The Boyd Group/ASRC Predictions on AA and others


Sep 22, 2002
The Boyd Group/ASRC
Predictions – Year 2003 The Boyd Group/ASRC
Predictions – Year 2003
The Boyd Group/ASRC focuses on futurist consulting. In this endeavor, we are constantly reviewing trends as they evolve. Unlike other consulting firms, we''re not afraid to publish our forecasts and predictions. Here are some of the key issues to watch in the coming 12 months.
General Trends
Prediction: Traffic – Declines In 2003. Slow Growth Thereafter
Shocks to the system caused by wholesale failures, such as a Chapter 7 filing from United.
More information will be posted over the next months at www
Airline Structural Changes
Broken Hubbing & Low Fare Airlines – Fantasy Lives
The Hub-And-Spoke model is broken.
That’s the latest refuge of in-the-know analysts and some in the media who don’t have a clue about the airline industry. We all know, is the mantra, that low-fare airlines, for example Southwest and jetBlue, are the model of the future. The hub-and-spoke model no longer works. This usually comes from people who are not as informed as they need to be regarding the nature of the hub-and-spoke system. It’s not worth the time to try to reason with the peanut gallery of otherwise intelligent journalists who have bought into this nonsense.
But it’s fun to read their occasional stories about how airlines such as AirTran and Frontier are examples of the new, point-to-point model. Sure.
Start-Up & Low-Fare Airlines
As in prior forecasts, the market for new start-up airlines hovers between thin and none. A great way to lose money.
However, it is very possible that we could see some poor souls (at least, that''s what they will be eventually) attempt to start turboprop airlines to serve all those small airports that are either underserved or not served at all. A great way to go down the financial tube.
There will be limited expansion of existing discount airlines, and most will be between large markets, or at least to airports that are gateways to large markets. As mega-carriers (the latest buzzword is legacy airlines) re-structure, don''t look for Southwest and the very few other discount airlines to march across the countryside bringing low-fare victory to the downtrodden masses. Note that Southwest has stated it will do very little expansion in the coming year. AirTran is apparently focused on bigger markets, such as ATL-DEN. Frontier is concentrating on big leisure destinations.
There are very real limits to the expansion allowed by the Southwest model or by the economics of the low-fare model.
Mega-Carrier Shifts
As of this date, it appears that only one mega-carrier, United, is in danger of becoming a footnote in airline history. US Airways, also in chapter, has a clear plan to survive. And while it is no guarantee, that puts the airline leagues ahead of United.
It isn''t a pleasant thought, but the fallout from a United Airlines failure must be considered. As of January, 2003, the airline''s management has not announced any substantive programs to turn the company around. The credibility of United senior management has been hurt by a number of mis-steps. These include a filing with the ATSB that was predicated on numbers nobody could believe, shifting projections of the amount of labor concessions needed, and indications that the airline was planning to start another internal low cost airline within the existing one.
In the worst case, here''s what could be the outcomes of a United Airlines failure:
At ORD, AA would expand, and there would be some increases in service to other connecting hubs to grab the local share. A full-blown replacement of the United hub would be problematic, but one could see in the near term some mini-hubbing by a couple of carriers.
Denver: Some replacement of the United hub is a strong possibilities, by the usual suspects.
Tokyo: The fifth-freedom rights of United at Tokyo would have great value to perhaps American, assuming they have the wherewithal to pick it up.
San Francisco: It''s an important, if declining, Pacific gateway. An airline with a large Asian presence might find some value in replacing some of the service left by United. If American would grab the Tokyo portion of United’s assets, plan on the possibility of AA filling in the United vacuum at SFO. Remember, right after American bought Air California in the mid-1980s, they instantly became the largest carrier at San Francisco. Whereupon they moved most of their assets to an ill-conceived San Jose hub. But it is an open issue if a United replacement at SFO (whoever that might be) would be interested in also replacing much of the small community feed now operated by United Express.
Washington/Dulles: Most likely, a lot of United’s IAD international operation will be an unwanted orphan.
South America: A big who cares here. For the foreseeable future, there’s limited value to United’s Latin route system, or, for that matter, the same can be said for a large portion of the markets in the region. Continental was pretty clear when it decided not to enter the Argentina market – the place is an economic basket case. Columbia is crawling with drug loads and rightist militias. Venezuela is run by certified nut case. And that’s the high points. Besides, American owns South America. Add in tough competition from Continental and Delta, and the result is that nobody will find much of value in trying to replace United there.
So, let’s start with this: There is no regional airline industry. It’s gone. There simply is no longer a definable segment of the airline industry that is focused on serving small airports. It disappeared long ago.
In fact, there are very few regional airlines left. What we have today is an industry that has evolved into the real growth area of aviation: Small Jet Providers, or, SJPs for short.
We pointed out – correctly - that the code-sharing agreement was essentially quit-claim deed giving the regional’s route system and its independence to the major partner. Once done, there was no going back. Depending on the major partner and its future, the deal could work well, or work really, really badly. The regional’s former routes were now operated in the major’s name and identity. If the major wanted to dump the regional and pick up another, there was no place to go, as carriers such as Rio, Royale, and Trans-Colorado (among others) eventually discovered.
In the long term, we predicted, the system would evolve from dual regional and major route systems into a single one directed and dominated by the major, with the regional merely providing lift where the major dictated. And while code-sharing has had benefits, the downside is that it eliminated the independence – and the future potential expansion – of a host of potential new competitors
And that’s exactly where we are today. Big, (and well-run, by the way) entities such as Skywest, Mesa, and Chautauqua, among others, are really no longer airlines in the traditional sense. They have limited, if any, route systems of their own. Many don’t have much in the way of traditional airline marketing and product infrastructure, like reservations systems, revenue accounting, even pricing and ticket stock. Except in a very few markets, a consumer cannot even book a seat on one of these entities. That’s because they’re no longer direct sellers to the public.
These companies are not in the business of competing for passengers, per se. Today, what were once independent regional airlines have by-and-large evolved into the business of selling lift to major airlines – specifically small jet lift (and, to a declining degree, turboprop lift as well.) The major pays for it, decides where it will operate, and does most of the scheduling. Therefore, they are not airlines but instead are part of a new segment of the airline industry - vendors of capacity and lift to major carrier systems. These include independently-owned and internally-owned SJPs, like American Eagle.
Going forward, it is important to recognize this distinction. It represents an entirely different industry, with different dynamics, a different product cycle, and most importantly – a different customer base. As independent airlines, the customer was the flying public. Today, the immediate customers are the major airline systems to which these companies sell lift. Events affecting major airlines will affect these SJPs just as surely as shifts in demand for PCs affect suppliers of memory chips.
With this background established, we can suggest the following trends to watch in 2003:
Watch For: Pull-Backs In Small Airport Service
Small to mid-size airports are facing a tough year. As turboprops are replaced and small jets are re-deployed into mainline markets, losses of air service are inevitable at a number of smaller airports.
Plan on seeing mega-carriers continuing to shift SJP lift over the next 12 months out of thin markets and into replacement of mainline aircraft on what have been traditionally mainline, large-jet markets.
In that process, several airports may be squeezed out of the scheduled air transportation system. Forget wide-scale replacement of these RJs with turboprops. Consumers are increasingly turboprop-averse, and mega-carriers are having their SJPs retire them.
As we’ve said before, the economics of 50-seat jets are not well-suited to small community service. Those unfortunate communities who coughed up money for that ridiculous Proposition RJ boondoggle of a few years back might want to ask for their money back.
Prediction: Increasing Consumer Resistance to Small Jets.
You betcha. Resistance.
That’s because from an ergonomic standpoint, these are not aircraft well suited to long-haul passenger service. There’s a limit to human endurance – try nesting yourself in a window seat for nearly three hours (enplanement to deplanement) on a CRJ next to a woman of substance on her way to a Jenny Craig convention. It''s an experience not to forget.
So by all means, therefore, do forget the less-than-a-centimeter-in-depth media stories about how much passengers just love regional jets. This is not to say that small jets are not fine machines, only that they do have cabin and seat size issues that come to bear on increasingly-longer stage lengths.
Nevertheless, going forward in 2003, the applications of small jets will continue to be focused in large part on down-gauging from 737 and similar airliners. And that means material shifts in cabin comfort that will have a consumer backlash. Take it to the bank.
Example: That Delta customer who finds he must ground-level board an RJ in DFW to fly to Denver may well re-think his level of brand-loyalty. Again we emphasize that this is not to say that