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  • CFO Magazine

The Long Haul

As airlines struggle to survive, the role of finance in decision-making takes off.

The airline had already shifted to buying Airbus 319 and 320 jets, which were much cheaper than Boeing 737s, the mainstay of America West’s early fleet. While the Airbus purchases continued — the airline now has 87 Airbus planes, 42 737s, 13 larger 757s, and 43 regional jets from Canada’s Bombardier Inc. — picking the cheaper Airbus planes was hardly a no-brainer. “We do 10-to-20-year price-outs,” says Kerr, who became CFO in 2002. He reviews such long-term aircraft outlays as maintenance, one area in which Boeing planes offer savings. But, Parker says, any Boeing savings “just get overwhelmed in the purchase-price decision.”

The CEO had a tough system decision to make in February 2003, when he scrapped the Columbus hub — part of an industry trend to remove the least cost-effective hub operations. “It wasn’t fun flying out to tell those people they weren’t going to have jobs there. But it was the right thing to do,” says Parker. Also right, he says, was America West’s offer of transfers to the 228 affected employees. (The airline has 13,000 employees overall.) Parker thinks his airline and Southwest have done especially well at avoiding layoffs and pay cuts during hard times, dodging the extreme labor strife of some other airlines.

One thing that’s here to stay is fuel-price hedging. “I think airlines will always hedge from now on,” says Parker, who remembers when hedging was seen as foolish in the days before deregulation. “If fuel prices went up, fares went up,” he says. “And if they fell and you’d hedged, the fares went down and everybody else made money, while you lost money.” America West uses a “costless collar” hedge on prices, currently covering 67 percent of its fuel purchases. It installs a put and a call on either end of a predetermined price range (currently $1.10 to $1.32 a gallon) to help ensure against price spikes up to nine months in advance. Its system doesn’t offer the one-year-plus protection that Southwest has achieved, but Kerr notes that other airlines lack the credit ratings Southwest has to support such longer-term arrangements.

CASM and RASM (cost and revenue per available-seat mile, respectively) are still the basic metrics used by America West and others (see “Airline Fracture”). In the third quarter of 2004, America West ranked third behind Southwest and JetBlue in CASM, with a per-seat-mile cost of 7.90 cents. (Its RASM was 7.57 cents, helping to explain its loss for the period.)

Only half-jokingly, Parker says a third metric grabs his attention these days: days cash outstanding relative to the rest of the industry. It’s basically the airline’s way of asking, “Who’s going to file for bankruptcy next?” he says. “It’s not your standard CFO kind of measure, but it’s fascinating.”

These days airlines consider cash reserves as something of a small hedge against the havoc another terrorist attack could wreak. “I can’t remember looking at [relative airline cash positions] on a regular basis until 9/11,” says Parker.

Penciling in the Five-Year Plan

America West has a long-term planning function, even in this fast-changing competitive environment. “You can have a five-year plan,” says Parker. “It just needs to be in pencil.” (Delta’s new fare initiative, for example, has forced America West and other carriers to prepare responses on routes where they fly against Delta.) America West plans to stay hub-based — “hub-and-spoke airlines have much greater unit revenues,” says Parker — and the company figures that in this area, at least, legacy carriers will not model themselves after Southwest and JetBlue.


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