Two dimensions to this story:
As to the fuel component of the story, DL and UA are the only two airlines that report quarterly fuel price guiadance s as part of their monthly traffic reports. IN the most recent traffic report, DL’s expected price is 15 cents per gallon lower than UA’s. In the 4th quarter of 2013, for which all US airlines have reported fuel prices, DL had a fuel cost advantage over AA, UA, and WN but which only amounted to 2 to 4 cents.
If DL is really widening the gap in fuel prices between itself and other carriers – even if just UA – it marks a significant shift in the competitive landscape in the US airline industry – and augers a potential repeat of what WN was able to do about 10 years ago when WN was able to hold onto fuel hedges which other carriers had to let go of due to their weakened finances. WN significantly expanded its growth because of its fuel cost advantage.
It is not known if DL’s fuel cost advantage relative to UA will be just a DL-UA advantage or if DL is really beginning to reap the benefits of its enhanced fuel strategy of which Trainer is part. DL has said that Trainer is refining Bakken crude this quarter and that upgrades to the refinery would start increasing the output of jet fuel. DL still has hedges in place and has said they are paying off.
IIRC, Parker said (and someone correct me if I am wrong) that new AA would either quit hedging or dramatically reduce new AA’s hedging based on US’ ability to keep fuel prices close to or below industry average without hedging over the past five or so years. UA does still hedge as does WN and AS and other carriers.
If DL really does come up with a fuel price advantage of 15 cents or more per gallon, it translates into a cost advantage that could be as high as $500 million per year on an annual basis compared to AA or UA but proportionately just as significant relative to other carriers. That is a potentially enormous advantage that combined with DL’s already lower non-fuel CASM could provide the basis for DL to significantly grow its network.
Quarterly reports will be out in the next few weeks and the fuel cost item will be one of the most interesting to watch. Given that passenger pricing in the industry is fairly firm thanks to consolidation, success at reducing major cost items will have a direct impact on profitability.
Regarding Allegiant and Spirit, both are developing the ultra low cost/ultra low fare carrier concept which has been wide well developed in Europe by Ryanair and Easyjet among others but which is relatively new and much smaller in comparison. European travelers have grown used to the idea that they can get very low, highly unbundled air service with a certain amount of inconvenience, particularly given that the ULCCs in Europe generally have little access to the largest airports that the Euro legacy carriers use.
There are several major reasons why Allegiant and Spirit have an will continue to have a cost advantage over the US legacy carriers and the low fare carriers (B6 and WN):
1. The ULCCs are young and growing which means they have less seniority, lower paid staff and are adding more and more of them which helps keep average fares down. Part of the success CO had coming out of BK 2 was that they rapidly grew the company which helped keep their costs down, a strategy that DL is using as well driven in large part by their insourcing of regional carrier flying using the 717s. Every airline has to keep growing and adding lower cost employees in order to retain their cost advantage. It is precisely because WN is growing at a much slower rate than they historically have done that their cost advantage relative to the legacy carriers is shrinking.
2. The ULCCs are all about flying when the demand exists – and not an hour before or after. It is easy for any airline to create revenue premiums when you limit your flying to peak periods but it also means you have little ability to pursue higher yield business travelers who need frequency and a consistent reliable schedule. The ULCCs may or may not be there tomorrow which makes them even terribly attractive for high frequency leisure travelers. The fact that the LCCs generate high margins says that there is a segment of leisure demand that can be served when the demand is there and service pulled down when it is not there. However, any carrier should be able to flex its schedule enough to add leisure seasonal or day of week demand. DL’s Saturday Cancun operation and its redeployment of capacity from the Midwest and NE to Florida during the peak spring break period is something any of the US carriers can do. The best way for the legacy and LCCs to cut off the ULCCs is to add capacity into the markets which the ULCCs could serve, esp. from the legacy carriers’ strongest markets.
3. While most US travelers have adapted to the complexity of the service package that US network carriers are now offering, the unbundling of fares by the LCCs is even more difficult for customers to understand and DOT complaint data shows it. There will always be a continuum along which customers will fall regarding convenience and all-in-one price pricing vs unbundling in an attempt by a consumer to get a lower total price. The legacies and LCCs all have an advantage that their pricing is understood and supported by consumers and they, thru good revenue management, can win a certain number of consumers who aren’t willing to risk surprises and lack of operational reliability to get a total cost that might have been lower but also might have involved a lot lower level of service.
The ULCCs likely do have strong growth potential but the LCCs and legacies are better equipped to limit the advantages the ULCCs have (which is so far largely just price driven).
