Forbes Article

[luvthe9]

Costs Lift Off At Low-Cost Airlines
Mark Tatge, 10.24.05, 12:00 PM ET


CHICAGO - Low-cost airlines are now facing the same cost pressures that have driven bigger, established legacy carriers into bankruptcy--boosting wages, building costly hubs and buying expensive new fleets.

Workout specialists here for the Turnaround Management Association's annual convention said the honeymoon is over for Southwest (nyse: LUV - news - people ), AirTran (nyse: AAI - news - people ), JetBlue Airways (nasdaq: JBLU - news - people ).

The warnings came just on the heels of JetBlue announcing a third quarter pre-tax loss of $3.6 million, mostly due to higher fuel costs. The carrier warned it might report a fourth-quarter and full-year loss.

Even Southwest is facing headwinds. So far, fuel hedges have insulated Southwest from rising fuel prices. The airline currently has a 25% cost advantage over other carriers, mostly due to hedges that begin expiring next year. But Southwest's operating costs are rising, driven by fatter paychecks and an aggressive expansion into new cities, said Timothy R. Coleman, senior managing director for the Blackstone Group in New York.

Coleman, a consultant to the Delta Airlines bankruptcy, said as older, more established carriers retire planes, it removes available seats from the market. Those seats are quickly being replaced by new upstarts leasing shiny new Airbus' or Boeing (nyse: BA - news - people ) jetliners. JetBlue, for example, has firm orders for 106 new Airbus A320s and 101 Embraer E190s.

In the past, low-cost carriers grew rapidly by flying point-to-point, siphoning off traffic from the majors. Some leased or bought used jets and paid employees peanuts. Those days are over. The low-cost carriers are now well capitalized and are expanding aggressively.

One area is of concern is the pressure to build hubs, similar to those that Delta (nyse: DAL - news - people ), American (nyse: AMR - news - people ) and United (otc: UALAQ.OB - news - people ) operate.

Hubs have been both an industry boon and bane. They gained favor in the mid-1980s as deregulation took hold. Hubs were seen as a way to increase incremental revenue by funneling traffic from smaller, less profitable cities into a large central location.

Carriers figured hubs would reap additional revenue and profits. But costs ballooned. The majors are now struggling with how to downsize their hubs, fly more point-to-point routes, and eliminate costs without losing market share.

As Southwest has run out of room to grow, it has started to build hub operations, one of its biggest being at Chicago's Midway Airport. Other low-cost carriers are bumping into the same challenges as they get larger.

"We are watching a slow convergence between the different airlines," said Todd R. Snyder, managing director of Rothschild Inc. of New York, a consultant to United Airlines Chapter 11 bankruptcy reorganization.

What economic model will emerge a winner is literally up in the air.

David S. Kurtz, managing director of Lazard Freres & Co., in Chicago, an adviser to the federal Air Transportation Stabilization Board, said the capital markets loved bankrupt US Airways' merger with low-cost America West Airlines (nyse: AWA - news - people ), because it embraced both operating models.

Blackstone Group's Coleman said the "airline business is the most structurally flawed business model in the world." Yet, General Electric (nyse: GE - news - people ) Commercial Aviation Services, American Express (nyse: AXP - news - people ), JPMorgan Chase (nyse: JPM - news - people ) and other lenders are pouring capital into an industry that is losing billions. "The big question: is this a good long-time play? I don't think any of these players are thinking that way, " Coleman said.

Most investors are betting on the inevitable consolidation, Snyder said. United, expected to emerge from Chapter 11 next year, is figuring it will drive the industry consolidation. But others disagree, saying United's reorganization plan is flawed. They say United is erroneously assuming crude oil will drop to $52 per barrel. Plus, the airline is betting it can recapture premium fare-paying business travelers, a segment that started deserting United six years ago because of bad service.

Investors should watch for mergers. "How this will happen, when it will happen, and who will match up with whom is something that is on everybody's mind," said Lazard's Kurtz. "It's what is driving investment in this industry."


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[swflyer]

I thought the author of this article should be busted for plagarizing the USAviation forums. <_<

And he repeated the same cost "problem" that Markkus757 so wisely pointed out is simply not true in the "Cows will fly" topic.

Yes, SWA has to watch costs, and is not helped by the price of fuel, but the rest is just the same ol' song and dance. I expect better from Forbes contributers.

 

[WNJETFIXER]

Costs Lift Off At Low-Cost Airlines
Mark Tatge, 10.24.05, 12:00 PM ET


CHICAGO - Low-cost airlines are now facing the same cost pressures that have driven bigger, established legacy carriers into bankruptcy--boosting wages, building costly hubs and buying expensive new fleets.

Workout specialists here for the Turnaround Management Association's annual convention said the honeymoon is over for Southwest (nyse: LUV - news - people ), AirTran (nyse: AAI - news - people ), JetBlue Airways (nasdaq: JBLU - news - people ).

The warnings came just on the heels of JetBlue announcing a third quarter pre-tax loss of $3.6 million, mostly due to higher fuel costs. The carrier warned it might report a fourth-quarter and full-year loss.

Even Southwest is facing headwinds. So far, fuel hedges have insulated Southwest from rising fuel prices. The airline currently has a 25% cost advantage over other carriers, mostly due to hedges that begin expiring next year. But Southwest's operating costs are rising, driven by fatter paychecks and an aggressive expansion into new cities, said Timothy R. Coleman, senior managing director for the Blackstone Group in New York.

Coleman, a consultant to the Delta Airlines bankruptcy, said as older, more established carriers retire planes, it removes available seats from the market. Those seats are quickly being replaced by new upstarts leasing shiny new Airbus' or Boeing (nyse: BA - news - people ) jetliners. JetBlue, for example, has firm orders for 106 new Airbus A320s and 101 Embraer E190s.

In the past, low-cost carriers grew rapidly by flying point-to-point, siphoning off traffic from the majors. Some leased or bought used jets and paid employees peanuts. Those days are over. The low-cost carriers are now well capitalized and are expanding aggressively.

One area is of concern is the pressure to build hubs, similar to those that Delta (nyse: DAL - news - people ), American (nyse: AMR - news - people ) and United (otc: UALAQ.OB - news - people ) operate.

Hubs have been both an industry boon and bane. They gained favor in the mid-1980s as deregulation took hold. Hubs were seen as a way to increase incremental revenue by funneling traffic from smaller, less profitable cities into a large central location.

Carriers figured hubs would reap additional revenue and profits. But costs ballooned. The majors are now struggling with how to downsize their hubs, fly more point-to-point routes, and eliminate costs without losing market share.

As Southwest has run out of room to grow, it has started to build hub operations, one of its biggest being at Chicago's Midway Airport. Other low-cost carriers are bumping into the same challenges as they get larger.

"We are watching a slow convergence between the different airlines," said Todd R. Snyder, managing director of Rothschild Inc. of New York, a consultant to United Airlines Chapter 11 bankruptcy reorganization.

What economic model will emerge a winner is literally up in the air.

David S. Kurtz, managing director of Lazard Freres & Co., in Chicago, an adviser to the federal Air Transportation Stabilization Board, said the capital markets loved bankrupt US Airways' merger with low-cost America West Airlines (nyse: AWA - news - people ), because it embraced both operating models.

Blackstone Group's Coleman said the "airline business is the most structurally flawed business model in the world." Yet, General Electric (nyse: GE - news - people ) Commercial Aviation Services, American Express (nyse: AXP - news - people ), JPMorgan Chase (nyse: JPM - news - people ) and other lenders are pouring capital into an industry that is losing billions. "The big question: is this a good long-time play? I don't think any of these players are thinking that way, " Coleman said.

Most investors are betting on the inevitable consolidation, Snyder said. United, expected to emerge from Chapter 11 next year, is figuring it will drive the industry consolidation. But others disagree, saying United's reorganization plan is flawed. They say United is erroneously assuming crude oil will drop to $52 per barrel. Plus, the airline is betting it can recapture premium fare-paying business travelers, a segment that started deserting United six years ago because of bad service.

Investors should watch for mergers. "How this will happen, when it will happen, and who will match up with whom is something that is on everybody's mind," said Lazard's Kurtz. "It's what is driving investment in this industry."
Want to track news by this author or about this industry? Forbes Attache makes it easy. Click here.


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When are these people going to write an article with some meaning?? :down:

 

[Doc]

LUV's plan was that U was gone and now it's a 900lb. gorilla so now what.
I say the playing field is leveling out it’s time for a little competition should be fun to watch. Maybe LUV will ask for concessions.

 

[WNJETFIXER]

LUV's plan was that U was gone and now it's a 900lb. gorilla so now what.
I say the playing field is leveling out it’s time for a little competition should be fun to watch. Maybe LUV will ask for concessions.

How is U a 900lb gorilla??? Maybe a little tree monkey but not a gorilla. And why do you think LUV will ask for concessions?? I would love to hear your answers!! 😉

 

[corl737]

LUV's plan was that U was gone and now it's a 900lb. gorilla so now what.
I say the playing field is leveling out it’s time for a little competition should be fun to watch. Maybe LUV will ask for concessions.

In fact, "U" can't be a gorilla nor anything else. Officially, "U" is dead. Welcome "LCC"!

It will be good to see you able to compete. There are plenty of passengers out there that want to travel and WN can't handle 'em all. You've the chance to come take the rest!

And no, LUV promises it won't come and ask you for concessions! 😀

 

[wnbubbleboy]

LUV's plan was that U was gone and now it's a 900lb. gorilla so now what.
I say the playing field is leveling out it’s time for a little competition should be fun to watch. Maybe LUV will ask for concessions.

U is gone, you are America West, just because you carry the name doesn't mean you survived. America West management is really in charge who do you think they will favor if times get hard again? Where is your headquarters again?

As far a consessions I'm sure you pray every night for our down fall. Why can't you be satisfied with us as the template of what your company should be instead of wishing for us to be pulled down into the mire that you have experienced.

Finally, as far the playing feild being leveled I thought that was going to happen with the conception of Metro Jet.

 

[KCFlyer]

LUV's plan was that U was gone and now it's a 900lb. gorilla so now what.
I say the playing field is leveling out it’s time for a little competition should be fun to watch. Maybe LUV will ask for concessions.

You know something....if SWA does ask for concessions, I feel pretty confident that it will be the LAST resort instead of the FIRST...and second....and third.

 

[Doc]

WOW….come on guys you don’t see it. Our cost are lower than yours

Your beginning to feel the crunch of fuel and ….LABOR COST…..

Psngrs are getting tired of your bait and switch tactics of tkt pricing.

Tell me how well you are doing in PHL .

I have no problem with LUV it’s just that I miss the days of well dressed travelers

Who had a respect for air travel and its employees.

LCC’s have created this fly in flip flops and sweats mentality.

I don’t mean to be mean but it is what it is.

 

[KCFlyer]

WOW….come on guys you don’t see it. Our cost are lower than yours

Your beginning to feel the crunch of fuel and ….LABOR COST…..

Psngrs are getting tired of your bait and switch tactics of tkt pricing.

Tell me how well you are doing in PHL .

I have no problem with LUV it’s just that I miss the days of well dressed travelers

Who had a respect for air travel and its employees.

LCC’s have created this fly in flip flops and sweats mentality.

I don’t mean to be mean but it is what it is.

Bait and switch ticket pricing? If you mean pricing for a profit, then yes, it's bait and switch. If you mean the "other guys" are charging less...and NOT making a profit, despite their lower costs (according to the LCC 10Q, labor costs were down 35% but operational costs were UP 1.6%), then be proud you gave what you gave...and plan to give more when your management realizes that their costs are STILL too high to make a profit undercutting Southwests pricing. Who needs to compete when you guys are doing a bang up job of killing yourselves?

 

[WNJETFIXER]

WOW….come on guys you don’t see it. Our cost are lower than yours

Your beginning to feel the crunch of fuel and ….LABOR COST…..

Psngrs are getting tired of your bait and switch tactics of tkt pricing.

Tell me how well you are doing in PHL .

I have no problem with LUV it’s just that I miss the days of well dressed travelers

Who had a respect for air travel and its employees.

LCC’s have created this fly in flip flops and sweats mentality.

I don’t mean to be mean but it is what it is.

Wow, You really know your stuff!!! Those were some bonehead comments to make. I challenge you to back at least one of them up!!! :down: Also, it sounds like you know how the company is doing in PHL, please enlighten me.

 

[will fix for food]

WOW….come on guys you don’t see it. Our cost are lower than yours

Your beginning to feel the crunch of fuel and ….LABOR COST…..

Wow. Now I think I have seen everything. Doc is actually gloating over being paid less than his colleague at WN. :blink:

 

[Doc]

The only reason LUV does better on the bottom line is your fuel hedging. I am not happy with the sacrifices we have made but it would have never comes to this if it wasn’t for the tactics of LCC’s ……Many of the big airlines were not hedged correctly and 9/11 brought that out. I don’t want any airline to fail but your airline seems to pride it self on it. You have predatory pricing you fly to a city where you see blood in the water and you price it so low even you don’t make money then when the others are gone it’s back to your normal pricing.

Like I said I don’t want any airline to fail but your fuel hedging will not last forever and it will be nice to compete on a more level playing field.

I don’t think LUV planned on U being around so PHL is not what LUV expected
U is in good shape to compete with almost 3bil in the bank and a good cost structure our pay will return along with our profits.

Please don’t be happy when an airline fails it just means that a lot of families are going to suffer. This is why I get so defensive.



even your own eployees see the truth in your other Forum

http://www.usaviation.com/forums/index.php?showtopic=22563

 

[corl737]

You have predatory pricing you fly to a city where you see blood in the water and you price it so low even you don’t make money then when the others are gone it’s back to your normal pricing.

That, Mr. Doc, is where you have crossed the line into fantasy. SWA's pricing always makes money for SWA -- even the low introductory fares. (SWA's Yield Management algorithms are the best in the business!) Thus, it isn't, by any definition, a predatory practice. Notice I didn't say that YOU could make money at the price SWA charges but that isn't SWA's concern nor the concern of the passengers.

Another criteria to qualify under the "predatory" practice interpretation is to raise the price after the competition is gone. Why else would SWA, at Dallas Love Field where it enjoys a 97% market share, price it's tickets virtually the same as elsewhere around its network?*

Like I said I don’t want any airline to fail but your fuel hedging will not last forever and it will be nice to compete on a more level playing field.

The airline industry's playing field was leveled in 1978 with the passage of the Airline Deregulation Act. Your company had 27 years to figure out how to adapt to an environment that finally decided to become consumer friendly. (That's only somewhat longer than United's been in bankruptucy if you want to point your fingers at a company that refuses to play on a level field!) Your company's failure to plan and adapt is not the fault of SWA. Look to your leaders -- assuming you can find them hiding behind their golden parachutes. Sorry you happened to hook your fortunes to a horse that turned out to be stuck in a rut. (Definition of RUT: a grave without ends.)

Please don’t be happy when an airline fails it just means that a lot of families are going to suffer. This is why I get so defensive.

No one is "happy" to see others in unfortunate situations. Yet you yourself are promoting a scenario in which OUR families will suffer. Defensive or not, your words are truly hypocritical.

It is inevitable that SWA will take a tumble. Virtually every company does at some point. The goal is to delay that event through corporate strategy, employee-management teamwork.

*Tickets prices at Dallas Love are identical to most markets in total price. Dallas flights are somewhat higher than the system-wide average when judged on a "per mile" basis. This reflects the inability to amortize the high cost of the "takeoff event" over an equivalent system-wide average stage length since the Dallas flights are restricted in distance by the Wright Amendment. THAT is why the charge is on to repeal the dastardly law! :angry:

 

[WNJETFIXER]

The only reason LUV does better on the bottom line is your fuel hedging. I am not happy with the sacrifices we have made but it would have never comes to this if it wasn’t for the tactics of LCC’s ……Many of the big airlines were not hedged correctly and 9/11 brought that out. I don’t want any airline to fail but your airline seems to pride it self on it. You have predatory pricing you fly to a city where you see blood in the water and you price it so low even you don’t make money then when the others are gone it’s back to your normal pricing.

Like I said I don’t want any airline to fail but your fuel hedging will not last forever and it will be nice to compete on a more level playing field.

I don’t think LUV planned on U being around so PHL is not what LUV expected
U is in good shape to compete with almost 3bil in the bank and a good cost structure our pay will return along with our profits.

Please don’t be happy when an airline fails it just means that a lot of families are going to suffer. This is why I get so defensive.
even your own eployees see the truth in your other Forum

http://www.usaviation.com/forums/index.php?showtopic=22563

Your correct , the bottom line for SWA is better with fuel hedging but look at the 3Q profits. We still would have made a profit even without the hedges. The company is always bashed because our CEO/ex CFO had the forsight to hedge fuel in these difficult times. You say, " It would be nice to compete on a more level playing field". I'm sorry to say that it will never turn out that way. We would have to hire a bunch of monkies to run at our upper management level. Then maybe, just maybe but I don't see that happening.

And as for PHL, you should really do your reseach. Granted, SWA and everyone else though U would be gone by now but there are other options. All of the other airlines running /flying out of PHL can't really complete with SWA. Our load factors are excellent but gate space is limited. That will change in due time.

Man, I can't get over your statement," It would be nice to compete on a more level playing field". Why should we have to stoop to anyone elses level to do business? Should we feel sorry for mistakes your management had made time and time again? How many times will the legacies go into BK for a do over?
I think it's BS that they can go into protection. They should just be axed. I think it's only fair. One shot, if you can't succeed, BOOM your done.NEXT.... Maybe that would thin out some of the dead wood.

By the way, you can apply at www.southwest.com.. Jump ship buddy, looks like your going to hit that iceberg!!!!
:down:

That, Mr. Doc, is where you have crossed the line into fantasy. SWA's pricing always makes money for SWA -- even the low introductory fares. (SWA's Yield Management algorithms are the best in the business!) Thus, it isn't, by any definition, a predatory practice. Notice I didn't say that YOU could make money at the price SWA charges but that isn't SWA's concern nor the concern of the passengers.

Another criteria to qualify under the "predatory" practice interpretation is to raise the price after the competition is gone. Why else would SWA, at Dallas Love Field where it enjoys a 97% market share, price it's tickets virtually the same as elsewhere around its network?*

The airline industry's playing field was leveled in 1978 with the passage of the Airline Deregulation Act. Your company had 27 years to figure out how to adapt to an environment that finally decided to become consumer friendly. (That' only somewhat longer than United's been in bankruptucy if you want to point your fingers at a company that refuses to play on a level field!) Your company's failure to plan and adapt is not the fault of SWA. Look to your leaders -- assuming you can find them hiding behind their golden parachutes. Sorry you happened to hook your fortunes to a horse that turned out to be stuck in a rut. (Definition of RUT: a grave without ends.)

No one is "happy" to see others in unfortunate situations. Yet you yourself are promoting a scenario in which OUR families will suffer. Defensive or not, your words are truly hypocritical.

It is inevitable that SWA will take a tumble. Virtually every company does at some point. The goal is to delay that event through corporate strategy, employee-management teamwork.

*Tickets prices at Dallas Love are identical to most markets in total price. Dallas flights are somewhat higher than the system-wide average when judged on a "per mile" basis. This reflects the inability to amortize the high cost of the "takeoff event" over an equivalent system-wide average stage length since the Dallas flights are restricted in distance by the Wright Amendment. THAT is why the charge is on to repeal the dastardly law! :angry:

You said it alot nicer then I did!!! 😉