March 28, 2024

Airlines Battle Back to Profit, a Fare and a Fee at a Time

After a decade of losing money because of cutthroat competition, slumping traveler demand and volatile fuel prices, the industry has found a way to regain control of its fortunes — and make money — and that is by shelving its 1990s strategy of aggressive growth. Despite the weak economy, most domestic airlines will have their second consecutive profitable year in 2011, after losing $55 billion since 2001.

The one notable exception is American Airlines, which is set to report another quarterly loss on Wednesday. Once the largest airline, American has lost its top perch and is struggling with high costs and debt, and acrimonious labor relations.

American has become a distant third after being left out of the major mergers that have consolidated the industry, starting with the purchase of Northwest by Delta Air Lines in 2008 and followed last year by the merger of United Airlines and Continental and the purchase of AirTran Airlines by Southwest Airlines. The mergers allowed the biggest airlines to cut service to many smaller markets, ground unprofitable flights and focus on their most profitable hubs. With fewer airlines competing to make their seats the cheapest, carriers were able to increase fares. The nation’s top five airlines, including joint figures for United-Continental and Southwest-AirTran, accounted for 85 percent of all domestic seats in 2010; that compared with a 64 percent share for the top five in 2000, said Hunter Keay, an aviation analyst at Wolfe Trahan Company.

“This has been an incredible picture over the past three years,” Mr. Keay said. “It’s not rocket science. Airlines finally understand basic economics. It’s supply and demand. It’s fear-based discipline.”

Just looking at the number of seats available, domestic airlines’ capacity peaked in 2005 and has generally been falling since. But the cuts have been even steeper when the number of seats is compared with the size of the economy, said John Heimlich, the chief economist for the Air Transport Association, the industry’s main trade group. That ratio is at its lowest since 1979. “The industry’s survival over the past decade has necessitated a substantial degree of shrinkage,” Mr. Heimlich said. “It’s a combination of how oversupplied and under-demanded we’ve been and how tough the decade has been. That’s an unfortunate result. Most businesses would rather see an entity grow profitably rather than shrink profitability.”

With fewer scheduled flights, planes are now fuller than they have ever been. The percentage of filled seats on each flight has risen to a record high of 82.2 percent in 2010, compared with 71.3 percent in 2000, according to figures compiled by the Bureau of Transportation Statistics. And that number does not fully capture how full most flights are to the most popular destinations at the most desirable times.

Meanwhile, the flight experience has worsened, as the big airlines cut back their service and stopped providing free meals or even blankets and pillows on their flights. Legroom shrank on many of the low-cost airlines. Spirit Airlines, for instance, is now flying Airbus A320s with a seat pitch — or the distance between seats — of 28 inches. (A typical pitch at the other airlines is 31 inches.) That allows it to pack 178 passengers on these planes, 28 more than JetBlue, which flies similar planes, according to Matt Daimler, the founder of SeatGuru.com.

Domestic fares, which have risen in recent years, last year averaged $337. Adjusted for inflation, they are still nearly 30 percent lower today than they were in the mid 1990s, but the fare is only part of the price passengers now pay.

The airlines are now generating extra revenue from passengers by charging for everything from checked bags to priority seating to onboard items like food, television and blankets.

The fees can be confusing, with little consistency across airlines. American, Delta and Continental, for instance, all charge $25 for the first checked bag, while AirTran charges $20 and Southwest and JetBlue charge nothing as yet.. Some airlines charge extra for exit row seats or to sit in the first few rows of coach. Some apply cancellation charges. Some provide satellite television free; others charge for it.

Article source: http://feeds.nytimes.com/click.phdo?i=7bf6fb1c719f7a5a416ee4c2a421761f

DealBook: Galleon Jurors Hear Tape Discussing Call of Goldman Director

Rajat K. Gupta, a former director of Goldman Sachs.Seokyong Lee/Bloomberg News Rajat K. Gupta, a former director of Goldman Sachs.

8:04 p.m. | Updated

In October 2008, with the global economy hemorrhaging and his hedge fund struggling, Raj Rajaratnam sounded calm during a lunchtime call with a colleague in Singapore.

“I heard yesterday from somebody who’s on the board of Goldman Sachs that they are going to lose $2 per share,” said Mr. Rajaratnam. “The Street has them making $2.50.”

The government played that secretly recorded telephone call on Wednesday during the trial of Mr. Rajaratnam, the co-founder of the hedge fund Galleon Group, who faces up to 25 years in prison if convicted on charges that he earned millions of dollars from insider trading.

The secretly recorded conversation came a day after Goldman held a board meeting informing directors that the bank was on track to report its first quarterly loss as a public company.


The Galleon networkAzam Ahmed and Guilbert Gates/The New York Times Click on the above graphic to get a visual overview of the Galleon information network.

The government says that Rajat K. Gupta, then a Goldman director, called Mr. Rajaratnam after the meeting and passed on the confidential information, allowing Mr. Rajaratnam to sell his Goldman position and avoid losses before its earnings announcement.

Federal prosecutors have named Mr. Gupta a co-conspirator of Mr. Rajaratnam but have not charged him criminally.

The Securities and Exchange Commission has filed a civil proceeding against Mr. Gupta accusing him of tipping Mr. Rajaratnam. Mr. Gupta’s lawyer has said his client had not done anything wrong.

When Mr. Rajaratnam told David Lau, his Singapore colleague, about Goldman’s poor performance, Mr. Lau seemed surprised.

“Really,” he said.

“So what he was telling me was that uh, Goldman, the quarter’s pretty bad. They have zero revenues because their trading revenues are offset by asset losses, and to date they have lost $2 per share,” Mr. Rajaratnam said. “I don’t think that’s built into Goldman Sachs stock price.”

The accusations against Mr. Gupta are being closely followed on Wall Street. Mr. Gupta, who ran McKinsey Company, the prestigious management consulting firm, was among the world’s most influential business executives.

Last week, Lloyd C. Blankfein, the chief executive of Goldman, took the witness stand at the trial and told the jury that it would be a breach of confidentiality for Mr. Gupta to divulge board discussions.

The Goldman call emerged during the testimony of Adam Smith, a former portfolio manager at the Galleon Group. Mr. Smith pleaded guilty to insider trading at Galleon and is testifying against his former boss as part of his cooperation agreement with the government.

During Mr. Smith’s cross-examination, Mr. Rajaratnam’s lawyers accused Mr. Smith of fabricating his illegal conduct at Galleon in order to secure a lesser sentence by helping them get “the big fish” — Mr. Rajaratnam. Mr. Smith testified that the government had caught him on a wiretap trading on inside information last year, after Galleon’s dissolution and while managing a different fund.

Defense lawyers also played a wiretapped call between Mr. Smith and Ian Horowitz, a former Galleon trader. During the call, made at the F.B.I.’s direction after Mr. Smith’s guilty plea, Mr. Smith tried unsuccessfully to gather more insider-trading evidence from Mr. Horowitz.

Mr. Smith, who testified that the F.B.I. had instructed him to lie in order to elicit incriminating information, said on the call that he believed Galleon’s trading was legitimate.

“You want the jury to believe you were lying then, but telling the truth now?” asked Terence J. Lynam, a lawyer for Mr. Rajaratnam.

“Yes,” Mr. Smith replied.

Sept. 24, 2008 transcript (U.S. vs. Rajaratnam)

Oct. 24, 2008 transcript (U.S. vs. Rajaratnam)

Article source: http://feeds.nytimes.com/click.phdo?i=023d7cdf21ac8ff6ea95ea389ed31ca3