Dawg and Frugal,
Thanks for your contributions to a good, spirited discussion on the business issues. Hope you are enjoying it.
First, I absolutely agree that the AS-DL spitting match is vastly overblown, esp. in terms of how quickly it needs to be resolved. That said, there are enormous strategic objectives that both AS and DL want that require either cooperation or stepping on each other’s toes. Right now, it is leaning more towards stepping on toes. AS and DL do have a contract that does provide both sides some of what they need now and also requires some attempt at finding middle ground, even if the solution is not long-term. Both sides can figure out the long-term down the road but for now AS and DL will continue to work together, even if in a strained relationship.
I agree that there will be parts of AS’ network that DL would likely pull down but there are also other new flights that would make sense, esp. to the eastern US, if AS and DL actually did merge and DL has access to a much larger number of SEA gates.
DL doesn’t need to build a full-fledged nationwide hub from SEA for now; DL has TPAC flights from DTW, a hub that provides great connectivity to the eastern US. DL likely will add more SEA-unique Asia flights but for 2014 it is just HKG. Also, even without a codeshare agreement, AS will carry a certain amount of traffic that connects to DL int’l flights. DL connects some passengers to BA and LH at ATL just based on normal industry interline agreements.
You are correct that fortress hubs are the easiest to defend and DL has fortress hubs at ATL, DTW, MSP, and SLC – if fortress hub is defined as local market share that is multiples larger than the nearest competitor. DL is making NYC work despite it not being a fortress hub because DL is running a much better operation and has been willing to push into the key markets of other competitors, removing their edge. DL has been far more successful at pushing into other carrier strength markets than any other network airline, and often has beat LCCs who have tried to push into DL strength markets.
I have only said that the 717 is a natural size step up if DL chooses to upgrade some of its west coast flying to mainline but there are other mainline fleet types that DL could use on the west coast. The 717s apparently are going to be used to free up large RJs from the big hubs and to reduce frequency from small/medium sized cities that have multiple small RJ flights. DL’s focus appears to be on deploying mainline capacity in the eastern US while using large RJs for growth on the west coast. In time and if the AS-DL situation is not resolved, DL will upgrade some large RJ flights in the west to mainline.
I don’t believe I said anywhere that DL could buy ALK for less than $5B; the chances are high that the deal would be largely if not entirely stock-based which is why DL has been pushing to increase the value of DAL stock. ALK, as airlines go, is a high value stock. DAL stock has outperformed most airlines in 2013 and many other stocks; it will take a lot of focus on DL’s part to continue that momentum in 2014, esp. given that new AA will attract some investors.
If DL is willing to offer enough of a premium, ALK will sell. So far, ALK has to decide they face enough of a competitive threat to their business model from DL and the increased competition that they will have to act. UA is adding capacity from SFO to SLC, IIRC, to counter AS’ attempts to try to pull AS into the fray. AS will feel the pressure of a spreading west coast battle.
But keep in mind that DL already has enough gates (or will by fall) to operate about 60 domestic flights which means the benefit from spending $5B in SEA is to gain a presence in a much smaller number of markets that really matter to DL’s Asian operation. Sure, an ALK acquisition adds a larger presence in Alaska and LAX that have strategic value but DL can get what they need in both areas via other means, and probably at lower cost.
It is precisely because DL does not want to pull AA and UA into its spats with AS that DL has not launched SEA - PHX and DEN but DL absolutely wants to see other carriers pile on to AS as UA is doing from SFO and WN is doing from SAN and PDX. At some point and if DL obtains the gates at SEA to do so, they will have to expand their network from SEA but remember most of these new markets won’t start for 6 months or more so this is all a big chess game. The risk is also relatively small in the summer when demand is strong; if this continues into the fall of 2014, then the stakes get higher.
As for LAX, I have posted before and will say again that DL’s average fares at LAX are 2nd only to UA’s whether int’l is included or not. The notion that DL gets low fares from LAX is simply not accurate. Further, DL’s average fares to Japan are far higher than what AA and UA get to Japan or to PVG. Further, we are talking a difference of 20% or less in total passenger size and a lot less in revenue between AA, DL, and UA…. There just isn’t any huge frontrunner in the market. DL might be #3 in total revenue and #4 in passengers carried but its profitability is likely much higher than either AA or UA from LAX given the higher average fares than all except UA and even UA’s fares are only a couple percent higher than DL’s, less than the difference in overall CASM. Also, regional carriers are part of the purchased capacity for every airline, Frugal. Further, WN shareholders care little to nothing about how many passengers WN carries and everything about profitability. The legacy carriers all carry far more revenue from LAX than WN.
LAX-JFK is a key market that will further propel DL’s growth in LAX. AA is cutting overall capacity and losing cargo capacity with its strategy to put 321s on transcons yet DL is stepping in to replace some of that capacity that is being cut, a strategy that DL has repeatedly used in key legacy carrier markets. DOT data already shows that DL is carrying more cargo per flight on its 763s than AA carried on its 762s. As AA pulls the 762s off the transcons, DL will be the only passenger carrier operating scheduled JFK transcon widebodies which should push up cargo yields. Also, DL’s additional BOS-LAX flights are happening because other carriers, including UA, are reducing their capacity.
You may or may not be right about UA’s ability to sit on gates at LAX without using them but I would be very surprised, even given the way LAX leases work, that UA or any carrier can squat on gates without using them. Still, UA has been the dominant legacy carrier on the west coast for 2 decades since the DL/WA and AA/QQ mergers but AA and DL both are focused on growing their presence out there. AS and WN have found niches away from UA but you can absolutely be assured that UA will be forced to defend two CA hubs or lose a lot of money. I am strongly believing that UA will have to come to rationalize their network and will start reducing their huge CA presence and with it the number of gates they hold at LAX.
The broader issue is that UA is in the crosshairs of industry competitiveness.
- UA has 4 pairs of competing hubs in its network. They have not only yet to rationalize their own network post-merger but they are facing enormous competitive pressure from both AA and DL who have lower costs and are retaining premium passengers better. UA has only EWR and IAH as fortress hubs and if you consider EWR competitive with LGA and JFK, then UA doesn’t even have a fortress hub at EWR. Further, UA is trying to defend its network using a very high percentage of 50 seat regional jets which don’t have the amenities customers – esp. premium customers want – and those aircraft are also high cost aircraft. UA has enormous strategic challenges even without factoring in other carriers and their lower costs.
- DL is gunning to overtake UA as the dominant carrier in NYC; they have already done it domestically and are focusing on the top markets internationally. It is only time before DL adds another JFK-Asia flight which is the only region from NYC where UA has a clear advantage.
- AA is absolutely focused on strengthening its position in ORD where the Ejets will make a difference and AA also sees opportunities on the west coast, to Asia, and to Latin America.
- DEN is still a mess and WN continues to grow its overall local market share, largely at UA’s expense.
- IAD will be impacted by the increased low fare presence at DCA; WN’s addition of Latin America markets from HOU will certainly affect UA.
UA has nowhere to grow its network – or at least they aren’t doing it - which is the only way they can get rid of some of their duplicate hubs by redeploying assets elsewhere. The only choice is to lay off employees and a no-growth network which are both leading to an unhappy workforce. The reason why DL has been successful in restructuring its network post merger is because DL has redeployed capacity and employees to growth areas – NYC and Asia/Pacific flying from CVG and MEM. AA recognizes they need to do the same thing and much of AA’s growth will be in markets competitive with UA.
Fundamentally a major problem for UA is that the legacy carriers have consolidated but have done little to grow outside of the total segment that the legacy carriers have been able to maintain. All of the legacy carriers gave up markets to the LFCs post 9/11 but AA and UA have done little to gain anything back either from other legacies or from LFCs. DL has done the best job at limiting LFC growth and at taking back DL markets that LFCs grew in as well as in taking markets from other legacies.
THE ONLY WAY THAT THE LEGACY CARRIERS HAVE A FUTURE IS TO GROW THEIR NETWORKS at least as fast as their naturally rising costs– THE SAME WAY THE LFCS HAVE DONE. UA IS IN ABSOLUTELY THE WORSE POSITION TO DO THAT. FURTHER, DL’S FOCUS ON GROWING NYC AND THE WEST COAST ABSOLUTELY DESTABILIZES UA PRECISELY WHEN THEY MOST NEED STABILITY – AND AA RECOGNIZES THE ABILITY TO DO THE SAME THING. UA MUST ADDRESS THAT STRATEGIC WEAKNESS OR THEY WILL DRAMATICALLY SHRINK – LIKELY IN ANOTHER BK WHICH WILL NOT BE MATCHED BY AA OR DL – IN THE NEXT FEW YEARS.
AA and UA have traded market leadership back and forth for years but AA has the advantage now and it is hard to see UA regaining it without a BK or dramatic downsizing and redeployment of assets.
UA’s strongest markets which have also been some of the least competitive are under attack and not only does UA not have the right assets to fight back but they have the highest costs.
If you really want to know where DL should spend $5B, then they should sit around for a couple years and wait for UA to implode which is absolutely what will happen if they don’t turn their ship around very quickly. With $5B, DL could have a whole ‘nother terminal at LAX and hubs at ORD, IAH, and IAD and still spit back more than enough to keep regulators happy.
DL is pushing the conflict with AS because it highlights DL’s need for feed at SEA but don’t mistake for a minute that DL recognizes that UA is vulnerable and the solution to DL’s need for assets on the west coast could well come from UA.
BTW, UA is currently cancelling 50+ mainline flights/day apparently due to pilot staffing issues.
Happy New Year to each of you and esp. you, Dawg and Frugal!
