Friday's Journal -- Majors fight back

[MK82Man]

In case you missed it. Some great information to keep in mind. Might help some of you decide who to go with if you are lucky enough to have multiple offers. Great Article by Melanie Trottoman:


Wall Street Journal
Friday, 2/6/2004

By MELANIE TROTTMAN

As the older U.S. airlines recover from the post-Sept. 11, travel slowdown, they are increasingly taking on the low-cost carriers that seized market share in the past three years. As of September, seven cut-rate air-lines have captured 22% of the U.S. market, up from 16% in the year 2000, according to the Transportation Department's Bureau of Transportation Statistics. Now, after rounds of cost-cutting and shrinking, old-line airlines are adding flights, matching lower fares and offering ticket promotions to win back customers.

When low-cost JetBlue Airways of New York said it would start twice-daily service last month from Boston to the Los Angeles area, AMR Corp.'s American Airlines didn't just match the fares, it added a fourth daily nonstop flight on the prime business route and will start another next month. In October, when low-cost America West Airlines launched nonstop service from New York's John F. Kennedy International Airport to Los Angeles International, American matched the lower fares and started a 10th daily nonstop flight at the end of last month. And when JetBlue Airways and AirTran Holdings Inc.'s low-cost AirTran Airways began daily nonstop service from Atlanta to the Los Angeles area last spring, Delta Air Lines matched the lower fares and boosted its own daily nonstop flights into Los Angeles's LAX to 13 from eight. After JetBlue pulled out of Atlanta, Delta reduced its nonstops to 11.

"The majors are starting to fight back," said UBS Investment Research analyst Sam Buttrick. This year will be the first since 2000 that the older airlines will actually grow and they are turning more of their U.S. focus on routes served by low-cost carriers, he said. Still, these majors aren't being as aggressive as they were years ago when many tried to flood markets to drive out new airlines. In 1995, for instance, UAL Corp.'s United Airlines flew wide-body, fuel-hungry DC10s between its hub in Denver and Colorado Springs, Colo., to keep passengers off of Colorado Springs upstart Western Pacific Airlines. The 30-minute flight-in which United replaced smaller, more efficient planes with the bigger jets-allowed United to pick up passengers who preferred Colorado Springs and connect them through Denver to other United flights. After several years of warring, Western Pacific went out of business in 1998.

The new counterpunch packs less wallop because the major airlines are still hurting financially. The cut-rate carriers say they have the strong balance sheets and quarterly profits to withstand expensive fare wars and capacity increases. "We have low costs, and what low costs enable us to do is to be very aggressive on pricing," said Tim Claydon, JetBlue's senior vice president of sales and business development. One big-airline effort already may have run into stiff, headwinds. Delta this week said it is shelving the anticipated cross-country expansion of its low-fare Song unit, which competes heavily with JetBlue and other low-cost carriers. Delta, which has marketed Song's chic image on flights serving mostly the Northeast to leisure destinations in Florida, said it is conducting an operational review to seek more ways to cut costs throughout the company.

But big carriers have resources that the low-cost airlines lack: a world-wide network of flights and massive frequent-flier programs whose reach is made even broader through alliances with foreign airlines. American last month started offering its frequent fliers a free ticket on domestic or international AMR flights for flying two round trips in select markets-some of those served by JetBlue and America West-through mid-April. Delta matched the offer, though it excluded its lowest fares, and United followed. JetBlue fired back by offering coast-to-coast travel on Tuesdays, Wednesdays and Saturdays for as low as $79 one-way through mid-April when booked through its Web site. American the following week matched the lower fares and touted their applicability to the free-ticket promotion. "Promotions like this are costly," said Scott Kirby, America West's executive vice president of sales and marketing. On the four coast-to-coast routes America West has entered with nonstop service-from both New York and Boston to both Los Angeles and San Francisco-Mr. Kirby estimates American and United's fare-matching alone will save consumers $200 million this year. That is because these prime business routes had been long dominated by the older carriers, keeping prices much higher. Since America West began lower-fare flights on three of the four routes, prices have dropped by more than 50%, he said.

For example, a ticket purchased the day of departure for round-trip travel between Boston and San Francisco-the only one of the four routes where America West's flights have yet to start-costs $2,467 on American, United and US Airways. But between New York's JFK and LAX, a route America West started serving in October, a same-day ticket is $470 on America West and several other major carriers. America West plans to start its nonstop flights March 1 between Boston and San Francisco. America West said it has seen what it believes is retaliation even on routes where it hasn't posed new competition to the majors. For example, after America West said it would enter the coast-to-coast markets with nonstop service, late last month American started two daily nonstops between JFK and Phoenix, America West's home turf, by offering introductory fares as low as $79 each way and double frequent-flier miles. "It's blatantly obvious that this is a message to us to say 'stop flying trans- continental,' " said America West Chief Executive Doug Parker. “We've got the message and we're going to keep flying transcon," he said. One option for America West: Pull a flight off what it says is now an oversupplied JFK-Phoenix route and put that service into the coast-to-coast markets, he said, the very thing it believes American is fighting against in the first place.

A spokesman for American said it puts resources in markets where it can make a profit. It also offers fare sales and other promotions frequently. "We aren't just going to abdicate our market share to the limited-choice carriers. We are in a position where we're going to fight for the long-term survival of the company," he said. For now, America West is filling a "fairly good" number of seats on its non- stop coast-to-coast routes, but the tougher price war with competitors means it is only breaking even on the routes although it had expected to be profitable by now.

Meantime, Frontier Airlines is gearing up for an assault in its hometown of Denver, where United's low-fare division, named Ted, will launch service starting next week that by mid-March will expand to eight nonstop routes Frontier serves. United, as expected, announced yesterday that Ted will take off from its Washington Dulles Airport hub on April 7 and by mid-May will fly 15 roundtrips a day to Las Vegas and Fort Lauderdale, Orlando and Tampa, Fla.

History shows established airlines can wound if not cripple new entrants. And other than low-cost leader Southwest Airlines, which grew during the past 32 years largely by avoiding head-to-head competition with the major airlines, no low-cost carrier has a stellar long-term track record, said Mr. Buttrick, the UBS Investment, analyst. It is very unlikely that the collective actions of the older airlines will stop the other discounters in their tracks, be said, but really tough competition "can both slow and deflect discount-carrier expansion."

 

[General Lee]

We still need to bring the costs down, and when we do (at Delta atleast) we will provide a lot more competition for the LCCs. American has done that, and they really are trying to compete with Jetblue (at BOS and JFK) and Airtran eventually at DFW. As the economy gets better and fuel prices go lower (hopefully), the Majors will really stregthen. It will be interesting indeed.

Bye Bye--General Lee

 

[AlbieF15]

Yes, the majors have run the LCCs out of town before, but there are a few new wrinkles this time.

First, the ride and service on a JetBlue A320 or AirTran 717 is a much nicer product than that Delta 757 or AA MD88. The "please" and "thank yous" at the LCCs have added up, and the history of poor service has haunted some (not all) majors.

Second--AirTran and JB typically MAKE MONEY at their lower fares. The majors usually don't. Right now the financially solid LCCs (Frontier, AirTran, and JB) aren't afraid of direct competition. ATA, with its higher debt ratio, avoids major fights and uses the SWA model of avoiding confrontation. As they grow that may change...I'm not an expert.

The real damage to JB from the majors has not been cash flow but market cap. Once DAL showed it was willing to fight, the stock price of JB (likely already someone overrun) dropped considerably. However, as the General has pointed out before, market cap and cash reserves aren't the same thing. Like Ty Webb, however, I tend to believe that if company A makes money on a route and company B loses money on a flight, eventually A will persevere. That is why I think the LCCs are in a better position than ever to challenge the majors.

 

[F9 Driver]

We'd better circle the wagons

Whatever you think of Mike Boyd he brings up some great points.

http://www.aviationplanning.com/

Hot Flash - February 9, 2004

Year 2004's First Aviation Non-Event
United's Ted: Lots Of Hidden Costs
Going Where Everybody's Gone Before - Unsuccessfully

Never in the history of aviation has a coat of paint been so expensively promoted.

Yes, United's Ted, a.k.a. Son-of Shuttle, debuts this week. At first it will simply represent essentially nothing more than different livery on some existing Denver hub service.The sector costs of running the airplane will be the same as before, and fares will remain matched with Frontier, just as before. So, on the surface, the whole Ted thing is a wash - a no-harm-no-foul deal that simply creates a sub-brand within United. The service levels will be at the same very high standards of mainline United, and it will initially simply be part of the Denver hub system, except there will be no first class.

Danger Signs Already. But amid the press hype that some members of the media swallow like goldfish at a fraternity party, Ted does represent some potential dangers to United. In fact, if United's senior management starts to believe their own press about Ted, United could be in trouble. Of concern is the recent announcement that they will put Ted service at IAD with over a dozen flights to Florida. Great, more capacity in a marketplace that has about as much brand loyalty as a wino with the DT's. That should raise flags. Red flags.

Trying to be like Southwest is a stunt that's been played out time and again over the last 20 years. Aside from the silly fiasco of the "United Shuttle" and of MetroJet, and of Continental Lite, and maybe even Song, which at least has a clear focus to its intended customer base, United's Ted is fast shaping up to have disturbing similarities to virtually every other failed Children's Crusade to "be like Southwest."

These similiarities include: A newly crowned leader from afar. The intent of kicking competitive butt with low fares, high utilization, and fast turns. Typically, the move starts with a "vision" led by a new CEO. The employees rally around the new concept. The concept is implemented. It falters. The management re-doubles their efforts to make it work. Finally, management quietly shuts the program down, and the airline is worse off than before.

Let's look at an ancient story that has disturbing parallels with Ted....

And, It Was Done, Once upon a time, a formerly highly-successful airline fell on hard times. Like at United today, losses mounted, competition was pouncing, and the airline was losing its way. As with United, management went to the employees for wage cuts. A vote was held, and a double-digit reduction in pay rates was approved.

But the Board of Directors at this once-powerful carrier wanted more. So, they sought out the services of a Messiah CEO - a magical leader who, with vision and foresight, would lead the airline across the Jordan River of red ink and back to wonder and glory. And it was done,,, a Messiah was found and duly hired. The Messiah wasted no time.

"We must move quickly," the Messiah exclaimed upon taking the CEO throne. "I have a Grand Plan. One brilliant in its scope and breathtaking in its simplicity. We must transform ourselves to be just like Southwest!" The Board was awed and thrilled. "Yes!" they agreed. "Southwest! That's the answer! It makes money. Our new Messiah is truly gifted!"

And it was done.

Southwest had no first class, so therefore the Messiah banished such from the airline, just as is being done with Ted. The Messiah ordered, "Out with the demon first class curse," and all such seats removed immediately. Those consumers who wanted a premium service weren't wanted. "If they cannot see the wisdom of being like Southwest," the Messiah dictated, "let them go elsewhere." And, they did.

Southwest had high-density seating, too. So the Messiah so ordered that many more seats would be put into the now all-coach cabins. "This will get our ASM costs down," the Messiah declared. And, indeed, it did. Just like at Ted.

Southwest has high aircraft utilization, so the Messiah issued an edict that the airline would fly more hours every day, and make faster ground turns. Just like today's Ted. "Add more segments to the existing route structure. That will bring our costs down... spread the fixed expenses over more flying..."

And it was done. At first, nobody questioned the wisdom of the Messiah. "Our loyalty to the Glorious Leader must be total," was the will of the employees. "We must not doubt, but instead follow the Messiah," was the feeling of union and non-union alike. "What he says must be the Truth and the Way to economic salvation. We will make airline history. Smote those who blaspheme."

And, Lo! The Messiah's Grand Plan was implemented in its brilliant fullness. It did make history. Headlines, too. All of these visionary moves did reduce unit costs by 9% in the first quarter of operation. But it also caused unit revenues to drop by 23%, and with the extra flying, much of it well below break-even load factor, losses headed for the Stratosphere. We don't know what happened in the second quarter, because the airline never filed any data for that period. Six months after inaugurating the Grand Plan, the Messiah was banging on a judge's door in the middle of the night to get a chapter eleven petition signed.

In fact, in a very short period, the airline was history. It was Braniff International.

Confused Model = Confused Consumers. See, the "Southwest Model" may be a very attractive flower, but it doesn't do well when it gets re-potted into the network, hub-and-spoke model. Like at Ted, the Messiah's Grand Plan lowered Braniff's ASM costs by cramming more seats into the cabin, but it didn't do diddly to lower the costs of hurling the airplane from point A to point B. And flying the airplanes more hours of the day did spread the costs over a wider base. But the Messiah left out the part that if you fly an airplane more hours, there better be tushies in the seats on those extra flights. There weren't. (This fly-more-and-lower-the-cost scam got so ridiculous that at one point Braniff had three 727s departing San Antonio for DFW within 20 minutes of each other in the mid-morning, when demand was next to zip.)

More Costs Than Meets The Eye. This is not to say that Ted will lead United into the abyss. But it is a program that mixes messages and confuses the consumer regarding the product. And, Ted could well be a lot more costly and expensive that it appears:

Funding The Ted Fleet From Mainline. It appears that to get planes into the Ted system for ill-advised forays in low-yield markets such as East Coast to Florida, some mainline routes are being shifted to RJs. Major business markets like ATL-DEN. Take it to the bank, because Frontier and Delta will, that Premier Executive that goes through the RJ experience for almost four hours will re-think his brand loyalty.

Premium Passenger Loss. A large part of the Ted operation will be tied to United's hub system, thereby mixing products. There are lots of passengers at Denver who will be connecting to destinations operated only by Ted airplanes. The important premium passenger from LAX to MCO that may be looking for a upgrade is going to be disappointed. And it's not good business to disappoint you best customers. This includes the premium passenger connecting to ATL, where the A-320 that formerly operated the route has been shifted to the Ted system. He finds he has to board at ground level, slop across a snow-covered ramp and board an RJ, where he has no earthly chance of even opening his laptop, let alone using it.

Sub-Fleet Costs. The Ted aircraft will be dedicated to certain routes. That means they are no longer inter-changeable within the United system. A sub-fleet means less operational flexibility. And that means ultimately less efficiency. Add to that the fact that Ted A-320s will have over 150 seats, unlike other United A-320s. That eliminates the possibility of using three, instead of four, flight attendants when loads are light.

Ultimate Outcome: No Major Damage. But No Major Gain. Regardless of how Ted works out, United will survive. But to spend millions on a new product that offers no real competitive advantage, and indeed, has competitive disadvantages, at a time the airline is so desperate that they're trying to slash retiree benefits, is a highly questionable strategy.

Ted starts February 12th. Break out the purple Cool-Aid.