Legacy Vs. Lcc's


Dec 11, 2002
Mission impossible: Here's the real reason the Big Six are dying
I greatly respect Joe Brancatelli, my fellow USATODAY.com Travel columnist. He's a brilliant writer, and right about most things. But we consistently disagree on one point: the real reason the Big Six airlines are failing.
Joe claims that the major carriers are dying because their fares are too high, fare structures are too complex, customer service is poor, management is inept and top executives have been fiscally irresponsible by taking too much compensation.

I'm a former airline executive, and I agree with Joe that the Big Six are dying — at least as they exist today. And I agree that many of the factors he cites are contributing to their demise. But I believe that even if all those issues could be solved, it would not save the big airlines.

The Big Six – American, Continental, Delta, Northwest, United, US Airways — were doomed by deregulation a quarter-century ago. Their cost structures are based on long histories, and deregulation opened the door to a new crop of airlines such as Southwest and JetBlue that were not saddled with the same burdens. The upstarts could charge lower fares and still make money. Deregulation created an uneven playing field that has forced the Big Six to deteriorate over time.

In fact, the Big Six used to be the Big 12, but names like Pan American, TWA, Eastern, Braniff, Republic and Western have vanished in bankruptcies or mergers since deregulation.

The survivors have cut wages, eliminated unprofitable routes, squeezed more seats into airplanes, laid off employees, cut back in-flight services and amenities, and devised complicated fare structures to extract every last penny out of the traveling public. And then when all that didn't work, they begged the U.S. government for handouts to help them survive.

But it hasn't been enough — and it never will be. For one, the Big Six have labor contracts that keep their costs higher than airlines that entered the market after deregulation. These newcomers can pay rock-bottom wages and set up work rules that favor the airline.

These airlines are called the Big Six because they provide comprehensive service across global networks. That means flying a wide variety of routes, some of them unprofitable, and employing several different types of aircraft to do it. Low-cost airlines, for their part, typically fly only on carefully selected, profitable routes. They operate a single type of aircraft to minimize training and maintenance costs.

The Big Six have started launching low-fare subsidiaries: Delta's Song, United's Ted. But for the Big Six to emulate the models of their low-cost competitors, they would have to change so much they would be unrecognizable. They would no longer be the Big Six.

I agree with Joe that there have been some egregious travesties in executive compensation, and other wasteful acts by managers of Big Six airlines at one time or another. This certainly has not helped their images or financial situations.

But even if Big Six management had been completely saintly over the years, the outcome would still be the same. The big airlines cannot survive in a two-tiered cost structure.

When a company is profitable, it's easy to spread the cheer, the way Southwest does. But when a company suffers continual losses, problems flow. As the Big Six began to cut service, customers became angry. As low-cost carriers began to offer $200 airfares, the public became enraged that prices had been so high for so long. And as the Big Six tried to make up for lost revenue, they alienated business travelers and fliers on noncompetitive routes by sticking them with high fares.

But unlike Joe, I can't really blame the Big Six for cutting service and manipulating airfares to charge whatever the market would bear. They had no alternative, if they wanted to try to stay in business. I'm not condoning their practices; I'm just saying that what they did was totally rational.

Only it hasn't worked. As the economy slowed and the crisis deepened, Big Six airlines alienated not only travelers but also their own employees, laying off thousands who had faithfully devoted their lives to those airlines for countless years. Many who still had jobs became bitter, and sometimes took it out on customers, making matters worse. Only one Big Six airline – Continental – made Fortune magazine's list of the 100 Best Companies to Work For this year, and it shed more than 1,000 jobs.

Please don't get me wrong. I am not defending the tactics of the Big Six, nor am I bemoaning deregulation. Deregulation of the airline industry has been a great boon to consumers, who have reaped the benefits of low airfares. The expansion of low-cost carriers throughout the world has increased the demand for air travel and made it accessible to many people who could not otherwise afford to fly.

Nor am I bashing the unions or employees of the Big Six carriers. These people want the same things as every other American – a decent job with decent wages and some job security. But we must recognize that deregulation created a situation where the old carriers and the new carriers could not peacefully coexist. And the result was an industrial earthquake that has shaken airfares, service and thousands of jobs.

Joe Brancatelli is correct that the Big Six are a dying breed. Some of the companies may survive, but not with their existing business models. And when they are gone, fares will be lower and probably less complex, amenities offered in the air will be commensurate with the price paid for travel, and many new jobs will exist at the low-cost carriers for airline employees who are willing to work for less. As a result, the public will arguably be better off – with the painful exception of the airline employees whose jobs were eliminated.

But change won't necessarily bring stability. We've already seen newer airlines, such as JetBlue, coming into the market with cost structures that are even lower than the original low-cost carriers, such as Southwest. More are undoubtedly waiting in the wings. We'll have to wait as well – to see if history repeats itself.

Read previous columns

Send David your feedback: David Grossman is a veteran business traveler and former airline industry executive. He writes a column every three weeks on topics of interest and concern to business travelers. E-mail him at [email protected].

Legacy carriers watch out! you may be doomed! :eek:
Just FYI, when you copy something from a publication even to a public bb like this one, it is a violation of US copyright law to fail to include the name of the source and the date of publication. I.E., "copied from USA Today article dated 20JAN04."
Here are my reasons why the major legacy carriers are in today:

1. A rapid change in consumer behaviour. More and more business and lesuire passengers are purchasing their tickets online where they have the oppurtunities to go bargain hunting and to compare prices and this is something they could not do in the 'good old days'. Many companies have slashed their travel bugets and this include using more technology to hold their conferences without leaving their offices and using more buget airlines when it becomes necessary for them to travel. Also they are still quite a few people who will now drive than fly especially when their destinations are close by.

2. The rapid expansion of budget airlines. B6, WN, TZ, F9 etc are expanding into markets that were once dominated by the legacy carriers and as a result yields have decreased and in some cases those routes are very important to the major carriers since they were profitable and may have been subsidising other unprofitable routes within their route network. Also along with the expansion of the LCCs comes the extra capacity that the majors are trying to control.

3. Large infrastructure. The majors have a large airlines too many rules within the organisation making it necessary for them to have too many managers or VPs. They have too many fleet types but this can be explained since the majority of them were purchased or acquired during the 1980's but this will add more costs to training, maintence and flexiability. The majors have large and expensive pension plans to support since being around for so long they have built a lot liability to many of their former employees. The majors also have hubs to maintain and this is expensive not to mention the fact that funnel most of their passengers through them. The majority of majors have unflexiable work rules and traditions that are not relevant in todays enviroment but one can argue that this comes along when a company gets too big but I think this can someway be managed since all it requires is a lot of thinking and vision. I almost forgot the majors have first class and clubs to maintain in their operations but this has become more expensive especially after 9/11 due to the reasons I have mentioned above.
WNrforlife said:
And USAir will be the first Legacy carrier to meet it's demise. Watch out!! We're coming to PHL to getcha!!! :lol: :lol: :lol:
Just amazing the concern shown for the employees and their families. And smily faces to boot. My heart goes out to them, been there.
Deregulation happend over 30 years ago. WN was here 30 years ago. The difference WN is news now is that it has made it to the East where the major news orgs are. These battles have been going on for years, with Braniff, Texas Int'l, American, United. I don't know the definition of Legacy carrier, but WN has been around for just about the same amount of time as the US air merger with Piedmont. Maybe "full service" is a better term.
WNrforlife said:
And USAir will be the first Legacy carrier to meet it's demise. Watch out!! We're coming to PHL to getcha!!! :lol: :lol: :lol:
And your point is?

If you get your gleeful wish, and all the mean, nasty legacy carriers go bye-bye, WN and its ilk will either A) face real competition for the first time (read: price-based competition) or B) stop growing like weeds out of fear for running into each other. In either case, your days of growth are done. Over. Finished. Welcome to the real world. Also, your days of free advertising masquerading as news will be over, since all airlines will be "low fare" carriers.

Then there is an even more likely scenario - freed from the need to masquerade as champions of the downtrodden consumer, the surviving commodity carriers will begin to gouge them in the same way they now shrilly accuse the legacy carriers of doing; surely you don't think they charge "low fares" for their health? They do so for one reason and one reason only - charging low fares is the only way a peanut-serving, cross-country busride can attract customers! Once the big meanies are gone, customers will still get the peanuts and the cattle calls, but, with all compeitive impetus to maintain chep fares gone, they'll be right back to paying "legacy" fares. They'll be paying more - to get less! :lol: :lol: :lol:

Make sure you celebrate that, too, as you wish for tens of thousands of people to be out of their jobs.
I can't find the quote but a recent analyst noted that when it has a monopoly on a market it doesn't raise fares until the number of passengers drops off. Rather, SWA just keeps adding airplanes. I agree with this analysis. SWA would rather keep adding planes and keep the market to itself than invite competition with monopoly pricing.
mrman said:
Deregulation happend over 30 years ago.
Only 25 years ago. The initial provisions of the airline deregulation act took effect in December 1978. Just a couple of days ago, AA issued a press release commemorating the 25th anniversary of service to their first post-deregulation cities in January 1979. The cities were (let's see if I can do this from memory) ABQ, LAS, RNO, MIA, TPA, MSP, and MSY.
Hard to believe that prior to dereg AA didn't even serve MIA, or anywhere in FL for that matter.

Also as a matter of minor correction, the US/PI merger was announced in 1988 and fully integrated in 1989. Only 15 years ago.