They Are Killing Themselves - Don't Blame the LCC's

[Cactus73]

They complain all day about the over capacity in the market yet they are adding seats at unsustainable rates. Maybe they should stop blaming the LCC's and look at their own models. This is crazy.


Delta Air sees increased capacity in 2005

Thu Jan 20, 2005 10:04 AM ET
NEW YORK, Jan 20 (Reuters) - Delta Air Lines (DAL.N: Quote, Profile, Research) on Thursday said it expects capacity to increase by 6 percent to 8 percent in 2005 as a result of its restructuring efforts, adding the increase will not require any capital investment.

Capacity will increase 6 percent to 8 percent in the first quarter, 4 percent to 6 percent in the second quarter, 6 percent to 8 percent in the third quarter, and 7 percent to 9 percent in the fourth quarter, Chief Financial Officer Michael Palumbo said on a conference call with analysts.


Continental Airlines sees capacity up in 2005

Thu Jan 20, 2005 11:01 AM ET
CHICAGO, Jan 20 (Reuters) - Continental Airlines Inc. (CAL.N: Quote, Profile, Research) sees its mainline system capacity, or the number of seats it puts up for sale, up 2.7 percent in the first quarter and up 5 percent for all of 2005, an airline executive said during a conference call on Thursday.

 

[BeCareful!]

Scheduling efficiencies and aircraft utilization account for much of the growth the majors will be doing. Smart move, because they will be emulating the LCC's. Furthermore, they can pull back at no cost should the need arise.

2005 will be a good year.

 

[MedFlyer]

While overcapacity is a problem, DL and CO have no choice but to grow. You can't shrink your way to profitability. One of the reasons that USAirways has failed to get costs down is because as fast as they cut costs, they were also cutting capacity. The end result...a smaller airline with the same stubbornly high costs.

Many of the LCC's will also post losses in the 4th quarter (and beyond), but you don't see them shrinking either. They know that you have to keep growing to keep unit costs under control.

 

[skykid]

How much of that capacity increase for Delta and Continental is international flying? Example - Delta's proposed Moscow service.

 

[mad691]

That is very true but to grow just keep unit costs down and not be able to increase revenue at the same pace you still in the same boat as before. Most of the LCC's can grow AND be profitable. That is the MAIN difference. A great example is ATA. They second lowest costs per ASM in the industry. Lower than SWA and Airtran. Only JBLU had lower CASM than ATA. But if you have to fill those seats with heavy discounts(like ATA) you will loose alot of money in the process. Either way it is extremely hard right now to run an airline profitably for the legacy carriers and the LCC's.

Something is going to give here. Nobody can sustain this forever. I don't know who or when but the industry can not sustain this all year. In my opinion this is a lot worse than 9/11. 5 airlines in bankruptcy and maybe a couple or more on the verge. Not a good sign for the year to come.

 

[General Lee]

Skykid,


We will increase INTL flying by 17% in 2005, and domestic by 4% I believe.


Bye Bye--General Lee

 

[Cactus73]

While overcapacity is a problem, DL and CO have no choice but to grow. You can't shrink your way to profitability. One of the reasons that USAirways has failed to get costs down is because as fast as they cut costs, they were also cutting capacity. The end result...a smaller airline with the same stubbornly high costs.

Many of the LCC's will also post losses in the 4th quarter (and beyond), but you don't see them shrinking either. They know that you have to keep growing to keep unit costs under control.

I couldn't disagree more. They have a choice.
With the cost of fuel as high as it is, flying the airplanes more just to reduce CASM's isn't going to make them any more money. The airlines will price their seats to fill their planes. As long as capacity remains high they are going to have to create demand by pricing their seats below their cost to fly these additional flights.

The LCC's are growing for a number of different reasons. SWA is buying cheap fuel and can make money with additional capacity. Jetblue and Air Tran made committments for airplanes a few years ago when the economics of the business were different. Air Tran has been trying real hard to find a place for all the 737's they ordered. This is why the MDW deal was a set back for them. A lot of jetblues growth will be with the 190 which they can put into smaller markets that can make money.

At AWA we are keeping growth to a minimum because any capacity we add to the market is just hurting us more by preventing us from raising our own fares. We have obligations with Airbus to take 22 airframes over the next 18 months. If we don't take the airplanes it will cost us a lot of money as these planes were already part of a pre-9/11 order.

Delta and Continental should be increasing ASM's internationally but they should do so by reducing domestic seats.

The legacies are trying to destroy labor contracts and retirements while playing and irresponsible game of growth for the sake of growth.

Doesn't make sense to me.

 

[mad691]

Its kinda funny most of the legacy carriers are talking about expansion of international routes but take a look at Delta's numbers. It looks like they are not doin to well over sea's either. Yield is VERY important part of the overall revenue enviroment. All sectors are down.

Note 2.

December 2004 Quarter Traffic, Capacity, Load Factor, Yield and Unit
Revenue vs. December 2003 Quarter

Year-Over-Year Change
North America Atlantic Latin America Pacific

Traffic 5.7 % 10.8 % 25.2 % 10.0 %
Capacity 3.7 % 11.1 % 26.5 % 10.3 %
Load Factor 1.4 pts. (0.2) pts. (0.7) pts. (0.2) pts.
Yield (7.7%) (2.2%) (7.5%) (1.9%)
Passenger Unit
Revenue (5.9%) (2.5%) (8.4%) (2.1%)




--------------------------------------------------------------------------------
Source: Delta Air Lines

 

[michael707767]

I couldn't disagree more. They have a choice.
The legacies are trying to destroy labor contracts and retirements while playing and irresponsible game of growth for the sake of growth.

Doesn't make sense to me.

They are not out to grow for the sake of growth and they really don't have a choice. Ask yourself this. If Delta, AA, UAL, etc don't grow will the rest of the industry also restrict growth? Or will the LCCs grow even more, thus further degrading the revenue of the majors?

Going back to the months following 9/11 the majors killed themselves by shrinking. Bad move. It allowed the LCCs to grow unrestricted into the markets where the majors cut back/pulled out.

Now the majors have to grow or they will loose even more market share. It is a downward spiral for the industry, but the majors have to compete or they will die. Sitting by allowing the LCCs to grow and steal even more of your passengers is a sure way to fail. At least by growing, they have a chance to make it.

 

[Cactus73]

They are not out to grow for the sake of growth and they really don't have a choice. Ask yourself this. If Delta, AA, UAL, etc don't grow will the rest of the industry also restrict growth? Or will the LCCs grow even more, thus further degrading the revenue of the majors?

Going back to the months following 9/11 the majors killed themselves by shrinking. Bad move. It allowed the LCCs to grow unrestricted into the markets where the majors cut back/pulled out.

Now the majors have to grow or they will loose even more market share. It is a downward spiral for the industry, but the majors have to compete or they will die. Sitting by allowing the LCCs to grow and steal even more of your passengers is a sure way to fail. At least by growing, they have a chance to make it.

I still don't agree. They are growing because they feel threatened. Back when they could demand a premium for their product this made some sense.

Take the LAX/LGB/ONT to NYC market.

This segment was long dominated by the big three. This segment also had some of the highest prices in the country. Along comes jetblue with walk-up and advanced purchase fares that were 75% less than the prices charged by the big three. In a typical response AA starts service from JFK to LGB a few times a day and matches jetblues fares. The problem is that jetblue could make money charging less and AA was losing their tail.

Now along comes America West with LAX to JFK service. What did UA and AA do? They added hourly service from JFK, matched AWA's fares, and then paid their customers to not fly AWA by giving away a free worldwide ticket to any customer that flew one of their non-stops more than once. This was crazy. They were bleeding money doing this and AWA was breaking even. UA finally came to their senses and reduced capacity by offering a three class 757 with less seats and better service.

To add to the crazyness, AA added non-stop flights from JFK-PHX twice daily with 757's. They were losing so much money they finally pulled these flights last September. During this time they added segments in a lot of jetblue's transcon markets.

AA was doing this all over the country. When Air Tran entered DFW-LAX, AA added even more flights. Air Tran made money and AA lost their shirts.

So as the legacies add capacity they lose more and more money. Their only way to save themselves is to strangle their own employees with concension after concesion. Since they can't possibly make money on their operation they just keep sticking it to the workers.

The solution. I don't know. The legacies are going to have to learn to live in a world where the LCC's carry 50% of the market and they are going to have to target different customers. They should also probably move domestic capacity to international markets.

Growing just to grow is insane.

 

[P3-Adub]

Legacys just have to live with LCCs having 50% Share

No, what they are going to have to live with is the same pathetic pay rates and benefits. This industry was a growing industry with increasing pay rates and then some guy decides to take that dream job flying as a captain on an Airbus after only 11 months of being hired, who cares if he is only making 120K a year, he has a job. Right. This argument has been going on so long now the LCCs are starting to sound like the group that is being ripped off. What is happening today is not the Legacys getting what they deserved, it is what the LCCs have created themselves, the never ending downward spiral in pay and benefits. While several airlines are in a fight for their very survival, read thousands of jobs, pilots here bicker about who is to blame, what senior airline management messed up their airline, and what the majic fix is. Bottom line is the American Citizen passenger believes that you can fly coast to coast for $100. Does not work, will not work, and anyone who tries to raise these pathetic fares is now gouging the public. What a dream job !

 

[Mugs]

So as the legacies add capacity they lose more and more money. Their only way to save themselves is to strangle their own employees with concension after concesion. Since they can't possibly make money on their operation they just keep sticking it to the workers.

.

Ummmm. Your company doesn't have any history in this department?

 

[ivauir]

I think the root cause of tis flawed thinking is the term "market share". It implies two fallicies: first off that the market is zero sum, and second that the largest player in the market place sets the price. Both thoughs stem from the market dynamics pre deregulation, but it is amazing that they persisit. I have no idea what I would do to nake the legacies profitable but I know that I'd figure out how to make money before I grew, because all you get when you expand a losing business is bigger loses.

 

[General Lee]

ivauir,

I guess you have been to the strategy meetings and know all about what is going on at each legacy carrier? Yeah, you probably know everything that is going on........riiiiiiiight. Man, can we tap you as our next chairman?


Bye Bye--General Lee

 

[Cactus73]

Ummmm. Your company doesn't have any history in this department?

AWA was horrible in this department for years. Franke (before my time) was the most hated man to walk our halls.

Doug Parker seems to have a better grip on the situation. He has pulled back our expansion and is dealing with the Mesa contract and 22 Airbus arrivals the best he can.

Thngs are far from perfect here. We are going to show a loss for Q4 and the entire year tomorrow.

P3-adub-

I wouldn't blame all of us for the low salaries. Look at SWA, they have some of the highest paid 737 pilots and they are making money.

Now if MESA agrees to fly the 737 for the rates I've been hearing, I agree we are all in trouble.

 

[Marko Ramius]

Not exactly

Cactus73,

The reason that UA went to PS(three class 757) wasn't so much because of what you said, but because the 767-200's that were the backbone of that route have gone away. The three class 757 is the best solution to the problem of replacing the 767-200's capacity and maintaing a premium product offering for those out there who still want it.

 

[General Lee]

How did America West do on those routes? I thought AA and UA ran you guys out of there--and SFO/LAX to BOS/IAD too. It sure was expensive.



Bye Bye--General Lee

 

[fly-by-wire]

So much for the transcon's.....


America West Cuts Back
On Transcontinental Flights

By MELANIE TROTTMAN
Staff Reporter of THE WALL STREET JOURNAL
January 20, 2005 8:53 p.m.

America West Airlines said it is pulling out of three of the five transcontinental markets it serves with nonstop flights, citing "irrational" fare responses from competitors following the discounter's entry into these markets with lower fares.

The move underscores that discount airlines aren't immune to the impact of the brutal fare competition they started.

The Tempe, Ariz., carrier, a unit of America West Holdings Corp., said it will no longer offer nonstop flights between San Francisco International Airport and both Boston and New York's John F. Kennedy International Airport, and between Washington's Dulles International Airport and Los Angeles International Airport.

The airline has already been pulling down service on the routes in off-peak periods, citing lower traffic and brutal fare competition. But it had indicated it would pick back up come spring.

Over the past several months, for example, the airline has reduced to zero its nonstop flights between San Francisco and both Boston and JFK. It had previously indicated it would add back one daily flight on each route in June, but the carrier filed a schedule showing it won't resume that service.

Likewise, America West in August reduced its two daily nonstop flights between Washington's Dulles Airport and Los Angeles International to one flight a day. It will exit that nonstop market completely in April, the airline confirmed.

America West will continue to offer nonstop flights on two cross-country routes: Los Angeles-JFK, and Los Angeles-Boston. It currently offers one daily nonstop on each of these routes, down from three daily last June, and will offer two daily flights on each of the routes as of the coming June, the airline said.

America West began entering the lucrative and popular cross-country business routes in October of 2003, vowing to bring lower last-minute unrestricted fares to road-warriors tired of paying around $2,000 for roundtrip flights.

The low-cost hub-and-spoke airline, which at the time had just completed its transformation into a low-fare carrier, began offering last-minute unrestricted fares of as low as $598 round trip. That was sharply lower than the $1,800 plus that Delta, AMR Corp.'s American and UAL Corp.'s United were charging for comparable tickets on cross-country routes.

At the time, discount airlines were stepping up their game to gain lucrative market share from larger carriers that had been cutting capacity. It worked, stimulating traffic at America West and boosting revenue. But the competitive response was more brutal than America West expected as competitors matched the lower prices and even offered frequent-flier-mile and free-ticket promotions to keep customers.

As the larger airlines began cutting their operating costs to become more competitive with discount carriers, the transcontinental markets grew even more competitive and flooded with the seat capacity.

"We started service offering reasonable everyday fares, but the competition dropped fares below sustainable levels," said America West spokeswoman Janice Monihan. "We had other routes where we could operate more effectively and have decided to use our aircraft elsewhere."

Last fall, just before America West stopped nonstop service between San Francisco and Boston for the off-peak season, the airline says it had a one-way last-minute unrestricted fare of $299. When its flights on the route dropped to zero, the one-way fare on other carriers that had matched the lower price shot up to $700-plus, the airline says.

As at all U.S. carriers, the industry wide fare competition is hurting revenue and profits. Indeed, America West is expected to tomorrow report a fourth-quarter loss of $1.50 a share, compared with a small profit a y

 

[Cactus73]

How did America West do on those routes? I thought AA and UA ran you guys out of there--and SFO/LAX to BOS/IAD too. It sure was expensive.

Bye Bye--General Lee

Seems we got run out of the SFO markets and the LAX to IAD.

I guess we are keeping LAX-JFK and BOS.

We have a good Flightfund customer base in LAX and the flights are full but they probably aren't making much money. I'm kind of surprised IAD is going away because the loads on it seemed fairly good. It does tie up a 319 for a day so they must figure more money can be made with it elsewhere.

I'm happy Doug Parker is making decisions based on numbers and not emotions. The AWA of ten years ago would have put 747's on the route.

Marko Ramius-
Whatever UA's reasons were, it had the effect of pulling 35% of their seats out of the market. The PS product is very different than what AA offers and what they used to offer on the 767's. It was a good move by UA, I wasn't putting it down. They have something unique and can try to charge a premium for it. Our flights to JFK are far from unique but the price is right.

 

[Ty Webb]

I have said on this board (for the past several years) that what the "Legacy" carriers are doing is "dumping" seats.

If this was any other industry, be it computer chips, steel, or shrimp, it would be considered "dumping". They are putting seats into markets at way below their cost, and they say they are trying to "preserve marketshare". B.S.! If you can't serve that market at that price, then it ain't your market.

Funny how the Legacy guys want to blame the LCC guys for the dunderheaded mistakes of their own management. . . . if the problem was our payscale, how come your companies are still losing money now that you guys are working cheaper than us, and with crappier work rules?

Talk amongst yourselves . . . .