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Is Fleet Structure the Bogeyman for US Airways?

November 26, 2012 | About:
Readers who have followed my writings thus far will note that I rarely do peer comparison. This is because of my belief that there are no two identical apples in this world and peer comparison is potentially misleading, at least on a pure financial basis. However, a holistic view of peer comparison across financial variables and operating metrics would be more useful.

The operating margins of airlines are significantly affected by the complexity of the fleet structure. The more aircraft types an airline has, the higher its maintenance costs because of the use of different type of parts.

I will make a comparison of the margins for three U.S.-based airlines: US Airways (LCC), Delta Airway (DAL) and Southwest Airlines (LUV).

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From the charts, it can be seen that US Airways has the lowest operating margins, while Southwest Airlines has the highest margins. If we analyze the fleet structure for the different airlines, the disparity in margins is easily understood. Southwest Airways only has one type of aircraft — the B737 for both its short-haul and medium-haul flights. In contrast, US Airways has four different types of aircraft (A319, A320, A321, B737) for its short-haul flights; the A330 and A350 aircraft for its medium-haul and long-haul flights, respectively.

I was doing a comparison of a few Asia-listed luxury retailers a few months ago and found that one of the retailers had consistently lower gross profit margins. After I did further investigation, I found out that was because that retailer had a greater proportion of wholesale business than its peers. Although that retailer had lower margins, it had a shorter cash cash conversion cycle because of lower inventory days for its wholesale business. Also, its wholesale business was more resilient than its retail business during the financial crisis.

About the author:

Mark Lin
Mark is a private value investor and runs the Cheapskate Investing website which borrows from the wisdom of value investing giants, using a systematic quantitative screening approach to filter the global stock markets for cheap cigar-butts and wide-moat compounders. He is also a regular contributor to various value investing communities.

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Comments

angus90210
Angus90210 - 1 year ago
There may be some value realized by maintaining a common aircraft fleet however there are many other factors affecting the bottom line.

USAirways does not presently operate the A350, it operates the A330, the B767/757 for long haul flights. The B737 will be removed from the fleet by year end 2013. They are currently the largest single aisle Airbus operator in the world.

USAirways maintains one of the highest yields in the industry, that in large can be attributed to having diverse fleet to better manage access to a wide variety of communities.

In addition, USAirways has the lowest cockpit labor costs in the industry, up to 52% lower than competitors Delta and Southwest.

The future may bring some changes for USAirways, however based on recent performance they are trending positive.

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