Analysts: Increase in passengers would cover fuel price hikes

Friday, Dec. 8, 2000 | 10:24 a.m.

If National Airlines could put about 15 to 20 more passengers on each of its 56 flights, it could whether the volatile fuel price crunch that has helped to throw the Las Vegas-based carrier into bankruptcy, observers say.

Airline industry experts say National has a high level of customer satisfaction and the perfect airplane to carry out its goal of transporting passengers on long hauls from the East Coast. Although fuel costs that have nearly doubled in the last year and a half may have triggered Wednesday's Chapter 11 filing, they say putting more people in the seats is what's needed to cure the airline's ills.

The Las Vegas-based carrier has borrowed a page from the operating manual of one of the nation's most successful airlines by operating a fleet with just one aircraft type. Dallas-based Southwest Airlines frequently touts that by using one type of jet, the Boeing 737, the short-haul workhorse of the industry, it saves money in crew training and parts inventories. Every pilot can fly every plane; when something needs to be repaired, there's a ready supply of replacement parts that will fit every plane.

For National, the aircraft of choice is the Boeing 757, which company founder and Chief Executive Officer Michael Conway proudly called "the hot-rod of the industry" when the airline launched in 1999.

The 757 is one of Seattle-based Boeing's most fuel-efficient jets. First put into commercial service by Eastern Airlines in 1983, the 757 was designed with a wing that is less swept back and is thicker through the center that earlier aircraft, reducing drag and making it more aerodynamic.

The plane's wing offers the versatility to mount four different engine types, according to Boeing, and National's planes use the Rolls-Royce RB211, the series with the greatest horsepower. That enables National's planes the ability to climb higher faster, another fuel efficiency feature.

In general, jets are at their best efficiency when at a high cruising altitude, in part because thinner air at high elevations reduces resistance on the aircraft. Also, the higher the plane, the more coasting there is when it comes down. That's how planes on long runs across the country can run more economically than those on short hops.

A number of variables

Every flight is a unique operation that requires calculations to determine how much fuel to put on board and a number of variables affects those decisions. Among them: the weight and load of the plane, anticipated air traffic and weather conditions at the destination, weather along the route and the speed of winds aloft.

The 757 can carry a maximum of 42,680 pounds of fuel -- 11,276 gallons.

When crews calculate how much fuel to put on a plane, they consider all elements of the flight plan and put enough in the tanks to reach the destination, plus about 10,000 pounds in reserve to reach a predetermined alternative airport. For example, flights to Las Vegas can divert to Phoenix if there's an emergency or weather delay at McCarran International Airport.

In general, flights that travel from east to west need more fuel than those that go from west to east because the actual distance of the flight is greater -- the Earth is rotating underneath the plane as it flies -- and traditional wind patterns usually favor eastbound flights.

For example, a travel industry database shows that on two recent National flights between Las Vegas and Miami, the jet that left for Miami took off with a weight of 42,500 pounds and arrived with 10,100 pounds while a Las Vegas-bound flight left with 48,600 pounds and landed with 9,200. Recent takeoff weights on National flights to Chicago and Dallas were 39,900 and 26,100 pounds, respectively, the database shows.

When National started operations in May 1999, jet fuel cost 60 cents a gallon. So, a full tank of 11,276 gallons would have cost about $6,766. But since then, fuel has climbed to as high as $1.17, so a fill-up would cost about $13,193. Today, fuel is about $1.09 a gallon, so a full tank would run about $12,291.

Even though fuel costs have ravaged the profits of National and other airlines in the past 18 months, that has been mitigated to some extent by fuel surcharges added to every passenger's ticket. Up to $20 is added per direction by National and other carriers with such surcharges, so 100 passengers can generate an additional $2,000 per flight to offset added fuel costs.

Still, with the fuel surcharge, it costs National about 52.1 percent more now to fill its planes than it did when operations began -- a bump not unlike the pain experienced by motorists when they drive to the corner gas station.

'Hedging' fuel costs

National also is at a disadvantage in that it has not been able to "hedge" fuel costs, paying in advance for fuel at lower costs, because as a start-up carrier it has not had the financial reserves to do that.

With as many variables as there are on flight plans, there may be just as many on revenue generation. Not every seat costs the same. For example, the leisure passenger who buys a coach ticket several weeks in advance will pay less than a business traveler who chooses a first-class seat on the day of the flight.

A ticket from Las Vegas to Los Angeles generally will cost less than a ticket to New York.

And, there's price volatility that is dictated by the actions of competitors that can change daily. If Southwest Airlines, for example, announces a sale and flies between Las Vegas and Los Angeles for $50, National won't be able to stand by and sell its tickets for $75. Most carriers will match the fares offered by the lowest-priced airline. In many markets, National is the low-fare carrier that has to be matched by the major operators.

Filling the seats

Even with those variables, the bottom line for most airlines is to fill the planes -- and that's something that National hasn't done as well as its competitors. But low load factors are a fact of life for start-ups because travelers often are reluctant to change from their favorite airlines because they are invested in loyalty programs -- frequent flier deals that earn them free travel.

"Startup airlines almost always have lower load factors than most," said Mike Boyd of The Boyd Group, a Colorado-based aviation consultant. "It's even harder for a carrier that serves a leisure market like Las Vegas," because vacation travelers will pay less than business travelers on trips.

Because National carries a lower capacity on its 757s than most airlines, Boyd estimated that it needs a load factor of about 75 percent to be successful.

The 175 seats on the plane is on the low end of a 757's capacity. Boeing says the typical two-class configuration of the plane accommodates about 192 seats. But it was part of Nation's business strategy to emphasize comfort -- and that has paid off to some extent.

When American and United airlines ballyhooed their planes were offering more leg room by reducing the number of rows of seats in their planes, National ran an ad campaign that said it had comfortable planes from its first day of operations.

Boyd said the airline had a good strategy -- customer satisfaction levels are high. Dennis Casteel, an agent with Carlson Wagonlit Summerlin Travel, said he hasn't heard many complaints about National's service. That's good news to National, which is counting on its partnership with travel agents, who still receive a 10 percent commission from the airline for tickets sold. Most carriers have drastically cut commissions to travel agencies.

Conway has steadfastly kept National's loads proprietary to keep ahead of his competition, but he said after the bankruptcy filing Wednesday that his airline needed to have loads "in the low 60s" to break even.

The most current information available on National's actual loads comes from a report filed to the U.S. Department of Transportation, which is about six months old because of the hypersensitive nature of airline industry competition. It shows National to have had loads of 53.7 percent in the first half of the 2000 fiscal year. That means that of the 175 seats on National's 56 daily flights, an average of about 94 were occupied by revenue-paying customers. That doesn't count employees of National and other airlines with reciprocal agreements that pay little or nothing to fly.

National spokesman Dik Shimizu and Conway have indicated that loads today are much better than they were when the Department of Transportation report was filed. Shimizu said that report included the time frame of the infamous pre-Millennium travel downturn in which Las Vegas resorts braced for thousands of visitors to usher in 2000 -- but most people stayed home.

Six months of profit

Conway has indicated that for six months beginning in March, National was profitable, which means the airline probably hit its low-60s load factor.

So, if National had loads of 62 percent, that means it had an average of about 108 revenue passengers per flight aboard. To reach Boyd's arbitrary goal of 75 percent, planes would need to have about 131. A possibly more reasonable expectation is to hit a load factor on the level of Southwest or America West, the two biggest players in the Las Vegas market. During the same early 2000 reporting period, they had loads of 67.1 and 67.8 percent, respectively, at that time.

That would translate to about 118 passengers per flight, or about 10 more than National presumably carries now.

So, while fuel costs have hurt National, putting more people in the seats seems to be the solution, especially since the airline isn't likely to do anything radical, like cut crew costs by eliminating meals on flights. They also aren't likely to reconfigure their planes; they haven't been able to fill the seats they have -- why put in more?

"It's a damn shame," Boyd said of the bankruptcy filing, "but I'm at a loss as to how fuel costs could turn an airline that had been profitable into one that had to file for Chapter 11."

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