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Discount Airlines Gain on Cost Front
The Wall Street Journal
THE MIDDLE SEAT
By SCOTT MCCARTNEY
February 18, 2004
You buy your own food, fly on smaller jets, print your own boarding passes and try to be sympathetic when flight attendants complain about their pay cuts.
After all the rollbacks in service and pain faced by fliers in the past year, which airline actually managed to trim its costs the most? United Airlines in Chapter 11? Reorganized US Airways?
No. It was the low-cost carrier ATA Airlines.
The year-end numbers are in, and they highlight like never before the changing choices that passengers are making. Consumers are increasingly flocking to low-cost carriers and bypassing the big traditional airlines: Last year, six low-cost carriers grew by almost exactly the same amount of traffic that the seven network airlines lost — a one-for-one shift.
Together, the six low-cost carriers now control nearly one-quarter of domestic air travel. They also earned $730 million in net income, while the seven higher-cost carriers posted total net losses of $3 billion.
The key is in how well the upstarts manage their expenses. ATA Airlines was able to slash its unit costs 16.5% last year, more than anyone else. America West Airlines, JetBlue Airways and AirTran Airways — all low-cost carriers to begin with — also significantly reduced costs. For high-cost carriers, the limbo bar just got lower. As a result, travelers will surely be seeing more cutbacks in service.
Just look at US Airways Group Inc.'s bind. US Air dropped its unit costs by 10.3% last year, the most among high-cost airlines. (That's measured by costs spread over how many seat miles flown, with a seat-mile equaling one seat flown one mile.) Thanks to its bankruptcy reorganization, labor costs at US Air were down 18%. But is that enough?
Two years ago, US Air paid 71% more to fly one seat one mile than Southwest Airlines. But last year, US Air was still 49% more expensive on the cost side — a difference it can't make up on the revenue side. Unit revenue likely will fall as competition builds and Southwest attacks Philadelphia, US Air's richest hub.
In the long term, US Air Chief Executive David Siegel says the airline's revenue advantage over low-cost competitors will be 10% to 15%. So costs must come down to the same level.
That's why the airline is arm-wrestling unions for more concessions, and threatening to sell assets, less than a year after emerging from bankruptcy. Indeed, industrywide, future disruptive battles with labor unions may be in the offing even if the business, overall, is recovering.
AMR Corp.'s American Airlines cut its unit costs by an impressive 8.9%, which was better than the 7.5% drop at its archrival, UAL Corp.'s United. United, of course, is operating under bankruptcy-court protection. Of the cuts United did get, a bigger chunk has come out of labor. But United's payroll was down 25% as it shed 19,800 employees, or one-quarter of its work force. American shed 14% of its labor force and saw the total spent on labor drop 13.4%.
American has improved efficiency, though, smoothing out its schedule at hub airports so planes and workers don't sit idle as much and airports don't get clogged, and it has simplified its fleet by renegotiating leases and shedding aircraft. American also did better on the revenue side last year, posting flat results while United's revenue fell 3.9%. Bottom line: AMR had a net loss of $1.2 billion, while UAL had a net loss of $2.8 billion.
And what about Delta Air Lines and Northwest Airlines, both of which are currently trying to win concessions from pilot unions? Concessions are a hard sell when the economy is rebounding, losses are shrinking, and bankruptcy, at least for now, isn't a credible threat.
Delta was the only airline among the seven network carriers to see its unit costs go up last year. Delta shed 4,500 jobs, about 6% of its work force, and slapped cuts and changes on nonunion flight attendants and others. But pilots got raises, and top managers got big bonuses, too. Overall, Delta's payroll was up 2.9% last year. The airline spends 4.72 cents on labor to fly each seat one mile — the highest in the U.S. industry. Delta had the worst operating margin in the industry last year, except for UAL. A nasty fight lies ahead between Delta and its pilots, who are the highest paid in the industry.
Low-cost airlines, amazingly, are finding ways to become even more efficient. They have benefited from cuts in travel-agent commissions and cheaper distribution on the Internet. They've outflanked bigger airlines on hedging against high fuel prices by locking in low prices long term.
Growth helps, too. At ATA, passenger traffic jumped 16% and revenue rose 19% last year. The Indianapolis-based company, which has its major hub at Chicago's Midway Airport, ended up earning $20.4 million last year, after a 2002 net loss of $169.3 million.
ATA, by the way, became the nation's 10th "major" airline, a noteworthy accomplishment. By the Department of Transportation's definition, an airline needs $1 billion in annual revenue from scheduled passenger service to be considered "major." Four-year-old JetBlue darn near made it, too. JetBlue, which grew a staggering 69% last year, had $965 million in passenger revenue.
The choices for consumers will continue to grow -- while they continue to get tougher for the legacy airlines.
• Write to Scott McCartney at [email protected]
The Wall Street Journal
THE MIDDLE SEAT
By SCOTT MCCARTNEY
February 18, 2004
You buy your own food, fly on smaller jets, print your own boarding passes and try to be sympathetic when flight attendants complain about their pay cuts.
After all the rollbacks in service and pain faced by fliers in the past year, which airline actually managed to trim its costs the most? United Airlines in Chapter 11? Reorganized US Airways?
No. It was the low-cost carrier ATA Airlines.
The year-end numbers are in, and they highlight like never before the changing choices that passengers are making. Consumers are increasingly flocking to low-cost carriers and bypassing the big traditional airlines: Last year, six low-cost carriers grew by almost exactly the same amount of traffic that the seven network airlines lost — a one-for-one shift.
Together, the six low-cost carriers now control nearly one-quarter of domestic air travel. They also earned $730 million in net income, while the seven higher-cost carriers posted total net losses of $3 billion.
The key is in how well the upstarts manage their expenses. ATA Airlines was able to slash its unit costs 16.5% last year, more than anyone else. America West Airlines, JetBlue Airways and AirTran Airways — all low-cost carriers to begin with — also significantly reduced costs. For high-cost carriers, the limbo bar just got lower. As a result, travelers will surely be seeing more cutbacks in service.
Just look at US Airways Group Inc.'s bind. US Air dropped its unit costs by 10.3% last year, the most among high-cost airlines. (That's measured by costs spread over how many seat miles flown, with a seat-mile equaling one seat flown one mile.) Thanks to its bankruptcy reorganization, labor costs at US Air were down 18%. But is that enough?
Two years ago, US Air paid 71% more to fly one seat one mile than Southwest Airlines. But last year, US Air was still 49% more expensive on the cost side — a difference it can't make up on the revenue side. Unit revenue likely will fall as competition builds and Southwest attacks Philadelphia, US Air's richest hub.
In the long term, US Air Chief Executive David Siegel says the airline's revenue advantage over low-cost competitors will be 10% to 15%. So costs must come down to the same level.
That's why the airline is arm-wrestling unions for more concessions, and threatening to sell assets, less than a year after emerging from bankruptcy. Indeed, industrywide, future disruptive battles with labor unions may be in the offing even if the business, overall, is recovering.
AMR Corp.'s American Airlines cut its unit costs by an impressive 8.9%, which was better than the 7.5% drop at its archrival, UAL Corp.'s United. United, of course, is operating under bankruptcy-court protection. Of the cuts United did get, a bigger chunk has come out of labor. But United's payroll was down 25% as it shed 19,800 employees, or one-quarter of its work force. American shed 14% of its labor force and saw the total spent on labor drop 13.4%.
American has improved efficiency, though, smoothing out its schedule at hub airports so planes and workers don't sit idle as much and airports don't get clogged, and it has simplified its fleet by renegotiating leases and shedding aircraft. American also did better on the revenue side last year, posting flat results while United's revenue fell 3.9%. Bottom line: AMR had a net loss of $1.2 billion, while UAL had a net loss of $2.8 billion.
And what about Delta Air Lines and Northwest Airlines, both of which are currently trying to win concessions from pilot unions? Concessions are a hard sell when the economy is rebounding, losses are shrinking, and bankruptcy, at least for now, isn't a credible threat.
Delta was the only airline among the seven network carriers to see its unit costs go up last year. Delta shed 4,500 jobs, about 6% of its work force, and slapped cuts and changes on nonunion flight attendants and others. But pilots got raises, and top managers got big bonuses, too. Overall, Delta's payroll was up 2.9% last year. The airline spends 4.72 cents on labor to fly each seat one mile — the highest in the U.S. industry. Delta had the worst operating margin in the industry last year, except for UAL. A nasty fight lies ahead between Delta and its pilots, who are the highest paid in the industry.
Low-cost airlines, amazingly, are finding ways to become even more efficient. They have benefited from cuts in travel-agent commissions and cheaper distribution on the Internet. They've outflanked bigger airlines on hedging against high fuel prices by locking in low prices long term.
Growth helps, too. At ATA, passenger traffic jumped 16% and revenue rose 19% last year. The Indianapolis-based company, which has its major hub at Chicago's Midway Airport, ended up earning $20.4 million last year, after a 2002 net loss of $169.3 million.
ATA, by the way, became the nation's 10th "major" airline, a noteworthy accomplishment. By the Department of Transportation's definition, an airline needs $1 billion in annual revenue from scheduled passenger service to be considered "major." Four-year-old JetBlue darn near made it, too. JetBlue, which grew a staggering 69% last year, had $965 million in passenger revenue.
The choices for consumers will continue to grow -- while they continue to get tougher for the legacy airlines.
• Write to Scott McCartney at [email protected]
