Discount Carriers Face Perils

[BoeingBoy]

Discount Carriers Face Perils as They Grow Against Rivals
By James Ott
06/27/2004 01:01:17 PM

BIG TESTS FOR DISCOUNTERS

A handful of time bombs are embedded in the upward paths of low-cost carriers whose low fares and improved service are changing the landscape of U.S. and global commercial aviation.

AWST Article

Jim

 

[WorldTraveler]

We are probably at the point where the legacy carriers are the most uncompetitive with the LCCs that they ever will be because 1) Legacies have been shrinking while LCCs have been growing, unnaturally raising legacy carrier costs; legacy carrier costs are worse now than they were before 2001 with the exception of the concessions that have been won. 2) Legacy carriers have been prohibited from combining or seeking to reduce capacity through economic channels but instead have had to use bankruptcy channels. Given the complete loss of pricing power by the legacy carriers and the prevalence of LCCs, it is very likely that the gov’t would now look favorably on legacy carrier mergers. Legacy carrier capacity will fall out of the industry either by failure or acquisition; I still think AA has the financial resources to acquire other carriers and DL will if they can get a pilot contract w/o going to bankruptcy (looking more likely) 3) LCCs are making their operations more complex while legacy carriers are simplifying. 4). LCC employees will demand that they get wages more in line w/ the legacy carriers as soon as a legacy carrier with better pay starts making money.

This is a good article but I disagree with the statement “For all future carriers, outsourcing of what have been in-house services will become standard and should help the drive for efficiency.â€￾ Airlines that can perform services in-house as efficiently as contractors will be able to keep the work inside. Several legacy airlines like AA and DL are very efficient maintenance providers, own their regional carriers, and have been industry-leading in technology transformation. Each of those areas of the business indicate a continued focus on keeping the business in-house but could also indicate that those airlines could sell those aspects of the business in order to capitalize on the core mainline transportation aspects of the business.