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On 1/25/2003 8:29:26 AM mturpiz wrote:
I don't mean to come off as just automatically contrary, but I've never thought that was a good arguement for buying TWA. For years, the emphasis at AA/ORD has been about increasing frequency and decreasing aircraft size. Given that...
(1) AA is perhaps the most sophisticated user of yield management based pricing
(2) Higher frequencies mean a de-peaked ORD could still serve most key connecting traffic well
(3) Most any potential capacity shortfalls could be resolved by upgrading aircraft sizes
...it seems AA could have well-served the local ORD market without needing to find someplace else to divert connections through. Perhaps doing it this way would not have been perfectly ideal, but the costs of going the other direction (TWA) were huge.
Maytbe things would be very, very different if the economy hadn't tanked. But I tend to think that the TW purchase would be "not so bad" rather than "good" even under better economic conditions. Perhaps part of AA's plan was to remove a thorn from the national air travel pricing market that continually pressed fares low. Maybe it was a combination of all these things. But buying and integrating TWA seems like a big undertaking just to help out ORD.
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Nice post. We could use a few more mturpiz and eolesen posts around here.
Remember that at the time the TWA deal was being put together (December 2000), we were just wrapping up a solidly profitable year, and had no reason to believe that things would be significantly worse. In those days, paying $600-$700 million for a major airline was seen as a tremendous deal (see also the original price of the UA-US merger and the $100 per share that NW wanted from us). We were expecting some consolidation, and we needed something to compare to UA's network initiatives. What better way than to attack them at their home base?
You may just have to take my word for it, but depeaking never would have happened if it weren't for the TWA purchase. Depeaking was never meant to be a cost-savings initiative. It was a direct attack upon UA's local share in ORD, with the interesting added benefit of some aircraft efficiency. That's why you saw depeaking going into effect in ORD first prior to 9/11. The aircraft efficiency is why you saw it expanded to DFW immediately after 9/11. The fact that we're moving ORD's connecting traffic over STL is why you haven't seen it expanded there.
(1) AA is perhaps the most sophisticated user of yield management based pricing
"Most sophisticated" and "best" are two different things. I think we do a good job of understanding historical revenue trends, but we don't do as good of a job at predicting future revenue environments. We still have not learned how to manage More Room. Our expectations were that we would gain a greater share of business traffic, and therefore an increased yield premium over the industry. The opposite has been true. Even more disturbing, our load factor gap versus the industry on an adjusted basis has widened. Nobody seems to have any answers, so you're seeing more experimentation in pricing schemes.
(2) Higher frequencies mean a de-peaked ORD could still serve most key connecting traffic well
Besides price, connecting traffic is concerned about their total length of trip. After depeaking, many of the possible connection combinations for east-west traffic in the northern U.S. could be served more quickly through STL.
(3) Most any potential capacity shortfalls could be resolved by upgrading aircraft sizes
Also known as the DL method. There are three drawbacks to this: (1) ORD is gate-constrained - there are only a few widebody gates, (2) you would be taking larger aircraft away from markets that probably make sense for larger aircraft already, and (3) when you add capacity to a market, it is often better to add it at a different time of the day rather than diluting a current flight with lower-quality revenue.
Perhaps your plan makes more sense in hindsight, but at the time it would have been scoffed at.
47 PM Connected1 wrote: 
