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Boyd Group: Airline Ch. 11 facts vs. myths (part 3)

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Well-known member
Dec 15, 2004
[font=Tahoma, Verdana, Lucida]It's Management Decisions. Not A Fundamentally Faulty Model. It is arguable - and true - that Delta, an essentially non-union company, waited too long to get things in order, and was caught right in the cost cross-hairs when fuel went for the moon. Northwest had the apparent strategy to get other costs down first and go to labor later, if necessary. (Continental had the same approach.) When fuel went up, NW, too, got caught, even though they already had de facto concessions from two of their four main unions. (Pilots, and, by virtue of bringing in replacements, their mechanics.)[/font]
[font=Tahoma, Verdana, Lucida]But these are hindsight calls by the usual suspects of the school of veneer reporting. If oil had stayed in the mid-$30s, as expected, they'd all be singing a very different tune.[/font]
[font=Tahoma, Verdana, Lucida]There's A Revenue Side, Too. Then let's talk revenue streams. To hear the "let'em die" analysts tell it, Northwest and Delta simply don't have route systems that work. [/font]
[font=Tahoma, Verdana, Lucida]Wrong.[/font]
[font=Tahoma, Verdana, Lucida]Northwest in particular has one of the strongest route systems and revenue flows in the industry. The mantra-chanters have no knowledge about things like where current and future revenue growth will be. Hint: the future is not in trying to get more families to take trips from the Northeast to Florida, which is a mainstay of LCC operations. It's not relying on the potential for stimulating new demand with low fares between Boston and Lincoln. It's not just cherry-picking heavy markets like transcons.[/font]
[font=Tahoma, Verdana, Lucida]Sorry to disappoint them, but as we'll note below, the new, growth revenue flows are between places like Montgomery and Seoul. Tokyo and Grand Rapids. Charleston to Osaka. Shreveport to Lansing. Greenville-Spartanburg to Milwaukee.[/font]
[font=Tahoma, Verdana, Lucida]These, and dozens of other destination pairs, are where the future is. And where the LCC model mostly can't go.[/font]
[font=Tahoma, Verdana, Lucida]Myth: The Hub-And-Spoke System Is Inefficient. There are the usual parrots that are spouting the "fact" that it's the "point to point" airlines that are making money, therefore the legacy carriers' hub systems are obsolete. [/font]

[font=Tahoma, Verdana, Lucida]Depending on the source, the story is sometimes accessorized by babble about fleet utilization, assuming that just flying an airplane makes money. In another twist, they sometimes point to the number of airplane types legacy systems operate, and note that Southwest only has "one" type of aircraft in its system.[/font]

[font=Tahoma, Verdana, Lucida]Fact: This is another badge of ignorance from people who get their airline knowledge from the cocktail party circuit.[/font]

  • [font=Tahoma, Verdana, Lucida]Note: The most successful new low fare carriers are indeed primarily hub-and-spoke. Guess Frontier didn't attend the same cocktail parties. Nor did AirTran. Even Southwest, contrary to the cognoscenti, operates substantial connecting operations, and over half of their passengers connect to other WN flights. Phoenix, Nashville, Houston, and Las Vegas all represent operations where Southwest interconnects passengers.[/font]
  • [font=Tahoma, Verdana, Lucida]Note: Southwest doesn't operate just one type of aircraft. There are fundamental differences in their fleets of 737-300/500s and their fleet of 737-700s. Until the end of last year, they actually operated a third type, the 737-200. It is a fact, however, that Southwest does focus on fleets of airliners between 124 and 140 seats, which is the general template for the LCCs that some of these "analysts" predict can and will replace Northwest and Delta, both of which have sinned greatly according to some "experts" and must go out of business. [/font]
  • [font=Tahoma, Verdana, Lucida]Note: Airplanes are operated to generate revenue. These "one airplane type is better" people know nothing about the airline industry. They hear somebody say something about higher efficiencies in maintenance, pilot training, and parts inventory in having a much simplified fleet, and assume that if "fewer" is better, well then, just one type must be the ultimate. Noting that this is another accepted mantra they read all the time, it's safe for them to repeat it as gospel. It's also el toro doo-doo.[/font]
[font=Tahoma, Verdana, Lucida]Fact: A Varied Fleet Is Necessary To Generate Revenues. Rather than go into trying to explain the obvious about revenue generation, let's point out Shreveport. [/font]

[font=Tahoma, Verdana, Lucida]It's a major auto center that provides a lot of traffic to American's hub at DFW and to Northwest's hub at DTW. Lots of revenue that goes on to other points on existing AA and NW flights - including ones where they must compete with an LCC. To capture this revenue, they use 50-seat jets, and they pay an operator for the lift. These communities are too small to support the high-frequency LCC model operating 100 to 150 seat jets. [/font]

[font=Tahoma, Verdana, Lucida]But AA can access these revenue streams. True, they do it with a small jet provider, but it's system revenue that Southwest can't access. The same for the strong yield flows that AA and CO are gaining from places like Saltillo, Chihuahua, and other points in Northern Mexico.[/font]

[font=Tahoma, Verdana, Lucida]AA and Northwest also operate their own 100 to 150 seat jets. Like the RJs, these provide lift into their hubs from points such as New York, Tampa, and Los Angeles. Guess what these airplanes feed? Widebodies carrying passengers going to and from places like Shanghai, Tokyo, and Hong Kong. [/font]

[font=Tahoma, Verdana, Lucida]Point: The LCC model is fine. But it cannot access much of the emerging revenue streams, particularly those where the future growth is. Montgomery, Shreveport, Charleston, and other gateways to regions that are targets for huge foreign investment. Southwest, AirTran, Spirit, Frontier, et al, are great airlines. But their chosen model focuses on specific consumer targets. Legacy carrier systems have much stronger and more fundamental route systems.[/font]

[font=Tahoma, Verdana, Lucida]The Southwest model can't support service at SHV, or at MGM, or at BGR, or at TRI, or at TPE, or at SHA, or at BJS - places where huge growth in revenue will be generated in the future. [/font]

[font=Tahoma, Verdana, Lucida]___________[/font]

[font=Tahoma, Verdana, Lucida]If you want to get the hard facts on what to expect, join us in Savannah at the Tenth Annual Aviation Forecast Conference, October 16-18. Click Here.[/font]

[font=Tahoma, Verdana, Lucida](c) 2005, The Boyd Group/ASRC, Inc. All Rights Reserved[/font]
There is certainly merits to the arguments forwarded here. The problem is that Legacies cannot adapt with the speed and dispatch to meet a marketplace that changes with each day due to unforseen developments.

Where i disagree is that this is a carry over from the days of regulation. The large carriers had labor and cultures that developed over many years and were not keen to change to the new unregulated environment.

While they are quick to point out the benefit that Southwest has from fuel hedging, at exactly what airline is not the fuel purchasing department a significant player in the success of that airline.

As fleets are bought and route systems created over time, certain big carriers have planned better than others. That does not mean that they will get to where they can operate them profitably.

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