B6 Continues to Blame DL for Over-Capacity

This is no surprise. If you're making money, you can afford to grow, if you're losing money at a record pace, it's a lot tougher.

B6 is making money now? Funny, I seem to rember a loss.
That will happen to you when you don't have fuel hedged. I guess Neeleman can't make money at $100 a barrel. Imagine that.
 
B6 is making money now? Funny, I seem to rember a loss.
That will happen to you when you don't have fuel hedged. I guess Neeleman can't make money at $100 a barrel. Imagine that.


The post I was referring to dealt with numbers from 2000 through 2005. Over that period, B6 made a pretty substantial profit. I don't think a one-quarter loss is something to go into a full panic over. BTW, how did DL do over that period?

As for $100/barrel fuel. You're right. A lot of airlines will be in the red - B6 included.
 
Titan-

Sorry for my delay. I, too, have had much on my plate as of late. Now on to the show...

Flying Titan: Now, for my promised reply to your digging through BTS data. I'm kinda scratching my head to figure out your point with these numbers. You choose to go back to 2000 and compare ASM growth. You point out that B6 has grown much more dramatically than other carriers during this period. Excuse me for my somewhat technical response, but..."Well, Duh!" In 2000, B6 was in its infancy (first flight in early 2000). Of course it was going to grow at a much more rapid pace than long established carriers. It's certainly not going to shrink in its first five years of existence. Has any successful carrier in history ever done such a thing?

I give you much more credit for intelligence about the "big picture" than the lack of sight at the macro-level that you are feigning. The "over-capacity" issue is an ENTIRE INDUSTRY issue and therefore I looked at the ENTIRE INDUSTRY using the year before the big slide and the most recent full year. That seems like the most obvious comparison to me. During those 6 years, the industry added too much capacity and coupled with fare transparency and highly price inelastic demand, yields plunged. The BTS data clearly points out who added the capacity and I'm not going to repeat that discussion. It also clearly shows who tried to right-size capacity but when a legacy takes down an ASM, an LCC adds 1.5. That doesn't seem like it is working to fix the overcapacity issue.

Of course B6 did not exist prior to 2000 and I wasn't there to prove that B6 should have stopped at flying only BUF-FLL 3x a day. But what should have been obvious is that I was showing how the ENTIRE INDUSTRY quickly had over-inflated capacity and where did that come from? B6 and WN. I knock B6 a little harder b/c while WN has expanded in largely unserved markets AND they actually stimulate traffic w/o eroding yields, B6 has entered the largest markets and used price to compete. Their obvious intentions from the beginning were to go at the jugular of US and DL who both had deep roots in the NE-FLA routes.

Flying Titan:Your data simply goes back to a question that I asked early on in this thread. If you follow that logic, could any new airline start service without being responsible for excess capacity? If not, then there's not much point to this conversation. If yes, then under what conditions would you prescribe?

Any responsible business does not enter a market where there is already excess product. Anyone with an ounce of economic experience can tell you the supply/demand curves and what adding too much supply would do to price. Is it fair to say that nobody could start a new airline? No. Is it fair to say that an aspiring new business should note that it is NOT the right time to expand if there is too much capacity? Yes. Just b/c you WANT to start an airline doesn't mean it's the right thing to do.

In B6's defense, the industry really didn't start tumbling until after they started service and THAT had NOTHING to do with B6. However...it is obvious that it quickly became part of B6's business plan as they attacked the legacies head-to-head using price and excess capacity. THAT was not a good business decision for the industry though it obviously was good for B6...until their costs began to increase. No...I don't think that B6 should have held back on their attacks if they were only weakening other carriers (though I have always despised carriers such as AA for these tactics...but they are certainly fair game) but once their actions began plunging the entire industry (and eventually hurting themselves), they should have adjusted. The BTS data CLEARLY shows who is to blame for too much capacity.

Flying Titan: Further, as a general question, when should any airline expand on a route? As a loose rule of thumb, profitable routes with more than 80% LF have historically been accepted as good candidates for expansion according to many route planners and airports seeking additional service. I think it's generally about right. Do you agree? What's a better standard?

You cannot put hard numbers on when to expand b/c it depends on the carriers. But your point actually brings up a much more valid point...if it takes 80%+ LF to profit (sometimes well over 90-95), then you are profiting off of too low of yields. This is where I strongly admire WN for profiting on 65% LFs. To me...that is wise expansion. If you need high LFs to profit, adding more capacity will only mean you need even higher LFs b/c the yields will drop. Supply and demand. Expansion not at the expense of yields (ala WN)...THAT is a better standard.

Flying Titan: For most of B6's existence, this scenario has accurately described their NY - Florida flying. It has enjoyed very high load factors, has been profitable, and has pulled down higher average fares than the competition. Traditionally, that would be reason to add flights not reduce them. As B6 added capacity on these routes, DL added even more. The difference, of course, is that B6 was doing it to make money - DL was doing it to attack B6.

You and others have brought up the point that a carrier has a right to fight for market share, even if it means losing money in the process. I suppose that's a valid point of view, but it's hard to turn around then and blame the other guy for overcapacity.


Sorry...but B6 was not an innocent lamb as you portray. Their business plan was to enter already well-served markets and compete on price. B6 went straight at DL and US and actually knocked out US for the most-part. Sure DL reacted but don't play that B6 was innocent and not the one throwing stones in the first place. Again...overcapacity is an industry/systemwide issue (are you the only one that doesn't get this) and I have clearly shown where the expansion has come from. Sure B6 may have profited but they also profited at lower margins AND plunged most other carriers into the red due to adding too much capacity at a time when all obvious signs say that is a dumb thing to do. I hardly think that DL's losses NE-FLA are what plunged the industry into the red...especially when I have already shown the data that clearly shows DL REDUCED capacity significantly during this downturn.

Flying Titan:On a systemwide basis, your data clearly shows that DL (and others) are shrinking while B6 the other LCCs continue to grow. This is no surprise. If you're making money, you can afford to grow, if you're losing money at a record pace, it's a lot tougher.


Bravo! You at least spent one sentence thinking on a "systemwide" level. Again...if you are expanding when the industry clearly cannot afford it AND you have dwindled your margins and those of the other once-highly-profitable LCCs, you aren't really a benefit to the industry. Ride the wave of low margin profits while you can...oh wait...that one already crashed. Guess it's a good thing that little-lamb B6 announced a "re-focus" on flying smaller markets to JFK right after fierce-tiger DL announced the same. I would think again before stating that B6 is the victim of DL. Actions speak to just the opposite.
 
Couldn't agree more with Chapt 12 (for once... ;) ). UAL has a similar problem in DEN, and overly aggressive expansion by a MONEY LOSING LCC that then has the gall to criticise the rest of the industry for "overcapacity". Capacity reduction starts at home. Besides, I'd rather have a prosperous DAL (that can actually support the defence of our country with airlift) than see them get destroyed by the punk of the week club.
Couldn't agree more.. :up:
 
It's also notable that WN has never engaged in capacity dumping in order to carve out a market for itself. It has slowly but continuously grown in many markets. They represent responsible growth based on developing real opportunities rather than looking to knock anyone out of business. WN also does not have much stomach for getting into brutal shootouts with other airlines - they are costly and WN has found they can develop their business without engaging in them.
 
It's also notable that WN has never engaged in capacity dumping in order to carve out a market for itself. It has slowly but continuously grown in many markets. They represent responsible growth based on developing real opportunities rather than looking to knock anyone out of business. WN also does not have much stomach for getting into brutal shootouts with other airlines - they are costly and WN has found they can develop their business without engaging in them.


You are kidding right... :blink: :rolleyes: if nothing else, the 65% load factor while losing money flying jets suggests SWA is FAR from lilly white.
 
Ch 12,
I'll try to respond point by point. If I miss something, it's not intentional.

To your first point, that I'm looking at this issue wrong because I'm focused on particular routes. Well, I know it's been a while, but you might want to look back at your first post in this thread - "flooding already full markets." Speaking in terms of the entire industry is simply changing the debate that started this conversation. Even with systemwide overcapacity (which you and I might be closer to agreement on), there are routes where that is not the case. See the current threads on the upstate NY - BOS routes which are about to heat up. Those are certainly not well served or "full markets." As such, I have chosen to keep my focus on NYC - Florida routes as that is where we began.

As to starting a business in an industry where there is "already excess product," I would point you to a good article I ran across in my morning Washington Post - "Five Guys, Taking a Bigger Bite." BTW - BEST BURGERS EVER!!! If you ever have a chance, make sure to stop and have one. In any case, few industries could be more saturated (pun intended) than the burger biz. Four years ago, this place had one hole-in-the-wall location in Alexandria, VA. Now there are 87! 100 more coming on line this year. The hope to have upwards of 1000 in a few years.

Burger sales have been flat, or in decline, for years. Now, here comes Five Guys in a big way. Are they flooding the market - or - are they just competing with a product that more people want to buy? Like B6, on average, people seem to be willing to pay a bit more for their product, and like B6, their restaurants are full. You usually have to stand in line and wait a while for your food.

You claim that yields are too low in the NYC - Florida markets, but as I've pointed out several times B6 is pulling down a higher average fare and is carrying higher load factors than their competitors. Could it be that the public has decided it will pay more for B6's well-marketed leather seats, newer planes, cute little TVs, etc.... than it will for the product that DL and others are offering? Shouldn't DL be pulling in the same dollars for a seat before complaining that others are forcing their fares down? At this point, is it possible that DL (and others) are making it harder for B6 to raise fares on this route?

You say that B6's business plan was to enter already well served markets and compete on price. Personally, I believe it was just the opposite. I think they saw a huge hole in the number-one market in the country. That hole was JFK. It was arguably the most underutilized major airport in the nation. You remember the reaction when Neeleman announced they would base their operations there? It was along the lines of - He's crazy. It's been tried before and always failed. It'll never work. Nobody wants to go all the way to JFK for a domestic flight. Yada,yada, yada. Well, people flocked to JFK. So did DL and AA (after B6), but I'm sure it wasn't to beat up on B6. :rolleyes:

In short - from the beginning, B6 saw and opening and took it. The opening was a perfectly good underserved airport in a huge market. Offer good service and reasonable fares (not FlyI fares), serve attractive routes, market it well and they will come (and they have). For the most part, they have carefully avoided attacking other airlines' hubs.

Just as Five Guys found that customers are there for the taking if you offer the product they want, B6 discovered the same thing to Florida (even from the wasteland that was JFK domestic). Is Five Guys attacking McD's, BK, and Wendys? I don't see it that way. If the big three burger joints decide they're going to build new restaurants across the street from most of the new Five Guys, I do see that as an attack, because they had no interest in doing so until Five Guys came along and it's not likely to be profitable. Same thing with the airline industry.
 
Flying Titan,

I suspect you're "swimming against the tide" on this one.....

First, human nature all too often dictates blaming one's (or one's companies) problems on the visible as opposed to guilty. B6 & WN (FL to a lesser degree unless you're headquartered in ATL) are very visible.

Second, the whole "overcapacity" argument, as stated, is specious. With demand for air travel regularly producing 80%+ load factors, it's hard to argue that there's too much capacity out there.

What there is is too many relative high cost seats (CASM-wise) chasing low fare passengers in an effort to fill those high cost seats. Effectively, there's an oversupply of high cost seats and an undersupply of low cost seats.

So the capitalist system is doing what the capitalist system does best - those who "build a better mousetrap" are expanding to fill the demand for their "mousetrap" (low cost seats in our industry), while the old line (legacies in our case) are trying to change to meet the changing environment while incurring loses trying to hang on long enough to change.

Jim
 
You are kidding right... :blink: :rolleyes: if nothing else, the 65% load factor while losing money flying jets suggests SWA is FAR from lilly white.

I love this line. Last I checked, even the mighty legacies have to put fuel into a jet in order to make it fly.

That LUV can do so at a cheaper cost than most (while decidedly inconvenient) does not mean that they are "losing money flying jets."

This makes for a great soundbite. It's just that, however--a soundbite.
 
Today, Neeleman finally acknowledged the problem of overcapacity in the USA domestic market - and he realized that B6 has grown too fast and flooded the market with too many seats.

Too many seats chasing the travelers with elastic demand = low fares.

Sure, airplanes are more full than anytime in history, but too many of them were attracted onboard by cut-rate fares that cannot be sustained when jet fuel exceeds $2/gallon.
 
True.

What was profitable at $40, $50, or $60 per barrel and made good, profitable business sense does not necessarily work at $70+ per barrel.
 
One of the problems airlines like B6 have is pricing the product in advance. When fuel prices go through the gyrations they have since Rita/Katrina, it makes pricing for profitability extremely hard - most tickets are sold in advance but you can't put the fuel in the plane till just before departure time. When fuel prices rise quickly and dramatically, you can't go back and charge a higher fare for those tickets already sold to offset the higher cost.

That's the primary advantage of WN's fuel hedges - they have a good idea in advance what their fuel cost will be and can price their product accordingly.

Jim
 
That's the primary advantage of WN's fuel hedges - they have a good idea in advance what their fuel cost will be and can price their product accordingly.

This cannot be said with enough emphasis: LUV knows exactly what they will need to do between now, and say, 2009 to either increase revenue or decrease cost. B6 got caught in it.
 
This cannot be said with enough emphasis: LUV knows exactly what they will need to do between now, and say, 2009 to either increase revenue or decrease cost. B6 got caught in it.

Thanks for putting succinctly what it usually takes me 3 or 4 paragraphs to say over on the other board.

And while Southwest benefitted greatly from these hedges...the truth is they have been hedging for years. Not to try and beat any sort of dramatic price increase...but to provide exactly the predictability you mention.

A lot of folks have hollered that Southwest would have lost money without their hedging program.

That takes for granted they would have behaved exactly the same without hedges as they have with hedges in place.

As you can see...in 2006 their fuel price is up (avg cost per gallon $1.46 vs $1.86 for JetBlue). What have they done? They've taken modest fare increases.

Not enough to run the passengers off. Their Q1 load factor was right about where it usually is (a little higher, actially) and theor yield was up.

Depending on what fuel does over the next few years, you can expect to see modest fare increases by WN when the price of fuel makes it essential that they do something.

One thing about fuel and Southwest. A lot of their traffic is still short haul. When flying short haul the car is a viable competitor. If you don't like the price Dallas to Houston or Raleigh-Durham to BWI....you hop in the car and drive.

If the price of a plane ticket goes up, you might be inclined to drive...unless the cost of gasoline makes the plane ticket more attractive. And $3 a gallon gasoline does means the Suburban is going to suck down $60 worth from Dallas to Houston.

A $100 plane ticket for a 50 minute flight looks fairly reasonable when contrasted with a $60, 4 hr drive.

Fuel is the one place where you can get away with passing the increased cost to the customer...since the customer is going to be looking at increased cost one way or another....either Southwest gets the money or Texaco does.