If it were UA that is bringing in less revenue despite producing more product, imagine the same people using this same invented metric. Or perhaps all that "analysis," found in other threads like the SFO-HGH route, with one-minute fare searches on kayak and last-minute peeks at the seat map, are really an effort to say that UA is becoming better by discounting heavily and flying more empty seats. After all, the capacity is "relative."

goodeats21

I am not sure they really have a lock on the operational reliability at this point either. From the delayed flight threads...and my own anecdotal experience since July 1...I imagine the numbers are going to fall this month.

spin88

Looking at the map, there is only one "hub" to ax, and that is LAX, where the margins are under real pressure, UA's share has fallen, and UA lost most of its valuable traffic as DAL built out its hub and AA stayed strong. I think it is stupid to cut off an important part of the network to make some second rate wall street hacks happy by TEMPORARILY boosting margins due to cost cuts, but that may be what Oscar has to do to try to buy some time.

LAX allows UA to give up on more flights (arguing it will route the traffic over SFO) but not touch IAD, which is the only other real "hub" that gets discussed.

I am not so sure either. My flight, which boarded on time SFO-IAH, the 788 flight, was late yesterday by 25 minutes leaving and 10 minutes into IAH. The casualness of it all when they were late says a lot about culture. They did not even mention it. We pulled back 25 minutes late without a peep, like it did not matter. When Delta is even a few minutes late leaving, you get an apology from everyone involved.

UA has not had any major WX issues, and I think the figures at this point reflect some good luck.

REPUBLIC757

There really isn't much to cut at LAX at this point. MSY is gone, BWI/PIT are now seasonal. They'd save a few 787s on prime International routes and that's about it. Plus building a Polaris Lounge is already in the plans.

I think it's IAH dragging UA down right now. I'd expect them to keep cutting down that hub in favor of saving a few bucks. But as we remember project quality, saving a few bucks really hurt UA which is still a factor as to why PRASM is still dropping.

EWR764

UA is already reducing capacity at IAH (smaller gauge, reducing frequency, cutting destinations) and in the call management singled out IAH with the best PRASM performance of the mainland hubs in the quarter, followed closely by SFO/DEN. While United is clearly pulling capacity out of IAH, and will probably continue to do so, there is no scenario under which I can see the hub closing. The SFO/DEN news is very good as it indicates the additional capacity is performing well.

Also, are you able to identify an airline that is showing positive year-over-year PRASM performance?

REPUBLIC757

Not saying IAH will ever close, but might get reduced further. I wonder if it would come down eliminating an entire bank during the day or something like that.