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Southwest and Spirit Exemplify LCC Choices
Aviation Week & Space Technology09/22/2008 , page 74
Andrew CompartWashington
North American low-cost carriers tackle new challenges in different ways
Printed headline: New Directions
Spirit and Southwest are North American low-cost carriers that in many respects are flying in opposite directions—exemplifying the varied paths the continent’s LCCs are taking to succeed in a mature market, slumping economy and high-fuel-price environment.
Southwest is running ads blasting other carriers for all of the fees they’re adding, going full-bore to promote itself as the airline that doesn’t charge for items such as the first or second checked bag or reservations made by phone.
At Spirit, CEO Ben Baldanza brags about his airline’s fees, including how it led the way more than a year ago in charging for the first checked bag. He’s happy to talk about all the other fees the airline charges or may charge. For example, it’s considering asking passengers to pay for using the shorter airport check-in line and for having the airline transfer checked bags to connecting flights.
Southwest plans to start international code shares next year to expand its reach and boost traffic and revenue. It still tries to keep costs in check, but does have limits on what that entails. It offers consistently low fares—giving consumers confidence they are not being ripped off—but not always the lowest for a given day or route.
Southwest is maintaining its focus on low costs and fares, but is shunning new fees and looking to boost traffic and revenue by attracting more business travelers and code-sharing with airlines offering international service.Credit: JOSEPHPRIES.COMWhile Spirit isn’t turning inward—most of its new routes are for Caribbean and Latin American service—its commitment to cost-cutting and low fares goes beyond religious, to fanatical. The carrier says it doesn’t compromise on safety—but everything else seems fair game: It even has compelled employees to clean their own offices, and just one bulb is used in many multi-bulb light fixtures.
Spirit offers a $9 fare club, has offered one-way sale prices as low as one penny and, in one instance, even paid customers to fly. With no ad budget—unlike Southwest, with television spots that are often ubiquitous—Spirit considers the publicity generated by its dirt-cheap one-way fares (customers typically pay more for the return flight) to be the advertising that drives traffic to its web site and increases its customer base.
This isn’t to say that either Southwest or Spirit has the best strategy, but each airline’s choices showcase two ends of the strategic spectrum for North American LCCs, which are facing challenges after years of success and growth.
The budget airlines are still increasing their domestic market share. The U.S. network airlines reduced their domestic capacity by 25% from 2000-07 while the LCCs’ nearly doubled, according to a July report by Washington-based Gerchick-Murphy Associates. U.S. budget carriers now transport about a third of domestic passengers, compared with roughly 20% at the start of the decade, the report says. While many of the U.S. LCCs are scaling back their growth plans this year and beyond, their market share will continue to increase as the large-network airlines make much bigger capacity cuts. And in spite of all the cost-cutting by the network carriers, the LCCs had unit costs that were 45.9% lower in 2007 when adjusted for flight distance, according to the report.
Nonetheless, the collapse earlier this year of Skybus and ATA, as well as Denver-based Frontier’s filing for bankruptcy protection so it could continue to fly, shows that the LCCs can be just as vulnerable as anyone. They are being compelled to adapt at a time when high fuel prices limit their ability to use low fares to stimulate more new demand. Even Southwest—with 69 straight quarterly profits and a huge advantage from fuel hedging that remains the envy of the industry (70% this year at $51 a barrel)—halted its growth plans for the remainder of the year and is pursuing some new tactics.
At one end of the strategic spectrum are ultra-low-cost carriers such as Spirit, which rely heavily on ancillary revenue from sources such as fees and hotel and car rental commissions. Spirit also just launched an effort to sell ad space on its aircraft tray tables, overhead bins and window panels.
Columbus, Ohio-based Skybus failed with a similar strategy. But Allegiant Air has succeeded by finding a niche with almost no competition: connecting small cities with major domestic tourist destinations such as Las Vegas and Orlando and Fort Lauderdale, Fla.
Allegiant Travel Co., the parent of Allegiant Air and Allegiant Vacations, turned a $12.3-million profit with a 7.2% operating margin in the first half of the year even though its fleet of MD-80s is not the highest in fuel efficiency. The airline ditched some long-haul and weaker markets this year because of fuel costs and reduced its capacity growth so it could fill a greater percentage of its seats, capture more ancillary revenue, and maintain fare levels—which led to jaw-dropping load factors in the mid-90s this summer. In the second quarter, the airline received $27.75 in ancillary revenue per scheduled-service passenger on top of an average fare of just $83.56.
On the other end of the spectrum are carriers such as Southwest that are turning in part to the creation of an international network to enhance their profitability—but without having to fly across the oceans themselves. Their hope is to avoid the expense and risk but still gain the benefits of a larger network—such as higher traffic and revenue from domestic customers linking to international flights or international customers linking to their service to other U.S. cities.
For example, JetBlue Airways started a partnership with Aer Lingus in April that broke new ground by making a transatlantic LCC connection. Code-sharing is not included. But travelers can buy a JetBlue flight from 40 U.S. cities to New York John F. Kennedy International Airport, connecting with Aer Lingus services to Shannon International or Dublin Airport—and vice versa for customers in Ireland—with cross-promotion via their respective web sites, a single booking and payment via Aer Lingus’s web site and call centers, a guaranteed connection and baggage transfers. In October, that partnership is scheduled to expand to include JetBlue’s service from Boston Logan International Airport.
JetBlue also is in talks to create a partnership with Lufthansa, which acquired a 19% stake in JetBlue in February. That could happen by the end of this year or early 2009.
Southwest also is on the prowl for global partners. Last September it sent representatives to Stockholm to participate in the Routes networking conference for the first time, and it said its information technology system will be ready to handle international code-sharing by 2009. It already signed a deal with Canada’s WestJet to start code-sharing next year, which will put Southwest into the Canadian market.
WestJet, for its part, should see a big boost in the U.S.-Canada transborder market from the feed that will be created to and from Southwest’s U.S. routes, and from Southwest’s agreement to sell and book WestJet service via its web site. Vito Culmone, WestJet chief financial officer and executive vice president for finance, says the carrier is aiming to increase its 9% share of the transborder market to 15-20%. It hopes to achieve this via the Southwest partnership and the expansion of its own U.S. service to 6-8 more cities over the next three or four years.
Culmone also says WestJet could enter into four or five additional partnerships over the next five years, including ones for transatlantic or transpacific service.
\\
Southwest and Spirit Exemplify LCC Choices
Aviation Week & Space Technology09/22/2008 , page 74
Andrew CompartWashington
North American low-cost carriers tackle new challenges in different ways
Printed headline: New Directions
Spirit and Southwest are North American low-cost carriers that in many respects are flying in opposite directions—exemplifying the varied paths the continent’s LCCs are taking to succeed in a mature market, slumping economy and high-fuel-price environment.
Southwest is running ads blasting other carriers for all of the fees they’re adding, going full-bore to promote itself as the airline that doesn’t charge for items such as the first or second checked bag or reservations made by phone.
At Spirit, CEO Ben Baldanza brags about his airline’s fees, including how it led the way more than a year ago in charging for the first checked bag. He’s happy to talk about all the other fees the airline charges or may charge. For example, it’s considering asking passengers to pay for using the shorter airport check-in line and for having the airline transfer checked bags to connecting flights.
Southwest plans to start international code shares next year to expand its reach and boost traffic and revenue. It still tries to keep costs in check, but does have limits on what that entails. It offers consistently low fares—giving consumers confidence they are not being ripped off—but not always the lowest for a given day or route.
Southwest is maintaining its focus on low costs and fares, but is shunning new fees and looking to boost traffic and revenue by attracting more business travelers and code-sharing with airlines offering international service.Credit: JOSEPHPRIES.COMWhile Spirit isn’t turning inward—most of its new routes are for Caribbean and Latin American service—its commitment to cost-cutting and low fares goes beyond religious, to fanatical. The carrier says it doesn’t compromise on safety—but everything else seems fair game: It even has compelled employees to clean their own offices, and just one bulb is used in many multi-bulb light fixtures.
Spirit offers a $9 fare club, has offered one-way sale prices as low as one penny and, in one instance, even paid customers to fly. With no ad budget—unlike Southwest, with television spots that are often ubiquitous—Spirit considers the publicity generated by its dirt-cheap one-way fares (customers typically pay more for the return flight) to be the advertising that drives traffic to its web site and increases its customer base.
This isn’t to say that either Southwest or Spirit has the best strategy, but each airline’s choices showcase two ends of the strategic spectrum for North American LCCs, which are facing challenges after years of success and growth.
The budget airlines are still increasing their domestic market share. The U.S. network airlines reduced their domestic capacity by 25% from 2000-07 while the LCCs’ nearly doubled, according to a July report by Washington-based Gerchick-Murphy Associates. U.S. budget carriers now transport about a third of domestic passengers, compared with roughly 20% at the start of the decade, the report says. While many of the U.S. LCCs are scaling back their growth plans this year and beyond, their market share will continue to increase as the large-network airlines make much bigger capacity cuts. And in spite of all the cost-cutting by the network carriers, the LCCs had unit costs that were 45.9% lower in 2007 when adjusted for flight distance, according to the report.
Nonetheless, the collapse earlier this year of Skybus and ATA, as well as Denver-based Frontier’s filing for bankruptcy protection so it could continue to fly, shows that the LCCs can be just as vulnerable as anyone. They are being compelled to adapt at a time when high fuel prices limit their ability to use low fares to stimulate more new demand. Even Southwest—with 69 straight quarterly profits and a huge advantage from fuel hedging that remains the envy of the industry (70% this year at $51 a barrel)—halted its growth plans for the remainder of the year and is pursuing some new tactics.
At one end of the strategic spectrum are ultra-low-cost carriers such as Spirit, which rely heavily on ancillary revenue from sources such as fees and hotel and car rental commissions. Spirit also just launched an effort to sell ad space on its aircraft tray tables, overhead bins and window panels.
Columbus, Ohio-based Skybus failed with a similar strategy. But Allegiant Air has succeeded by finding a niche with almost no competition: connecting small cities with major domestic tourist destinations such as Las Vegas and Orlando and Fort Lauderdale, Fla.
Allegiant Travel Co., the parent of Allegiant Air and Allegiant Vacations, turned a $12.3-million profit with a 7.2% operating margin in the first half of the year even though its fleet of MD-80s is not the highest in fuel efficiency. The airline ditched some long-haul and weaker markets this year because of fuel costs and reduced its capacity growth so it could fill a greater percentage of its seats, capture more ancillary revenue, and maintain fare levels—which led to jaw-dropping load factors in the mid-90s this summer. In the second quarter, the airline received $27.75 in ancillary revenue per scheduled-service passenger on top of an average fare of just $83.56.
On the other end of the spectrum are carriers such as Southwest that are turning in part to the creation of an international network to enhance their profitability—but without having to fly across the oceans themselves. Their hope is to avoid the expense and risk but still gain the benefits of a larger network—such as higher traffic and revenue from domestic customers linking to international flights or international customers linking to their service to other U.S. cities.
For example, JetBlue Airways started a partnership with Aer Lingus in April that broke new ground by making a transatlantic LCC connection. Code-sharing is not included. But travelers can buy a JetBlue flight from 40 U.S. cities to New York John F. Kennedy International Airport, connecting with Aer Lingus services to Shannon International or Dublin Airport—and vice versa for customers in Ireland—with cross-promotion via their respective web sites, a single booking and payment via Aer Lingus’s web site and call centers, a guaranteed connection and baggage transfers. In October, that partnership is scheduled to expand to include JetBlue’s service from Boston Logan International Airport.
JetBlue also is in talks to create a partnership with Lufthansa, which acquired a 19% stake in JetBlue in February. That could happen by the end of this year or early 2009.
Southwest also is on the prowl for global partners. Last September it sent representatives to Stockholm to participate in the Routes networking conference for the first time, and it said its information technology system will be ready to handle international code-sharing by 2009. It already signed a deal with Canada’s WestJet to start code-sharing next year, which will put Southwest into the Canadian market.
WestJet, for its part, should see a big boost in the U.S.-Canada transborder market from the feed that will be created to and from Southwest’s U.S. routes, and from Southwest’s agreement to sell and book WestJet service via its web site. Vito Culmone, WestJet chief financial officer and executive vice president for finance, says the carrier is aiming to increase its 9% share of the transborder market to 15-20%. It hopes to achieve this via the Southwest partnership and the expansion of its own U.S. service to 6-8 more cities over the next three or four years.
Culmone also says WestJet could enter into four or five additional partnerships over the next five years, including ones for transatlantic or transpacific service.
\\
North American carriers also are venturing into some international service of their own—but not across oceans. The Caribbean, Mexico and Latin America are their big targets, and not just for Spirit. WestJet expects to add more than 10 Caribbean destinations over the next three or four years. JetBlue says customer demand for its Caribbean service has exceeded expectations, and it will offer as many as 50 daily flights to the region this winter. Flights to the region will account for 17% of its capacity in the first quarter, up from 12% a year earlier.
These aren’t the only strategies.
During the past year, Southwest and JetBlue have been more heavily courting business travelers through the global distribution systems. Southwest’s moves also have included a tripling of its corporate sales force, a revamping of its gate areas in Dallas, and a new Business Select fare that lets customers pay to be in the front of the boarding line for unassigned seats.
Spirit is counting on industry-leading low costs, low market-stimulating fares, a host of fees, other ancillary revenue and its Caribbean and Latin American expansion to help it succeed.Credit: JOSEPHPRIES.COM PHOTOS
Some LCCs are charting their own path. AirTran, for example, is staying focused almost exclusively on the domestic market—although it’s now considering Caribbean service at some point—and believes its strength at its Atlanta hub and capacity retooling will see it through. It also has been adding service in Milwaukee, capitalizing on the problems of that city’s hometown carrier, Midwest.
Frontier obtained a debtor-in-possession financing package—in part thanks to union agreements to temporarily cut their pay and benefits to help the carrier attract investors—and is trimming its fleet. But it still faces contentious negotiations with its pilots and mechanics for permanent and perhaps deeper cuts, and strong competition in Denver from United and Southwest.
The newest entry in the North American LCC market, Virgin America, relies on its brand identity and inflight products—such as video touch screens featuring 25 films, live TV, video games, seat-to-seat chat and an on-demand food-ordering system—to help attract customers and make it profitable.
“We are pursuing the exact same market as Apple does,” Virgin America CFO David Cush said earlier this year. “If you own an iPod, you are our customer.” The carrier does get good press but, absent any financial results released since its August 2007 debut, it’s difficult to discern how it’s doing.
But it’s the financial results that will be the ultimate judge of which strategies work best. In the second quarter, Southwest made $321 million, AirTran lost $13.5 million and JetBlue lost $7 million. Spirit does not publicly report its net results, but financial data submitted to the U.S. Transportation Dept.’s Bureau of Transportation Statistics showed a $28-million operating profit and an industry-leading operating margin of 13.5% for the second quarter. More telling than those numbers, of course, will be the earnings in the quarters to come.
These aren’t the only strategies.
During the past year, Southwest and JetBlue have been more heavily courting business travelers through the global distribution systems. Southwest’s moves also have included a tripling of its corporate sales force, a revamping of its gate areas in Dallas, and a new Business Select fare that lets customers pay to be in the front of the boarding line for unassigned seats.
Spirit is counting on industry-leading low costs, low market-stimulating fares, a host of fees, other ancillary revenue and its Caribbean and Latin American expansion to help it succeed.Credit: JOSEPHPRIES.COM PHOTOS
Some LCCs are charting their own path. AirTran, for example, is staying focused almost exclusively on the domestic market—although it’s now considering Caribbean service at some point—and believes its strength at its Atlanta hub and capacity retooling will see it through. It also has been adding service in Milwaukee, capitalizing on the problems of that city’s hometown carrier, Midwest.
Frontier obtained a debtor-in-possession financing package—in part thanks to union agreements to temporarily cut their pay and benefits to help the carrier attract investors—and is trimming its fleet. But it still faces contentious negotiations with its pilots and mechanics for permanent and perhaps deeper cuts, and strong competition in Denver from United and Southwest.
The newest entry in the North American LCC market, Virgin America, relies on its brand identity and inflight products—such as video touch screens featuring 25 films, live TV, video games, seat-to-seat chat and an on-demand food-ordering system—to help attract customers and make it profitable.
“We are pursuing the exact same market as Apple does,” Virgin America CFO David Cush said earlier this year. “If you own an iPod, you are our customer.” The carrier does get good press but, absent any financial results released since its August 2007 debut, it’s difficult to discern how it’s doing.
But it’s the financial results that will be the ultimate judge of which strategies work best. In the second quarter, Southwest made $321 million, AirTran lost $13.5 million and JetBlue lost $7 million. Spirit does not publicly report its net results, but financial data submitted to the U.S. Transportation Dept.’s Bureau of Transportation Statistics showed a $28-million operating profit and an industry-leading operating margin of 13.5% for the second quarter. More telling than those numbers, of course, will be the earnings in the quarters to come.
GogglesPisano
Pawn, in game of life
- Joined
- Oct 20, 2003
- Posts
- 3,939
Come on Mike, you should be proud to work for such an industry leading airline. an airline that "examplifies" LCC choices.... I know I am...NOT!!!!!
At least we lost one of the bad apples
Would you rather the company cancel flights or be overstaffed?
I don't pick up open time because I am lazy..but I thank the pilots who are helping the company from going out of business.
WOW! Let us all thank the pilots who are picking up open time at 150% or who are accepting JA's at 200% while we have folks on the street making 0%...from the bottom of my heart thank you for doing that...just try not to get too much blood on your knives when you are twisting it around making the cut bigger.
People picking up open time has two impacts:
1. It increases efficiency which allows the company to hopefully return to profitability.
2. It decreases the staffing model which results in a lower percentage of pilots to block hours.
Communists and socialists want to increase jobs at the expense of efficiency. However, the result of inefficiency is ironically less jobs. So, people not picking up open time results in more furloughs over the longterm.
The capitalist theory is that increased efficiency will result in profitability and more jobs over the long run. So, people picking up open time will help bring back the furloughed pilots over the longterm.
However, Americans need short term gratification, and it is much easier to blame pilots for picking up open time rather than the reality of economics
1. It increases efficiency which allows the company to hopefully return to profitability.
2. It decreases the staffing model which results in a lower percentage of pilots to block hours.
Communists and socialists want to increase jobs at the expense of efficiency. However, the result of inefficiency is ironically less jobs. So, people not picking up open time results in more furloughs over the longterm.
The capitalist theory is that increased efficiency will result in profitability and more jobs over the long run. So, people picking up open time will help bring back the furloughed pilots over the longterm.
However, Americans need short term gratification, and it is much easier to blame pilots for picking up open time rather than the reality of economics
regionalcap
Well-known member
- Joined
- Jan 27, 2002
- Posts
- 903
Propsync
Everybody to the limit!
- Joined
- Mar 29, 2004
- Posts
- 722
Wow, stunned beyond words.I don't know where to begin, so I'll give at least the next two pages of this thread for everyone else to light you up like a Christmas tree.
enigma
good ol boy
- Joined
- Nov 26, 2001
- Posts
- 2,279
I predict that Beetle will live long and prosper. He's intelligent, educated, thoughful and confident enough in his position to engage others in a debate. The rest of you will be sitting around welcoming people to Home Depot while Beetle is writing the next chapter of the American dream.
Yes, I agree with Beetle. Featherbedding does not increase employement. In the long term, featherbedding only causes a weak employer.
One more thing, featherbedding is a huge reason that employers look at unions as opponents instead if partners. If you want to look at a company that looks at unions as partners, look no further than SWA.
Yes, I agree with Beetle. Featherbedding does not increase employement. In the long term, featherbedding only causes a weak employer.
One more thing, featherbedding is a huge reason that employers look at unions as opponents instead if partners. If you want to look at a company that looks at unions as partners, look no further than SWA.
Last edited:
greenlight
Active member
- Joined
- Feb 3, 2007
- Posts
- 27
I usually don't do this but I think you mean Adam Smith. A 18th century philosopher who wrote An Inquiry into the Nature and Causes of the Wealth of Nations.
Fred Smith founded a purple cargo airline. He knows a lot about economics too.
Cheers
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