BOS-TPA ?

[WorldTraveler]

Josh,
Glad you enjoyed the article. What isn’t said is that BOS and Massport continue to struggle with the reality that they aren’t going to be a hub or large focus city for a network carrier which means they will have plenty of domestic passengers because of B6’s activity alongside the hub operations for the US network carriers and they will attract foreign carriers because BOS is a rich market. However, BOS is at a geographic disadvantage in being a hub, precisely the type of operation where the network carriers succeed against low fare carriers and BOS has little network carrier hub potential, esp. because BOS has to compete with EWR, LGA, JFK, PHL, DCA, and IAD in the NE as hubs for network carriers. When you also consider that the TATL market is heavily fragmented with gateways throughout the eastern US, the geographic benefit of BOS at the “corner” of the US for TATL flights is mitigated.

Bears,
You always manage to ask the most probing questions and bring up the most strategically significant points and the question of BOS-TPA is no exception. I commend you for your ability to get to the key issues in the industry. Great question and great opportunity to once again discuss the key factors that have shaped the industry and will continue to do so.
No, DL doesn’t serve those BOS area regional airports to Florida nonstop and neither do other legacy carriers.
As you probably know, DL and US were both very focused on serving point to point leisure-oriented flights to/from Florida prior to 9/11. Both had low fare carrier strategies and like CO and UA, had carrier-within-carrier strategies that attempted to go after low fare carriers, in part because each of these legacy carriers saw low fare carriers as a threat to their networks and history shows that concern did have basis in reality. AA is the only remaining legacy carrier that didn’t aggressively pursue low fare carrier strategies but AA also did not fly near as much point to point, non-hub domestic leisure routes as other carriers.
As each carrier in the industry went thru BK, each emerged with the realization then or later that carrier- within- carrier strategies don’t work but also that it isn’t necessary to try to fly point to point routes that add little value to the network. Network/legacy carrier strengths are in their hubs and their int’l operations and that is where each of them have increased their presence post BK; in contrast, they are most vulnerable to low fare carriers trying to fly point-to-point leisure-oriented routes.
DL and US both dropped most of their NE-Florida non-hub routes and have refocused their network on their hubs which have much stronger business traffic and profit potential. US also pulled down LAS.
The difference comes that US said that it couldn’t make money with the scores of slots it had at LGA which it used to fly non-hub flights. DL believed it could and the reason may well have been that DL was larger and defined LGA and JFK as key to its network in part because of the partial value it gained with the Pan Am asset purchase, even if that potential was limited for more than a decade as AA and DL basically were content not to step on each other’s toes and had their complementary but separate NYC market strengths. Post BK and with the slot deal, DL decided it was going to break the AA-DL duopoly at NYC and go after every market from NYC that it could successfully fly regardless of who was in them.
US, as a smaller airline, chose markets where its smaller size gave it the potential to make money; DCA and PHL, where US has great historical strength, were exactly those kinds of markets. From a profitability standpoint, it is far better to dominate a smaller market than to unsuccessfully fight with other competitors to maintain a presence in much larger markets which is what some US legacy carriers have done.
But DL and US’ withdrawal from non-hub leisure flying also reveals a couple key strategic considerations. DL and US have both been successful at stopping WN from growing in their key hubs at ATL and PHL. DL and US have defined that they won’t allow low fare carriers from growing in their hubs but they have also given those LFCs room to grow elsewhere as they have pulled back their leisure flying to their hubs. DL and US have been far more profitable than their network carrier peers AA and UA who have continued to reduce their presence in key markets such as NYC and DEN where low fare carriers are also aggressively competing. B6 just reported its financial results today and they show that B6’s revenues are being pressured in its key JFK market by DL’s growing presence at both LGA and JFK. US apparently manages to successfully coexist with WN at PHX just as DL does with WN at SLC.
DL and US’ restructurings after BK also highlight that both learned that you have to decide to drop flying to places where you can’t make money and also stick to where you have a chance of protecting your markets against competitors. The UA merger has shown that generating new revenues and getting costs out as part of the promised synergies are much easier to claim in merger presentations than they are several years after the ink on the merger documents has dried.
So, Bears, there is a very good chance that you won’t see another network carrier on BOS-TPA for a long time to come and it is also possible that the future of non-hub leisure point-to-point flying throughout the US will be with low fare carriers and not with the legacies. For those low fare carriers that continue to find the right markets, there will be the opportunity to manage costs thru growth, something that LFCs have long been able to do better than legacy carriers. But for those legacies like DL and US that have been able to successfully redeploy their assets and leave markets that don’t make strategic or financial sense, there is a bright future. For those carriers that continue to struggle with maintaining their presence and revenues in key industry markets, and the list does not include just legacy carriers, the future remains cloudy. The industry will continue to evolve as assets are placed in the hands of those who can maximize profits using those assets, something the airline industry has historically done a poor job of doing. Grow comfortable with the idea that much of your non-hub domestic air service in New England will come from LFCs while successful legacies will strengthen their presence in key hubs, including in NYC, PHL, and WAS which have better geographic potential over BOS.

 

[Silver Meteor]

WT...very good analysis. (I know...one person in particular on this board says I only come on this board when I compliment you. Probably true.)

Two things...first of all, in the past you have been saying Jetblue is going to be seeing profit pressures do to DL at JFK and also maintance. Looks like that is happening.

Also, can you post here, or on the UA board, comments on UA's 2nd quarter results. Would like to hear your take.

 

[Glenn Quagmire]

Very creepy to have a sputtering gray meteorite fall from the sky to compliment WT.

 

[WorldTraveler]

Thanks for your comments, Silver.
I have never considered my role here on this forum to coddle and affirm anyone with my focus instead on pointing out the truth. Truth is not welcome to some people since it has a tendency to blow up their carefully-nurtured sacred cows.
Oh well… we must carry on… sacred cows or not.

B6 has had great run as a startup but they are facing the same issues that every maturing airline faces…. Their equipment starts to need maintenance, their people reach the top of the scale and also start to face significant medical expenses just like most people do with time, and most significantly, competitors figure out how to “crack the code” that has made the startup successful. IN B6’s case, they succeeded at JFK largely because they did not have a serious and capable competitor. DL’s BK allowed it to lower its costs and increase its ability to compete sufficiently that B6’s honeymoon came to an end. The slot swap further challenged B6 as DL was able to add significant number of flights at LGA in B6’s top markets and essentially duplicate a lot of the connectivity at LGA and increased aircraft size with the advantage that LGA has over JFK due to its proximity to Manhattan.

As for UA, the analysts were not terribly kind to their execs on their earnings call if you have read the transcript (which is available at Seeking Alpha if you have not.) Two big themes worried the analysts and UA mgmt wasn’t very successful in convincing them to put away their concerns. Several years into the merger, UA still has struggled to get the benefits from the merger. UA and CO were both high performing airlines from a revenue standpoint before the merger but they also each dominated their own hubs and didn’t have a whole lot of strength in secondary and tertiary markets – very different from the way AA, DL, NW, and US’ networks have worked. The well-documented integration issues haven’t helped. Add in that mergers are expensive and labor has always looked for the opportunity to gain when mergers are announced, and UA has still yet to resolve many of the merger-related cost items – and the tab keeps growing. Their latest quarterly results show they now have an 8% cost disadvantage to DL and 4% to AA – not a terribly comforting position to be in. As you may be aware, UA is getting more aggressive at cutting staff and outsourcing, which further alienates their best customers who have to access UA services thru a much wider array of contract carriers and handling companies than for other network carriers. Growing costs and revenues that aren’t were the big themes for the analysts. Less mentioned on the conference call but noted elsewhere is that UAL has a lot of debt maturities coming up in the next few years even as they ramp up spending as part of their pretty aggressive fleet replacement strategy.
It was also interesting to note in UA’s earnings call that “Delta does this” was mentioned more than once. It is “acceptable” to perform in a certain way if all of the industry does the same thing. The challenge for UA right now and potentially other carriers down the road is that DL isn’t operating the same way other carriers have done or are doing now. DL is managing to continue to grow revenues, in part because they are finding new markets to grow into where they have good potential to grow high value revenues. NYC was that for DL for the past five years and the focus is now shifting to the west coast, primarily int’l from SEA but DL is also making more and more noise about intending to strengthen its position throughout the west –and they have added domestic markets as well. DL is also managing its balance sheet very different than other carriers; it is one thing for analysts to look at AS and WN and see that they have very healthy balance sheets compared to other network carriers but it is quite another when there are distinct differences in how DL is managing its balance sheet compared to AA, UA, and US. It is very uncomfortable for an exec to be quizzed by analysts as to why they can’t do what a major competitor does but it also highlights the expectation that analysts have that mergers should deliver the benefits that were promised and are comparable to what peers are obtaining.
UA’s work is cut out for them.
As much as some people here don't want to hear it, a big reason why the DL/NW merger was as successful as it was is due to DL's ability and decision to reallocate surplus assets that came from the merger (all mergers produce a certain amount of duplication) and use them to build NYC. DL had a once in a lifetime opportunity in front of them first by adding a whole lot bunch of slots at JFK just before the airport had 24 hr slot restrictions added and then again with the LGA-DCA slot swap that effectively locks DL into the position of being the largest carrier at both airports with almost no chance for change at either airport.
It is very hard to find additional revenues in a merger but DL "happened" to be able to do it at NYC at the same time that they needed to reallocate assets from MEM and CVG and DFW before the merger, each time as hub economics changed, in part due to rising fuel prices.
UA has yet to find that kind of revenue synergy or replacement revenue for capacity that has to be cut in order to force fares higher as part of the merger.


glad you joined the conversation.... stop in anytime. tomatoes are fine too.

 

[737823]

Josh,
Glad you enjoyed the article. What isn’t said is that BOS and Massport continue to struggle with the reality that they aren’t going to be a hub or large focus city for a network carrier which means they will have plenty of domestic passengers because of B6’s activity alongside the hub operations for the US network carriers and they will attract foreign carriers because BOS is a rich market. However, BOS is at a geographic disadvantage in being a hub, precisely the type of operation where the network carriers succeed against low fare carriers and BOS has little network carrier hub potential, esp. because BOS has to compete with EWR, LGA, JFK, PHL, DCA, and IAD in the NE as hubs for network carriers. When you also consider that the TATL market is heavily fragmented with gateways throughout the eastern US, the geographic benefit of BOS at the “corner” of the US for TATL flights is mitigated.

I don't get that sense. Obviously BOS won't be a major network carrier hub anytime soon, but apparently we are the largest MSA that is not home to a major network carriers hub. The area has household incomes well above the national average and our local economy is driven by bio tech, education, financial services, high tech, medical devices, and a healthy mix of tourism to the city, Cape and surrounding areas. jetBlue has a growing operation here of 100+ daily flights and several thousand local employees and it isn't uncommon for people to connect between jetBlue flights or onto their international partners (JL, LH, etc). The airport is also well served by the major legacies. Personally I think Massport has done a good job managing the airport and attracting new service. I'm on a first name basis with a member of their administrative staff and I think they recognize the airports roll in the region and have a good grasp of the airline industry in 2013.

Josh

 

[Silver Meteor]

As much as some people here don't want to hear it, a big reason why the DL/NW merger was as successful as it was is due to DL's ability and decision to reallocate surplus assets that came from the merger (all mergers produce a certain amount of duplication) and use them to build NYC. DL had a once in a lifetime opportunity in front of them first by adding a whole lot bunch of slots at JFK just before the airport had 24 hr slot restrictions added and then again with the LGA-DCA slot swap that effectively locks DL into the position of being the largest carrier at both airports with almost no chance for change at either airport.
It is very hard to find additional revenues in a merger but DL "happened" to be able to do it at NYC at the same time that they needed to reallocate assets from MEM and CVG and DFW before the merger, each time as hub economics changed, in part due to rising fuel prices.
UA has yet to find that kind of revenue synergy or replacement revenue for capacity that has to be cut in order to force fares higher as part of the merger.

This statement kind of says it all. I agree UA, and for that fact Southwest has not, or will be not be able, to accomplish something like this anywhere in the US...but I could be wrong. AA/US...the jury is still out...but I can not see something like this playing out for them either. Only time will tell.

With the out of the box thinking of the DL management...who knows what is the next thing down the road they will surprise us with. My personal opinion is when Brazil has open skies, they will slowly start beefing up Miami. Might be totally wrong, but just an observation.

 

[WorldTraveler]

Actually, Silver, I believe WN is very aware of the necessity to create new revenues, not just because of the merger but because that is what WN has long done and done well. B6 has demonstrated a clear understanding of the same principle that you must continue to grow revenues in part because costs continue to rise as employees become more senior and with inflation in general.

It is less clear where B6 will turn for its next domestic growth opportunities but they continue to grow to/from Latin America and the Caribbean where there is enormous untapped potential.

WN, OTOH, has significant domestic growth potential left. Not only will they work to continue to increase their presence in the key NE business markets but they also have a once-in-a-lifetime opportunity available to them with the opening of Love Field to long haul domestic traffic next year. They too also have enormous potential with the addition of Caribbean/Latin flying and perhaps have even more potential because WN’s route system is more heavily focused in the south and southwest.

I’m also not sure you can slight anyone for not coming up with a revenue-increasing opportunity as big as what DL had in NYC. DL was incredibly strategic thinking about 10 years ago in realizing that all 3 NYC airports were on the verge of becoming fully slot-controlled. If you remember, delays were horrific and some carriers were arguing that the number of slots should be reduced. CO and DL both aggressively added flights at LGA, JFK, and EWR and then had their growth essentially grandfathered in when slot controls were added at JFK and EWR. DL was equally as forward thinking in getting US to agree to the slot and terminal swap which cemented DL’s position at LGA and JFK and will make it very hard for anyone else to mount a real challenge to DL’s leadership. Thus, much of DL’s growth in revenue came as a result of their forward thinking and decisive moves regarding NYC but that growth also helped DL to reallocate assets and “provide the fuel” necessary to ensure the merger worked.

It is very hard to come up with the revenue benefits in a merger; note that DL promised $2B in revenue benefits when it merged with NW. I can’t remember the exact number from UA but I believe it was about $1.5B and now Parker has promised $1B. Obviously revenue benefits decrease as the industry consolidates and there are first-mover advantages but the types of networks DL and NW had compared to AA and US and CO and UA also made a big difference. CO and UA were both very strong in their hubs but had very little strength relatively speaking in spoke cities. It is a lot harder for UA to add anything to CO at EWR or for CO to add anything to UA at SFO above a simple addition of the revenue each already carried. Because CO had cooperated with NW, DL was able to shift a lot of revenue that was going to CO from NW over to DL. Also there were routes like JFK-NRT that had not worked for either DL or NW as a standalone companies. DL launched the route again and it very quickly became one of the highest revenue flights operated by a US carrier and DL also succeeded at moving quickly to the position of #1 US carrier between NYC and Japan. That was all revenue that other carriers had before the merger but DL gained. It is much harder to do that type of thing post merger and I’m not sure there are any examples that are comparable to DL JFK-NRT.

AA/US will likely benefit on the European continent because US has had strength there, partly related to Star and they should be able to retain some of that based on AA’s strength even with the loss of Star. Conversely, UA is going to lose revenue to S. America as a result of the movement of TAM of Brazil to oneworld. UA noted in their earnings call that deep S. America is already weak and I don’t think the codeshare has even ended. The growth of DL’s SEA operation also pressures UA at SFO who had the sole large US carrier presence other than to Japan from the west coast.

As for DL in S. America, the real criteria whether they enter MIA is whether there is a strategic necessity for them to be there and whether they can make money or not. MIA is highly unusual in that it is the only major gateway where there is only one US carrier providing all of the longhaul int’l service. Of course, UA was in MIA-S. America after buying Pan Am’s Latin operation until AA successfully drove them out years ago. Given that MIA also has an enormous local Latin population and a hub from within the US is not really necessary to support MIA-Latin America flights, it is probably likely that DL will add flights, if UA doesn’t. Given that DL has alliance partners with AeroMexico and Gol (who are also equity partners) and a partnership with Aerolineas Argentinas (even with all their issues), DL does have the ability to connect passengers beyond those markets to the rest of Latin America. Because DL has equity in AM and G3, they also have the ability to sit on the boards of those companies and receive very detailed financial information that no other US company can obtain since the US does not have Open Skies with Brazil or Mexico.

Yes, it is possible to gain revenue benefits from a merger but it is dependent on the networks of the two carriers involved but even more so based on local situations like the slot situations at LGA and JFK and the opening of Love Field to long haul traffic – but in many ways those things were going to happen, merger or not. Both events just happened close enough to mergers that it provides opportunities to make the mergers work better than otherwise might not have happened.