Legacy Carrier Lcc Response Update

[USA320Pilot]

Legacy Carrier LCC Response Update

Delta Air Lines’ Song making some progress

Delta Air Lines low-fare subsidiary Song appears to be off to a reasonable start, but significant challenges lie ahead.

While only a small part of Delta, Song should be an interesting proving ground for concepts that Delta may ultimately deploy across its entire network and the B757 subsidiary could eventually be about 10% of the carrier’s total ASM’s.

Song recently distributed a press release indicating further growth during 2004 with definitive plans forthcoming, but the airline said its emphasis will be on New York to Western and Southern destinations, turning up the heat on JetBlue targeting markets where the Kennedy-based LCC currently offers service (Note- Song still does not plan to fly in major Delta hub routes).

According to Aviation Daily, Song’s expansion may increase from 36 B757s currently in the low-fare subsidiary, which would tap into Delta’s 56 other mainline B757s.

Song’s second quarter revenue data points to a mildly encouraging start, although revenue generation needs to improve substantially in order for Song to succeed longer-term. Delta still suffers large revenue deficits to JetBlue in New York to Florida markets and the cost gap between the LCC’s remains large as well.

Revenue data going forward should be interesting given that Song has recently made a large marketing push and has begun to install its in-flight entertainment system in a move to duplicate JetBlue’s successful innovation.

United Airlines “Ted†not really low cost after all?

United Airlines has introduced its new low cost operator, which will be branded as “Ted†and will primarily fly from Denver to other cities using A320 aircraft in response to LCC’s Southwest and Frontier gaining market share. In my opinion, “Ted†will have a tough uphill battle in front of them because the new United subsidiary will not match LCC CASM and will be a legacy airline-LCC hybrid type of operation.

Ted will have the same labor contracts and CASM similar to the mainline. The new product will have 17 more seats than a mainline configured A320, which will be significantly less than Song’s B757 single-class aircraft, higher aircraft utilization, and a simplified schedule. Management hopes the new product in a high density-seating configuration can compete with LCC’s in low yield markets, but this approach will require very high load factors and a revenue premium to be profitable.

A random sampling of one-way walk-up fares shows United’s new LCC ticket prices to be significantly higher than Southwest, which I believe, is somewhat startling.

United Airlines (Ted)

Los Angeles to Las Vegas - $193
San Francisco to Las Vegas - $275
San Francisco to Phoenix - $330

Southwest Airlines

Los Angeles to Las Vegas - $89
Oakland to Las Vegas - $123
Oakland to Phoenix - $151

From this observer’s perch, United’s efforts to form a hybrid low cost product is not low cost at all, Ted will have a CASM higher than Southwest and JetBlue, and the savvy ticket buyer will not pay a premium to fly on Ted. Thus, it appears United is making the same mistake twice with its “Shuttle by United†emulator.

US Airways’ MidAtlantic Airways division (MDA) facing further delays

The EMB-170 has received provisional certification from the Brazilian airworthiness authority and a similar certificate from the FAA is expected shortly. The provisional type certificate means that the aircraft meets international safety standards and allows the delivery of EMB-170s to airlines for the beginning of crew training and route testing flights.

However, the documentation for the aircraft's flight control system software certification must be supplemented before a definitive certification is granted, which is expected in the first quarter of 2004, which could prevent the first MDA revenue from occurring until US Airways implements its March schedule change.

US Airways is the U.S. launch customer for the aircraft and the first aircraft could arrive next month, although US Airways said it is working with Embraer to evaluate the impact the delay of the full certification and that the parties are in discussions aimed at defining initial deliveries of the EMB-170.

MDA will be able to compete with LCC’s and the aircraft offers US Airways a competitive advantage. The EMB-170 will have market flexibility due to its size, MDA will not cannibalize mainline revenues, the aircraft will not be required to only fly in high density/low-yield markets, and division will have a break-even load factor of about 50%, which is compelling. When all 85 aircraft are delivered to US Airways Group by September 2006, with a 279 mainline fleet count, the new US Airways Group LCC division will represent 23% of the combined mainline/MDA fleet.

Conclusion

In conclusion, from this observer’s perch, MDA will have the only P&L statement that can duplicate LCC’s, the division will provide tangible profits for the parent company, and the MDA cost advantage will have largely been provided by labor concessions.

Regards,

Chip

 

[batman]

Chip, could you please make a distinction between the copyrighted articles and your own comments and posts. It is very difficult to tell when you add& subtract the contents of an article and then add your own thoughts without making it obvious.

Also some of your posts emulate print journalism and come across as fact rather than your opinion.

Thanks
B
h34r:

 

[diogenes]

MDA's cost advantage will be due to labor concessions...duhhh! As RJ's have higher inherent costs (fewer seats) than larger jets, OF COURSE cost advantages will be out of labor's pockets. That is the whole reason U did not buy RJ's in the mid 90's, (and remember, they had RJ's prior to that) and place them on mainline. It's all about labor cuts.

Here's the fun question. How do you feel about crews flying 100 seat EMB's for considerably less than 100 seat F100's?

 

[USA320Pilot]

Diogenes:

Diogenes said: "Here's the fun question. How do you feel about crews flying 100 seat EMB's for considerably less than 100 seat F100's? "

Chip answers: Diogenes, ALPA understands the issues and the threat of the EMB-190 and EMB-195, which could very well replace the B737s. In fact, the ALPA MEC and the NC are already working on this issue.

Nobody likes the fact that the LCC total labor expense is less than network carriers, just like nobody likes what happened to the steel industry, when the Japanese and their lower cost steel products were dumped on U.S. markets.

However, for a number of reasons LCC unit costs are 20 to 40% lower than US Airways and it's going to take a number of innovative ways to further cut costs to a point that RASM is greater than CASM. If this equation is not put into balance in short order, you, I and others will not have anything to debate.

Regards,

Chip

 

[iflyjetz]

From this observer’s perch, United’s efforts to form a hybrid low cost product is not low cost at all, Ted will have a CASM higher than Southwest and JetBlue, and the savvy ticket buyer will not pay a premium to fly on Ted. Thus, it appears United is making the same mistake twice with its “Shuttle by Unitedâ€￾ emulator.

Chip, Ted's current mission is to contain FRNT's growth. Take a look at FRNT's route map. Then take a look at Ted's. Funny, Ted only goes to places that FRNT flies to. Ted will most likely expand to FRNT's Mexico destinations next.

Right now, Ted won't be competing directly with JBLU or SWA.

 

[diogenes]

"

Chip answers: Diogenes, ALPA understands the issues and the threat of the EMB-190 and EMB-195, which could very well replace the B737s. In fact, the ALPA MEC and the NC are already working on this issue.

Nobody likes the fact that the LCC total labor expense is less than network carriers, just like nobody likes what happened to the steel industry, when the Japanese and their lower cost steel products were dumped on U.S. markets.

Actually, for the past decade, WN and U's labor costs are approximately 40% of total costs.

The DIFFERENCE is, WN has managed its non-labor costs, available seats and mileage more efficiently than U has.

 

[BoeingBoy]

I'm still waiting for someone to tell me exactly how MDA (or MAA if you prefer) will be competitive on a CASM basis with LUV, not to mention JBLU. I keep seeing statements about MDA being a "profit center" or a "P&L statement that can duplicate LCC’s" but never an explanation of how that will be the case.

I reference Mesa's latest quarterly report (3rd quarter of the calendar year, their 2nd quarter of the fiscal year) - CASM 11.8 cents, and RASM 13.3 sents. Admittedly Mesa has a mix of turboprops and 50 seat RJ's. Add in some CRJ-700's and a few CRJ-900's, and their average aircraft is smaller than the EMB-170 - advantage MDA. However, their contracts with mainline partners calls for the mainline to reimburse FUEL & INSURANCE, which is a major cost-saving - disadvantage MDA. Mesa's RASM is higher than U's (I know, pay them more to carry the pax then we get from the pax), disadvantage MDA - unless someone seriously thinks that people will pay extra for the pleasure of riding the EMB-170 (I know, those wide seats and large overhead bins!).

Can someone please tell this ole farm boy where the profits are going to come from?

 

[BoeingBoy]

I think I just figured it out...

A highly placed source familiar with management thinking and EMB-170 operations said so!

 

[X-U]

Chip puppetted Dave's comment that "...nobody likes what happened to the steel industry, when the Japanese and their lower cost steel products were dumped on U.S. markets."

The U.S. Steel and Textile industries were not done in by low-cost domestic competitors, but rather by the U.S. government's faulty trade policies. They gave unrestricted access to the huge U.S. market while American companies were not allowed reciprocal access to the foreign markets. Seeing what was going on, the American manufacturers decided to build new plants overseas rather than re-investing their capital in the facilities that were already built. Read "The Great Betrayal" by Patrick J. Buchanan for further information on this subject.

 

[N628AU]

Don't forget the fact that when looking at the Mesa operation, you have a signifcant number of B1900 aircraft in that fleet. Ever since they went Part 121, they have been, in the best of times, a break even proposition. Add in the new bag and passenger weights, and that cuts the ability for them to earn revenue even more. Now we are getting winter weights for passengers, further hitting payload.

The 1900 operation with US is not like the revenue guarantee with the RJ, it is a percentage of revenue deal. When US has a fare sale, it kills any hope of them being profitable alone. In the early 90s when CCAIR flew CLT-Fla (I forget the exact city, but it was in the panhandle) with a J31, CCAIR at times flew planeloads full of people for something like $26 per roundtrip. Even before 121, it was impossible to make that work financially.

Any hope of the B1900 ever staying even break even, will be through EAS grants, to keep service to many small communities that will never see an RJ.

 

[USA320Pilot]

Iflyjetz:

I agree with your point about Ted and Frontier. Furthermore, United does not have much of an East Coast operation and does not compete head-to-head with JetBlue and AirTran.

However, today the New York Times wrote and airticle on Ted that was not glowing. Bob Mann is a very bright consultant who has been hired by ALPA and APA and he knows what he's talking about.

Here's the hyperlink:

See Story

Regards,

Chip

 

[ClueByFour]

However, today the New York Times wrote and airticle on Ted that was not glowing. Bob Mann is a very bright consultant who has been hired by ALPA and APA and he knows what he's talking about.

Is he the guy who told Woerth that UA would lose $400 million in the quarter?

Note that of the 3 airlines Mann has held an "officer" position in, two of them no longer exist (TWA and Pan Am) and the third airline is Tower. It seems like he's spent the rest of the time since 1990 advising unions (who just took the biggest hit in the hisotry of the profession) and giving quotes to newspapers. Bright guy. I'd say we should leave that judgement to the reader, eh?

Can we please let the United thing drop, or at least take it to the United forum?

 

[BoeingBoy]

N628AU,

You are right, Mesa has a significent number of 1900's - 42 as of 10/7/03 from what I can find out (28% of the fleet). You are also right that the turboprop operation is generally under revenue-sharing contracts (except for the pure Mesa 1900 operation in the midwest that is not contract feed). I didn't go into that much detail, lumping it into an advantage for MDA that it would operate only larger "RJ's". As you undoubtedly know, the smaller the plane the higher the CASM's (generally speaking)

You are also undoubtedly right that the 1900's are at best a break-even proposition (though I don't know what the fares are like in the Mesa branded operation). But that involves the revenue side of the equation. My only point on revenue was about RASM - that Mesa's was higher than US's mainline (13.3 cents vs. 10.56 cents). Will MDA enjoy the same premium over mainline that Mesa apparently does?

On the cost side, I have yet to see any factual evidence that says MDA will operate at a CASM advantage to mainline and certainly none that suggests it will be comparable to the LCC's.

Jim