Dave Siegel - Aero Club of Washington
Remarks of David Siegel
President and CEO, US Airways
Aero Club of Washington
October 28, 2003
Good afternoon, and thanks for the kind introduction.
The last time I spoke to a major aviation group here in our home town, I raised a few eyebrows when I poked fun at another airline CEO, comparing him to Dr. Evil. But what the heck – I was due a little levity. We had just filed for bankruptcy protection a month before. I had been out on two rounds of grueling, emotional employee road shows. We had just completed labor negotiations and had those deals ratified by nine different work groups. The summer of 2002 was long and hot in more ways than one.
But today, I promise to strike a more sober, statesmanlike tone -- to be more "visionary," as it were. As most of you here today know, it’s not all that hard to be a "visionary" in the aviation business -- since there’s pretty much a 50-50 chance that almost any prediction will prove true. The real challenge is to be a profit-making visionary.
Five years ago, there were some basic assumptions about the U.S. airline industry. Southwest had carved out its niche, and then these assumptions – I will call them "Unassailable Truths" – applied to the rest of us. Things like:
A true national airline needs to be ubiquitous, flying to nearly all 50 states; or
You can't run a profitable airline without a hub-and-spoke system, or;
Business travelers will never fly in the cheap seats.
Sometimes it seems that Unassailable Truth in the airline business means practically any notion that:
(a) can't be readily proven false in the short run,
(B) is simple enough to be widely understood, even by consultants,
© is repeated often and authoritatively in snappy sound bites, and
(d) serves the proponent's self-interest. (This is Washington, after all . . . .)
Today's Unassailable Truth is that the network airlines are dead. Kaput. Walking corpses. Jamie Baker at JPMorgan goes so far as to say that the low-cost carriers will "inherit the earth." At least one aviation leader in Congress has called us "dinosaurs" facing extinction. (Frankly, calling me a dinosaur is one of the nicer references that have been made about me recently…)
The cause of the major carrier demise? Take your pick: new consumer access to competitive fare information via the internet, business traveler refusal or inability to pay business fares, overall economic downturn, lingering fear of terrorism, so-called "commoditization" of air travel, stubborn fixed costs and uncontrollable cost increases and – my personal favorite, "myopic airline management." Most of the cause, however, is the evolution of the low-cost airlines – from pesky upstarts a decade ago to world-beating dragon-slayers that some say are destined to relegate the nation's airline networks to the dustbin of aviation history.
There is no question that the low-cost carriers have arrived – in force – and that their remarkable success poses the toughest competitive challenge ever faced by the U.S. "major" airline industry. Today these airlines are much stronger than a decade ago, and they are getting bigger and stronger every day. Meanwhile, the market capitalization of relatively diminutive JetBlue (with some four dozen single-aisle airplanes and no international operations) is approximately double the equity market value of the world's largest carrier, American Airlines. And these carriers are raising capital and attracting new investors.
LCC market share has grown with phenomenal speed, and today accounts for a third of all mainline departures. With more than 20% of domestic revenues, these airlines are growing and buying new aircraft at an amazing rate. Within three years, they'll operate more than 1,000 aircraft -- nearly 40% of all mainline U.S. commercial flights.
This means that just the LCC aircraft additions in the next three years will rival all of US Airways' current fleet. And, as everyone knows, Southwest Airlines is already the nation's biggest airline in terms of passengers flown. These carriers are clearly doing something right, as they continue to draw traffic and revenues away from the traditional hub-and-spoke airlines.
On the other hand, not everyone agrees with the Unassailable Truth as to the imminent demise of the network carriers. That includes Wall Street, where the Amex Airline index has nearly doubled since the major fighting in Iraq has ended. Some major airline officials – said to be pitifully "in denial" – argue essentially that what the network airlines really need to do is simply wait for the overall U.S. economy to improve, cut their workforces, pare aircraft capacity, and just "hold the line" until things "turn up" in an inevitable cyclical industry recovery.
Before we dismiss this notion as hare-brained optimism worthy of Dickens' Mr. Micawber (and remember, he too ended up in bankruptcy), let's recall that only five years ago, the Unassailable Truth of the day was that the low-cost "new entrant" carriers (except Southwest) had been driven from the marketplace, never again to emerge as even a modest competitive force. Remember the hand-wringing at DOT and the Justice Department at the time, which led to the unsuccessful predatory pricing case against American Airlines? The way things are going, the predators in this industry are the low-cost carriers who are eating the carcasses that the rest of us are leaving behind.
Then there is of course a third view. This is the "coexistence" or "can't we all just get along" theory of predicted airline industry structure. The idea here is that there is room in today's aviation marketplace for both network airlines and the new breed of aggressive low-cost carriers. On this theory, the legacy carriers offer business travelers the lounges, upgrades, higher frequencies, and international services they want, while the low-cost carriers come to dominate most shorter-haul services and high density point-to-point markets, and capture the bulk of leisure traffic.
You've got to appreciate those who are trying to find some overarching meaning in – or just make some sense of – today's aviation industry. But I'm frankly just not sure we can do so quite yet. This industry has been buffeted by so many cross-winds and downdrafts over just the last few years that it is nowhere near an equilibrium state that will permit a meaningful set of predictions and prescriptions for the future. So I'll happily leave it to the pundits and other "visionaries" to decide who will ultimately win the industry business model championship.
To my mind, there are more important questions for the U.S. network airline industry today: How do we adapt to the new realities of the marketplace and can we frankly recognize and effectively respond to the changed expectations and needs of our customers? How do we learn and borrow from the strengths of the low-cost carrier business model? At the same time, how can we better focus on what we do best, and build on our own strengths and the value we provide to the nation's travelers and the global transportation system?
We need to start by looking squarely, not defensively, at these new and changing marketplace realities. And we need to try to understand them from the standpoint not only of our own airline businesses, but from the perspective of our customers and the nation's travelers. They're not really very difficult to discern.
First, business travel as we knew it in the go-go dot.com era is not coming back – not quickly, not ever. People just don't want to hop on the next flight as they did in the 1990s. We all know the reasons. The airport "hassle factor." Terrorism fears. The perceived degradation of the air travel experience with crowded planes, less food and longer check-in lines. The growing availability of telephonic or video "substitutes" for "being there." Whatever the reason, the FAA predicts that we won't return to pre-9/11 traffic levels until 2006, at the earliest.
Second, fares are not returning to the levels of three years ago. We're still in an economic downturn, and travelers, armed with instantaneous "perfect knowledge" of every competing price option via the Internet, continue to resist paying premium fares that are high multiples of economy class costs. And the fact is that average prices continue to drop -- up to 60-70% in numerous key markets -- in response to the proliferation of low-cost carrier fares.
Third, the price/value equation has been turned on its head for many travelers.
In fact, the low-cost carriers are not always the low-fare carriers in the market. Book a seven day advance roundtrip from Washington to Fort Lauderdale, morning departure and morning return, and you will find that US Airways has lower fares available for flights to and from Reagan National than on some other low-cost operators out of Dulles or BWI. Checking last week for an October 31 outbound and a November 2 return, we had a roundtrip fare of $164. Compare that to $248 on JetBlue from Dulles, or $300 on Southwest out of BWI. Similarly, a recent DOT study found that people were at times even willing to pay a premium to fly on low-cost carriers. – more than 15% more to fly JetBlue from New York to Florida than to take "full-service" Delta, with all of its amenities, its frequent flier program, access to airport lounges, branded credit cards, international alliances, and meal service.
This suggests something pretty significant about the needs and desires of travelers, at least leisure travelers. It suggests that the problem for the legacy carriers is not so much that today's travelers increasingly see air travel as a commodity, where the choice of provider is dictated predominantly, if not exclusively, by price. Rather, those customers are getting more of what they want -- be it seatback TV's, simpler fares, new planes, overall a better travel experience – on the low-cost carrier. Again, business travelers may well have a different view, and there's little empirical evidence of customer attitudes. But the implications are unsettling for the network airlines.
Simply recognizing these realities hasn't been easy for a network airline industry simultaneously buffeted by 9/11, rising taxes and fees, economic doldrums, fuel spikes, and new regulatory requirements. Responding to them effectively will prove even tougher. But effective response starts with less focus on who's winning and who's losing, and more on some first-order issues: What do customers want, and how can we give it to them? What needs to change, and how do network carriers play to their strengths and minimize their weaknesses?
First, traditional airlines need to acknowledge the profound nature of the challenges they face in today's environment. This seems pretty obvious, but some are still looking for the "quick fix" – for example, the airline-within-an airline, or "less-room-in-coach," or the new "elite-for-a-day" marketing. These just aren't panaceas. Not close.
Second, the network carriers need to learn from their LCC competitors, borrowing what they can. Perhaps most significantly, they have established a simple set of customer expectations – and then they meet them. The network carriers, in trying to be all things to all people, have done just the opposite. We are a full-service airline. We are a high-frequency airline. We are a no-frills airline. We are a business traveler airline. We are a cheap fares airline. No, we don’t have Sybil and her 15 sisters running our marketing departments – but in trying to attract every possible customer, we have developed a set of schizophrenic expectations, many in conflict with one another. And since we can’t tell which expectation you might have when you come to the airport tomorrow, we are setting ourselves up for customer frustration for not meeting expectations.
Most important, though, the U.S. network airlines need to find a way to better exploit the great strengths and structural advantages that made them the world's aviation leaders for more than a half century. Given their decided cost disadvantages, the major airlines really have no choice. As a group, the U.S. network carriers had operating costs some 60% higher than their low-cost competitors, according to DOT data for fourth quarter 2002.
By leveraging our networks and participating in global alliances, the traditional carriers are uniquely positioned to offer high-frequency long-haul international service – from anywhere to literally anywhere on the globe. Over the long term, the forecasted demand for international service has been greater than predicted for domestic services. New international market opportunities continue to present themselves, as a result of the ongoing process of liberalization of international traffic rights and the expansion and maturation of integrated international alliances. Most recently, we've seen stunning new technologies making possible longer and longer nonstop flights on "thinner" routes, including ultra long haul transpacific routes.
Counterbalancing these network airline advantages, of course, is the core issue of cost. Building and maintaining hubs is a massively costly endeavor. So is meeting a payroll of thousands of dedicated, long-time employees. Given their dramatic cost differential in relation to their LCC competitors, the network carriers will need to do more than exploit their existing strengths in high-frequency, network and international service. Network carriers will need to find a new cost paradigm, one based on competitive levels of productivity and smarter ways of managing across every element of our business.
Again, I don't have all the answers, but I do sense that increased cooperation, coordination, and potentially consolidation between and among network airlines must be another source of strength through enhanced efficiencies, in both marketing and operations. In the domestic sphere, there has already been significant code-sharing cooperation among combinations of nearly every major U.S. airline – a positive step from the standpoint of both marketing efficiency and customer convenience.
Internationally, each of the U.S. network airlines has begun to integrate more fully within the three primary global alliances, and we are likely to see further initiatives to coordinate within these worldwide structures, hopefully under the umbrella of U.S. antitrust immunity. These alliances have proven to stimulate travel, reduce average fares and provide real convenience to international travelers demanding a more "seamless" travel experience. Hopefully, government competition regulators will recognize that the new competitive market realities, including the dramatic rise of the LCC sector, have dramatically changed the context for judging the benefits and risks of inter-carrier cooperation and coordination.
Other forms of inter-carrier cooperation – including partnering between LCC's and network carriers – may also be on the horizon. For example, why shouldn't the major U.S. international airlines cooperate with LCC's to feed their international – or even long-haul domestic – services? For that matter, why not bring LCC's into the major carrier frequent flier programs or other marketing efforts? Looking around this room, I'm sure there are some who can come up with even stranger ideas. You know who you are. See me at the door before you leave.
All of these changes are necessary for the survival of legacy carriers. Ultimately, we have to do more than survive. We have to succeed. And to that in this very challenging environment will require legacy airlines to think of themselves as entrepreneurial market stimulators and innovators, not just dinosaurs "on the defensive" seeking to "recapture" lost market share. We all have our respective sets of assets. But whether it be powerful hubs at Chicago and Atlanta, privileged positions at London Heathrow or Narita, slots and gates at Washington National or LaGuardia, or tens of millions of loyal frequent flyers – if we can’t make money with the assets, some other more efficient, creative airline will. That very same principle is why Wal-Mart has replaced Woolworth’s, and Canon has replaced Polaroid.
The current turmoil in aviation is likely to have some profound implications for the future shape of the airline industry here and around the world. For one thing, we're likely to see a convergence of the two predominant airline business models, rather than the "extinction" of any one business model. In some ways, the LCC's are starting to look like the majors. JetBlue, AirTran, and other LCC's are touting their "frills" such as TV and leather seats, and several LCC's are now flying long-haul transcontinental routes, with multiple daily frequencies.
Conversely, the major network airlines are dropping meal service on many routes, eliminating some first class cabins, and taking initial steps toward simplifying business pricing. Many are emphasizing Internet ticket distribution. Most obvious, some major carriers are directly emulating the LCC formula with their own LCC subsidiaries. Ultimately, however, the old guard airlines like US Airways are going to have to completely change the way we do business. Our Chapter 11 reorganization was designed to give our airline a second chance at life. We succeeded at one level, but we are certainly not done restructuring.
We have to deal with the new realities of the marketplace and the meet the demands and expectations of our customers. Which is why I will leave you with one prediction: sooner than we think, carriers with JetBlue’s cost structure will operate the principal aviation assets of this country. Whether it is with the employees of the incumbent legacy carriers or with JetBlue’s employees is the question.
I took this job 18 months ago knowing it would be a challenge. It certainly has been so far, and it likely will be for some time to come. As we chart our plan moving forward, I am going to heed the wisdom of the 19th century naturalist, Charles Darwin, who wrote in The Origin of Species: “It is not the strongest of the species that survive, nor the most intelligent, but the ones who are most responsive to change.â€
Remarks of David Siegel
President and CEO, US Airways
Aero Club of Washington
October 28, 2003
Good afternoon, and thanks for the kind introduction.
The last time I spoke to a major aviation group here in our home town, I raised a few eyebrows when I poked fun at another airline CEO, comparing him to Dr. Evil. But what the heck – I was due a little levity. We had just filed for bankruptcy protection a month before. I had been out on two rounds of grueling, emotional employee road shows. We had just completed labor negotiations and had those deals ratified by nine different work groups. The summer of 2002 was long and hot in more ways than one.
But today, I promise to strike a more sober, statesmanlike tone -- to be more "visionary," as it were. As most of you here today know, it’s not all that hard to be a "visionary" in the aviation business -- since there’s pretty much a 50-50 chance that almost any prediction will prove true. The real challenge is to be a profit-making visionary.
Five years ago, there were some basic assumptions about the U.S. airline industry. Southwest had carved out its niche, and then these assumptions – I will call them "Unassailable Truths" – applied to the rest of us. Things like:
A true national airline needs to be ubiquitous, flying to nearly all 50 states; or
You can't run a profitable airline without a hub-and-spoke system, or;
Business travelers will never fly in the cheap seats.
Sometimes it seems that Unassailable Truth in the airline business means practically any notion that:
(a) can't be readily proven false in the short run,
(B) is simple enough to be widely understood, even by consultants,
© is repeated often and authoritatively in snappy sound bites, and
(d) serves the proponent's self-interest. (This is Washington, after all . . . .)
Today's Unassailable Truth is that the network airlines are dead. Kaput. Walking corpses. Jamie Baker at JPMorgan goes so far as to say that the low-cost carriers will "inherit the earth." At least one aviation leader in Congress has called us "dinosaurs" facing extinction. (Frankly, calling me a dinosaur is one of the nicer references that have been made about me recently…)
The cause of the major carrier demise? Take your pick: new consumer access to competitive fare information via the internet, business traveler refusal or inability to pay business fares, overall economic downturn, lingering fear of terrorism, so-called "commoditization" of air travel, stubborn fixed costs and uncontrollable cost increases and – my personal favorite, "myopic airline management." Most of the cause, however, is the evolution of the low-cost airlines – from pesky upstarts a decade ago to world-beating dragon-slayers that some say are destined to relegate the nation's airline networks to the dustbin of aviation history.
There is no question that the low-cost carriers have arrived – in force – and that their remarkable success poses the toughest competitive challenge ever faced by the U.S. "major" airline industry. Today these airlines are much stronger than a decade ago, and they are getting bigger and stronger every day. Meanwhile, the market capitalization of relatively diminutive JetBlue (with some four dozen single-aisle airplanes and no international operations) is approximately double the equity market value of the world's largest carrier, American Airlines. And these carriers are raising capital and attracting new investors.
LCC market share has grown with phenomenal speed, and today accounts for a third of all mainline departures. With more than 20% of domestic revenues, these airlines are growing and buying new aircraft at an amazing rate. Within three years, they'll operate more than 1,000 aircraft -- nearly 40% of all mainline U.S. commercial flights.
This means that just the LCC aircraft additions in the next three years will rival all of US Airways' current fleet. And, as everyone knows, Southwest Airlines is already the nation's biggest airline in terms of passengers flown. These carriers are clearly doing something right, as they continue to draw traffic and revenues away from the traditional hub-and-spoke airlines.
On the other hand, not everyone agrees with the Unassailable Truth as to the imminent demise of the network carriers. That includes Wall Street, where the Amex Airline index has nearly doubled since the major fighting in Iraq has ended. Some major airline officials – said to be pitifully "in denial" – argue essentially that what the network airlines really need to do is simply wait for the overall U.S. economy to improve, cut their workforces, pare aircraft capacity, and just "hold the line" until things "turn up" in an inevitable cyclical industry recovery.
Before we dismiss this notion as hare-brained optimism worthy of Dickens' Mr. Micawber (and remember, he too ended up in bankruptcy), let's recall that only five years ago, the Unassailable Truth of the day was that the low-cost "new entrant" carriers (except Southwest) had been driven from the marketplace, never again to emerge as even a modest competitive force. Remember the hand-wringing at DOT and the Justice Department at the time, which led to the unsuccessful predatory pricing case against American Airlines? The way things are going, the predators in this industry are the low-cost carriers who are eating the carcasses that the rest of us are leaving behind.
Then there is of course a third view. This is the "coexistence" or "can't we all just get along" theory of predicted airline industry structure. The idea here is that there is room in today's aviation marketplace for both network airlines and the new breed of aggressive low-cost carriers. On this theory, the legacy carriers offer business travelers the lounges, upgrades, higher frequencies, and international services they want, while the low-cost carriers come to dominate most shorter-haul services and high density point-to-point markets, and capture the bulk of leisure traffic.
You've got to appreciate those who are trying to find some overarching meaning in – or just make some sense of – today's aviation industry. But I'm frankly just not sure we can do so quite yet. This industry has been buffeted by so many cross-winds and downdrafts over just the last few years that it is nowhere near an equilibrium state that will permit a meaningful set of predictions and prescriptions for the future. So I'll happily leave it to the pundits and other "visionaries" to decide who will ultimately win the industry business model championship.
To my mind, there are more important questions for the U.S. network airline industry today: How do we adapt to the new realities of the marketplace and can we frankly recognize and effectively respond to the changed expectations and needs of our customers? How do we learn and borrow from the strengths of the low-cost carrier business model? At the same time, how can we better focus on what we do best, and build on our own strengths and the value we provide to the nation's travelers and the global transportation system?
We need to start by looking squarely, not defensively, at these new and changing marketplace realities. And we need to try to understand them from the standpoint not only of our own airline businesses, but from the perspective of our customers and the nation's travelers. They're not really very difficult to discern.
First, business travel as we knew it in the go-go dot.com era is not coming back – not quickly, not ever. People just don't want to hop on the next flight as they did in the 1990s. We all know the reasons. The airport "hassle factor." Terrorism fears. The perceived degradation of the air travel experience with crowded planes, less food and longer check-in lines. The growing availability of telephonic or video "substitutes" for "being there." Whatever the reason, the FAA predicts that we won't return to pre-9/11 traffic levels until 2006, at the earliest.
Second, fares are not returning to the levels of three years ago. We're still in an economic downturn, and travelers, armed with instantaneous "perfect knowledge" of every competing price option via the Internet, continue to resist paying premium fares that are high multiples of economy class costs. And the fact is that average prices continue to drop -- up to 60-70% in numerous key markets -- in response to the proliferation of low-cost carrier fares.
Third, the price/value equation has been turned on its head for many travelers.
In fact, the low-cost carriers are not always the low-fare carriers in the market. Book a seven day advance roundtrip from Washington to Fort Lauderdale, morning departure and morning return, and you will find that US Airways has lower fares available for flights to and from Reagan National than on some other low-cost operators out of Dulles or BWI. Checking last week for an October 31 outbound and a November 2 return, we had a roundtrip fare of $164. Compare that to $248 on JetBlue from Dulles, or $300 on Southwest out of BWI. Similarly, a recent DOT study found that people were at times even willing to pay a premium to fly on low-cost carriers. – more than 15% more to fly JetBlue from New York to Florida than to take "full-service" Delta, with all of its amenities, its frequent flier program, access to airport lounges, branded credit cards, international alliances, and meal service.
This suggests something pretty significant about the needs and desires of travelers, at least leisure travelers. It suggests that the problem for the legacy carriers is not so much that today's travelers increasingly see air travel as a commodity, where the choice of provider is dictated predominantly, if not exclusively, by price. Rather, those customers are getting more of what they want -- be it seatback TV's, simpler fares, new planes, overall a better travel experience – on the low-cost carrier. Again, business travelers may well have a different view, and there's little empirical evidence of customer attitudes. But the implications are unsettling for the network airlines.
Simply recognizing these realities hasn't been easy for a network airline industry simultaneously buffeted by 9/11, rising taxes and fees, economic doldrums, fuel spikes, and new regulatory requirements. Responding to them effectively will prove even tougher. But effective response starts with less focus on who's winning and who's losing, and more on some first-order issues: What do customers want, and how can we give it to them? What needs to change, and how do network carriers play to their strengths and minimize their weaknesses?
First, traditional airlines need to acknowledge the profound nature of the challenges they face in today's environment. This seems pretty obvious, but some are still looking for the "quick fix" – for example, the airline-within-an airline, or "less-room-in-coach," or the new "elite-for-a-day" marketing. These just aren't panaceas. Not close.
Second, the network carriers need to learn from their LCC competitors, borrowing what they can. Perhaps most significantly, they have established a simple set of customer expectations – and then they meet them. The network carriers, in trying to be all things to all people, have done just the opposite. We are a full-service airline. We are a high-frequency airline. We are a no-frills airline. We are a business traveler airline. We are a cheap fares airline. No, we don’t have Sybil and her 15 sisters running our marketing departments – but in trying to attract every possible customer, we have developed a set of schizophrenic expectations, many in conflict with one another. And since we can’t tell which expectation you might have when you come to the airport tomorrow, we are setting ourselves up for customer frustration for not meeting expectations.
Most important, though, the U.S. network airlines need to find a way to better exploit the great strengths and structural advantages that made them the world's aviation leaders for more than a half century. Given their decided cost disadvantages, the major airlines really have no choice. As a group, the U.S. network carriers had operating costs some 60% higher than their low-cost competitors, according to DOT data for fourth quarter 2002.
By leveraging our networks and participating in global alliances, the traditional carriers are uniquely positioned to offer high-frequency long-haul international service – from anywhere to literally anywhere on the globe. Over the long term, the forecasted demand for international service has been greater than predicted for domestic services. New international market opportunities continue to present themselves, as a result of the ongoing process of liberalization of international traffic rights and the expansion and maturation of integrated international alliances. Most recently, we've seen stunning new technologies making possible longer and longer nonstop flights on "thinner" routes, including ultra long haul transpacific routes.
Counterbalancing these network airline advantages, of course, is the core issue of cost. Building and maintaining hubs is a massively costly endeavor. So is meeting a payroll of thousands of dedicated, long-time employees. Given their dramatic cost differential in relation to their LCC competitors, the network carriers will need to do more than exploit their existing strengths in high-frequency, network and international service. Network carriers will need to find a new cost paradigm, one based on competitive levels of productivity and smarter ways of managing across every element of our business.
Again, I don't have all the answers, but I do sense that increased cooperation, coordination, and potentially consolidation between and among network airlines must be another source of strength through enhanced efficiencies, in both marketing and operations. In the domestic sphere, there has already been significant code-sharing cooperation among combinations of nearly every major U.S. airline – a positive step from the standpoint of both marketing efficiency and customer convenience.
Internationally, each of the U.S. network airlines has begun to integrate more fully within the three primary global alliances, and we are likely to see further initiatives to coordinate within these worldwide structures, hopefully under the umbrella of U.S. antitrust immunity. These alliances have proven to stimulate travel, reduce average fares and provide real convenience to international travelers demanding a more "seamless" travel experience. Hopefully, government competition regulators will recognize that the new competitive market realities, including the dramatic rise of the LCC sector, have dramatically changed the context for judging the benefits and risks of inter-carrier cooperation and coordination.
Other forms of inter-carrier cooperation – including partnering between LCC's and network carriers – may also be on the horizon. For example, why shouldn't the major U.S. international airlines cooperate with LCC's to feed their international – or even long-haul domestic – services? For that matter, why not bring LCC's into the major carrier frequent flier programs or other marketing efforts? Looking around this room, I'm sure there are some who can come up with even stranger ideas. You know who you are. See me at the door before you leave.
All of these changes are necessary for the survival of legacy carriers. Ultimately, we have to do more than survive. We have to succeed. And to that in this very challenging environment will require legacy airlines to think of themselves as entrepreneurial market stimulators and innovators, not just dinosaurs "on the defensive" seeking to "recapture" lost market share. We all have our respective sets of assets. But whether it be powerful hubs at Chicago and Atlanta, privileged positions at London Heathrow or Narita, slots and gates at Washington National or LaGuardia, or tens of millions of loyal frequent flyers – if we can’t make money with the assets, some other more efficient, creative airline will. That very same principle is why Wal-Mart has replaced Woolworth’s, and Canon has replaced Polaroid.
The current turmoil in aviation is likely to have some profound implications for the future shape of the airline industry here and around the world. For one thing, we're likely to see a convergence of the two predominant airline business models, rather than the "extinction" of any one business model. In some ways, the LCC's are starting to look like the majors. JetBlue, AirTran, and other LCC's are touting their "frills" such as TV and leather seats, and several LCC's are now flying long-haul transcontinental routes, with multiple daily frequencies.
Conversely, the major network airlines are dropping meal service on many routes, eliminating some first class cabins, and taking initial steps toward simplifying business pricing. Many are emphasizing Internet ticket distribution. Most obvious, some major carriers are directly emulating the LCC formula with their own LCC subsidiaries. Ultimately, however, the old guard airlines like US Airways are going to have to completely change the way we do business. Our Chapter 11 reorganization was designed to give our airline a second chance at life. We succeeded at one level, but we are certainly not done restructuring.
We have to deal with the new realities of the marketplace and the meet the demands and expectations of our customers. Which is why I will leave you with one prediction: sooner than we think, carriers with JetBlue’s cost structure will operate the principal aviation assets of this country. Whether it is with the employees of the incumbent legacy carriers or with JetBlue’s employees is the question.
I took this job 18 months ago knowing it would be a challenge. It certainly has been so far, and it likely will be for some time to come. As we chart our plan moving forward, I am going to heed the wisdom of the 19th century naturalist, Charles Darwin, who wrote in The Origin of Species: “It is not the strongest of the species that survive, nor the most intelligent, but the ones who are most responsive to change.â€
