Interesting read by Boyd Group


Well-known member
Jun 17, 2002
Total Time
The Boyd Group Advantage

Aviation Perspectives & Insights
Available Nowhere Else - August 29, 2005

News & Reviews


Coming Surprise:
It's the Revenue, Stupid.

"The airline industry's malaise is fundamental and structural."

"There's no hope for legacy carriers."

"Legacies have no way of getting their costs down further."

"Consolidation is a must."

"Some hubs must close."

"LCCs are the carriers to bet on."

That's the ambient, accepted thinking among much of the learned cognoscenti who pass on events in aviation. It's the kind of information you can bet on - particularly if you're doing it with somebody else's money. Because it's all wrong.

Sure, these are the mantra-like comments now appearing all over the media. From some "experts" no less. Like from a few nitwit college professors who would need a passport and a roadmap to get back into reality. Or some "financial analysts" who seem to be proving that putting money in a mattress may be a safer bet than listening to some of the "expertise" oozing out of Wall Street.

We're going to be covering these issues at our Annual Forecast Conference in Savannah on October 16-18. But we thought we'd touch on some of the accepted-but-erroneous dogma that's being tossed around as if Moses just delivered it on his way home from Mount Sinai.

Most Legacies Have Re-Structured. Nobody seems to have noticed that even in the face of higher fuel prices, American, Continental and United have reported operating profits. And the first two didn't need to file Chapter 11 to do it. What that means is that if oil had stayed below $40 a barrel, as was expected 18 months ago, these same "experts" would be pontificating on the obvious, i.e., the "turnaround" at legacy carriers.

I Heard It Through The Grapevine. A lot of the analyst crowd, including some in the media who write for otherwise august business journals, seem to take their cues from one another, not from hard facts. One or two make some bozo comment like, "legacy carriers' costs are too high" or, "LCCs are the new model," and they all start shrieking it out like a confused pack of chimpanzees swinging through the jungle.

Let's deal briefly with some of the key tenets of the current Legacies-Will-Die doctrine. We'll be doing this in depth at the conference, but here's an overview:

Over-Hubbing. One financial type recently made the comment that Charlotte should be eliminated as a connecting hub. (America West might disagree.) He went on to pontificate that the traffic would be easily absorbed into other hubs, thereby reducing the amount of fixed costs in the industry while retaining the revenue.

Wonderful analysis. And yet another reason to consider depositing your savings in a Seeley Posturpedic instead of a stock fund. Left out of this guy's analysis: what other "hubs" would take up the slack? Which airlines would be interested? Which airlines have the equipment to access the range of markets that would lose access to CLT and its connecting flights? Oh, yeah, then there's the fact that existing airlines are already running full - when load factors get into the 80's that means for all intents and purposes there isn't excess capacity. How about issues like ATC and airport capacity?

Legacy Costs Can't Be Lowered. Some have opined that legacy carriers can't get costs down. Gee, then how did AA adjust to $50 a barrel oil? The fact is that there is somewhere around another $10 billion the industry can squeeze out - and it's not in labor.

Things like changes that can be made in distribution costs. (Note to airports: Don't buy any more of those Tiffany-priced MIDT studies - the source of that data is heading toward the same attic as black and white TVs.) How about shifts in product delivery? Lots of $$$ to be found there. Re-structuring and managing hub banks on a minute-by-minute basis (instead of "on-automatic" as is mostly done today) can bring hundreds of millions to the bottom line. And that doesn't even begin to touch the ATC improvements that the airline industry can start to demand.

Consolidation Is A Must. This is yet another sacred mantra from the shallow depths of Lake Nonsense. First, unless it's a buy-it-out-of-the-casket deal, like the HP acquisition of US Airways, the alleged "benefits" of merging two large carriers, like say, Delta and Northwest, don't go too far beyond the pretty maps of combined route systems that seem to mesmerize some "analysts."

These guys don't have a clue about things like fleet compatibility, maintenance program bridging, labor contracts, and other issues which make a merger between two large airline systems a very expensive proposition.

It's like trying to bolt a Chrysler transmission to a GM engine, plus mixing different types of fuel systems, electrical components, and accessories. It can be done, but only at high costs and with questionable benefits. Two smaller airlines, like AirTran and Midwest, okay. But two global, multi-dimensional airline systems such as DL and CO, or NW and AA, or whatever, and the deal is expensively ugly.

LCCs Are The Future. This is more dogma accepted blindly by folks who don't read past the first line of an airline press release. We'll skip for now the fact that virtually all LCCs are fundamentally losing money, including Southwest.

What we'll point out, however, is that there are two sides of a P&L statement. One is costs, which, it seems, everybody's fixated upon. The other is something called revenue, which apparently is being ignored.

We'll be covering this in detail at the conference, but here's a news flash: there are a limited number of markets that fit the LCC model of operating 100 to 150 seat airplanes. There is a finite level to which a given market can be stimulated with low fares. There are declining returns in trying to continue to grow Florida markets with fares intended to shift discretionary dollars from being spent at Home Depot to a trip to 'Lauderdale.

On the other side, the places where fundamental future revenue growth will occur in the next decade aren't in Florida. Or the Caribbean. Or in those now-overserved Northeast-to-SunburnLand markets. In fact, they are markets that the LCC model mostly can't access.

Unlike other consultants, The Boyd Group is constantly researching issues such as economic trends, demographic shifts, and global industrial migration. These analyses almost uniformly lead to one conclusion: The growth in airline revenues in the coming years won't be in trying to grow the BOS-OMA market with $79 fares.

The growth will be in tying emerging industrial centers together. Centers here and internationally. Growth such as at Montgomery, where people from Korea have opened a huge automobile factory and foundry. And the growth will be in places like Kaoshiung, Beijing, and non-pronounceable places in Shantung Province. And in the Carolinas, where increasing Asian investment is expected. Or in places like Erie, Muskegon, and Saginaw, all of which have global-centric industries.

The point is that in the coming decade, the airlines that can access and inter-connect places like these will be the ones to bet on. These are legacy carriers with multi-tiered fleets and global connecting hubs, not LCCs. Legacy carriers can get their costs down. It's the LCCs that will be in the corner trying to get their revenues up in the not too distant future.

For informational purposes only!!!!!!!!!


Jan 13, 2002
Total Time
Thanks for posting this, well thought out wth some interesting insights.

mrvmo said:
LCCs Are The Future. This is more dogma accepted blindly by folks who don't read past the first line of an airline press release. We'll skip for now the fact that virtually all LCCs are fundamentally losing money, including Southwest.
I guess by "fundamentally" they mean without fuel hedges. But they need to dig deeper here, yes we are using our fuel hedges and wouldn't have posted a profit for several quarters without them. But the reality is that we have them and are using them as we intended to. To argue that we'd have lost money without them is like arguing that without being tall your favorite basketball player wouldn't be as good. The point is true, but not relevant.

The point that is worth discussing is what the future looks like with less hedges at higher prices? I think we'll raise prices and still be the cheapest way to fly. However, this will take some of the downward revenue pressure off of the whole industry and will be good news for the legacies. Maybe this is teir point, but I wish they'd have fleched this part out a bit, because I am sure there are aspects that I am missing.


IBT does not represent ME
Nov 27, 2001
Total Time
I have to start a consulting "group". This guy is a fricken genious if he makes a living off this bs. Lets see, oil is expensive, big airline mergers are more complex than small airline mergers, atc system is old. Once again, the master of the obvious strikes with an in depth analysis of the same ole sh1t.