The Boyd Group

[Fly]

Legacy Airline Failures A Good Thing?

Hot Flash - June 27, 2004

News & Reviews

Legacy Airline Failures A Good Thing?
Biggest Beneficiary - Chevrolet, Not Other Carriers.

The usual suspects in the media are in rapture.

They're writing story after wind-bag story, crowing about how United's ATSB rejection is a harbinger of a much needed economic house-cleaning in the airline industry.

The theme in most of these articles is pretty much the same, give or take.

Point one: "We all know that 9/11 isn't the real cause of the legacy carriers' problems..."

Point Two: "We all know that the LCCs are doing it right. If United goes down, they'll be there to fill right in."

Point Three: "We all know that carriers like United, with their huge and inefficient hubs, are just corporate versions of the walking dead, so let'em go bust."

Then, we've sometimes seen the statement: "United doesn't deserve a government loan" - a comment that shows beyond doubt that the writer should be covering the entertainment beat, not airlines.

It's all part of the latest trendy in-the-know media bandwagon, surrounded by eager groupies writing frenzied stories foretelling the failure of legacy carriers. And, like most hippie-media bandwagons, this one's off in the woods, nowhere near reality. It would be nice if some of these literary parrots would get some real knowledge about the airline business.

First, this is not about the pros and cons of an ATSB loan guarantee. United's first ATSB application in 2002 was an amateur-level wallow in wishful thinking, so much so that the Board had no choice but to reject it. (Yes, we did an in-depth review of United's first filing.) Apparently, nobody outside the inner circle at United and at the ATSB has seen the second, and most recently-rejected, loan-guarantee application. But all that is a non-sequitur. A decision made by an appointed board of three highly-connected bureaucrats has absolutely zero to do with the viability of legacy carriers or the operating models they use.

The stuff we read today seems to claim that certain airlines are trying to keep an obsolete operating model on life-support at the taxpayers' expense. Yes, it's real trendy to write about that stuff. It's also inaccurate.

The ATSB story is just the latest May Pole around which some of these aviation reporters are dancing. They've somehow concluded that the ATSB decision proves that United, and American, and Northwest, and the rest of the villainous legacy carriers have degenerated to the point that their value to the transportation system is essentially a minus-quantity.

Their current mantra is that LCCs are good and network carriers are bad. They glance at financial returns and conclude that CASM alone is the sacred standard. The line of thinking goes on to conclude that legacy carriers not only will go out of business, but it will be a good thing if they do.

Better Hope They're Wrong. (And, fortunately, they are.) The issue at hand is not CASM comparisons. It is about fundamentally changing airline economics. It is about is something called an air transportation system. It revolves around the type and scope of air transportation we may actually see in the future, driven by cascading realities. It is about the fact that carriers such as American Airlines, Northwest, Continental, and others are far from brain-dead, as is the current mantra. It's about the levels of air service access that the nation may - or may not - have five years from now.

Now, Some Hard Realities. Unlike a lot of the follow-the-trend media reporters, we've actually been running models on the effects of several airline-failure scenarios. The outcomes vary widely, but they are all entire zip codes away from the prognostications we hear every day.

Next week, we'll cover some of the preliminary conclusions regarding what the fallout could be of a collapse of a major network airline. The complete study findings will be presented at our Ninth Annual Aviation Forecast Conference. Click Here for details on the conference.

In the meantime, we'd suggest you take with a grain of salt what's being written about how the demise of legacy carriers would be such a good thing for the consumer.

Or, maybe take it with the whole shaker.

 

[C54Capt]

Fly,

You are correct in your philosophy about the airline state, but don't blame the media or the LCCs or anyone else. The consumer dictates what the successful model is, period. UAL and others would love to tell the consumer what is "right" or "best" but that doesn't matter, nor does the consumers care for your well being.

 

[46Driver]

No offense, but if you are a customer would you rather fly coach on JetBlue with a new airplane, satellite TV, leather seats, and a lower price or would you rather fly on a UAL (or UEX to be fair) airplane that is older, often no radio much less TV, and at a higher price? The customers are voting with their feet.

 

[Fly]

United has inflight entertainment on every aircraft except the 737 (which I believe are being retired)

 

[whatkindoffreshhell]

Interesting article, thanks for sharing the post Fly.

 

[FA Mikey]

No offense, but if you are a customer would you rather fly coach on JetBlue with a new airplane, satellite TV, leather seats, and a lower price or would you rather fly on a UAL (or UEX to be fair) airplane that is older, often no radio much less TV, and at a higher price? The customers are voting with their feet.

In all honesty, the price match is there on the competing routes. JB will take many, many years to reach the saturation point of a carrier like United. Without offering a hub and spoke they will never be able to connect like a legacy carrier. United offers' the choice of 100+ different cities JB maybe a dozen.

I personally have no desire to watch movies or infomercials on a plane. I work on my laptop or read, the lost art. Even sleep. I don't like leather seats on a plane or in a car.

The customers are not voting with there feet. To say would imply a reduction on flights and seats filled by UAL and the rest, instead they are all reaching new highs in LF and PSM's.

JB like SWA fills a need and in many cases more to SWA they open a market, and bring out a people that were not going to fly otherwise. JB and the rest have a niche like the legacy carriers. Both will always exist.

 

[Segue]

In all honesty, the price match is there on the competing routes. JB will take many, many years to reach the saturation point of a carrier like United. Without offering a hub and spoke they will never be able to connect like a legacy carrier. United offers' the choice of 100+ different cities JB maybe a dozen.

I personally have no desire to watch movies or infomercials on a plane. I work on my laptop or read, the lost art. Even sleep. I don't like leather seats on a plane or in a car.

The customers are not voting with there feet. To say would imply a reduction on flights and seats filled by UAL and the rest, instead they are all reaching new highs in LF and PSM's.

JB like SWA fills a need and in many cases more to SWA they open a market, and bring out a people that were not going to fly otherwise. JB and the rest have a niche like the legacy carriers. Both will always exist.

Niche or not, its all about the price....there is much more elasticity than the majors ever thought there was. People tend to get lost in the soft product issues, but at the end of the day its icing on the cake and not the sole reason for Jet Blue's popularity.

Southwest and the other LCCs are not all about flying instead of driving. Airtran targets their offering to business passengers, and claims about 60% of their traffic is business.

Network carriers will survive, but will do so only at a cost competitive base. The days of selectively matching LCCs in competitive markets is over. It must be done at a systemic level.

While the network carriers will provide much better coverage, the LCCs will be in there scooping up the best nonstop markets and leaving the rest of the low yield connects for the majors.

I'd say the customers ARE voting with their feet. The industry has seen the largest "channel shift" in history. Overall system capacity is not shrinking - its just shifting from the majors to the LCCs. To attempt to keep up, the majors have radically reduced yields, however it is unstainable in the long run if unit costs exceed unit revenues.

If the majors could find a niche, that would be great, but they better hurry up!

 

[SVQLBA]

United has inflight entertainment on every aircraft except the 737 (which I believe are being retired)

aaah but there's the rub. This simple quote shows some of the myriad problems the legacy carriers face just on product and marketing.

1) The 737s DO have IFE -- it's just audio only. But it's still free (no need to buy a headset). Do the 757's have video?

2) Even this interchange (between two UA-knowledgable people) shows that there are so many variations in the basic UA coach "product" that even people well versed in UA don't know what the product is

3) UA and other legacies do almost zero, zip, nada marketing of the product. You may disagree with Holly Hegeman (PlaneBusiness) and her opinions, but I think she's spot on when she holds up SW and B6 as examples of good marketing. Everyone, even a once-a-year or first-time flier, knows what they'll get on SW or B6 because it's thumped home in every single piece of marketing. Even UA frequent fliers don't necessarily know what audio/video to expect, and I'm sure many are completely confused about what gets one into E+ half the time. (Sure can't buy an "E+" ticket -- compare and contrast with VS and BA)

4) Even the web site stinks at marketing the product -- try to find info on what the product is. There's certainly nothing about it on the fare search pages. (I could go on a rant about upselling here but I won't)

5) Ted, though corny, at least hammers home about Tedevision and TedTunes and Ted signature drinks in every piece of PR. Sickeningly corny maybe, but at least they're getting the message out. I bet unprompted awareness of the Ted product is probably far higher than for UA mainline. The decision to provide a distinct but linked brand I believe was very smart.

6) It's no good having a differentiated product if potential customers don't know about it. It doesn't help UA that the product is not consistent across mainline. However, the marketing needs to start re-emphasizing things like free audio every aircraft, Ch9, Eplus etc -- the stuff that still makes UA different -- or at least fairly close to B6 in some regards.

7) This goes for the upfront product too. I rarely get to go up front (lots of flying but a fair amount on non-rev, and spread across carriers, and my FF miles get used on family rather than upgrading me) but I realized from a thread on the AA board that I have no idea what their F/C product is. Same is true for UA. Now, I've only flown BA a couple of times in the last few years, and haven't flown VS for a decade, yet I know from their marketing what their F/C product is. (I LOVE the "safety card" magazine inserts from VS.) If I, as a consumer, don't know anything about a product, how can my purchase decision be based on anything other than price and maybe FF points (though I'd argue FF points are less powerful these days).

8) UA is in good company among the legacies. I think they all do an equally bad job of marketing their product. I seem to see a bit more marketing from CO and NW of their business class product (CO I fly a bit but not NW). AA gave a shot at marketing MRTC but I don't think it was ever effective, and they've now gone and confused that because some of their fleet don't have MRTC and the branding is no different. CO I think is still better about food in coach (laugh if you must, but some travellers don't have time to scour an airport for food before a flight, and the choice at many airports is worse than the stuff Gate Gourmet produces) but again, they get no market advantage out of it cos it ain't marketed. Once again, B6 and its "signature blue corn chips" does a better job on marketing the food service.

9) Starbucks -- given the cost of all the special galley equipment for Starbucks (you would not believe the trouble that will cause if a merger ever did happen), UA gets no mileage at all from this partnership. Where are the UA tie ins in Starbuck's outlets? Where do you find anywhere (outside of Hemispheres) that UA even has Starbuck's coffee?

I know there's minimal cash to invest in product at this point, but UA could get a lot more mileage with what it has at little cost.

UA still has a lot of areas where it could improve a lot further (we haven't even touched pricing, planning, utilization, etc.) in addition to (I doubt it's "instead of") salaries and benefits.

 

[SVQLBA]

Niche or not, its all about the price....there is much more elasticity than the majors ever thought there was. People tend to get lost in the soft product issues, but at the end of the day its icing on the cake and not the sole reason for Jet Blue's popularity.

Southwest and the other LCCs are not all about flying instead of driving. Airtran targets their offering to business passengers, and claims about 60% of their traffic is business.

Network carriers will survive, but will do so only at a cost competitive base. The days of selectively matching LCCs in competitive markets is over. It must be done at a systemic level.

While the network carriers will provide much better coverage, the LCCs will be in there scooping up the best nonstop markets and leaving the rest of the low yield connects for the majors.

I'd say the customers ARE voting with their feet. The industry has seen the largest "channel shift" in history. Overall system capacity is not shrinking - its just shifting from the majors to the LCCs. To attempt to keep up, the majors have radically reduced yields, however it is unstainable in the long run if unit costs exceed unit revenues.

If the majors could find a niche, that would be great, but they better hurry up!

Very well said Segue -- I couldn't put it better.

You're point about low-yield connects is key. The "breadth of network coverage" that legacies make a great deal about used to capture value not from the pax flying spoke-to-spoke (as you point out, they are generally low yield) but from their fortress hub FFers who could reach a full range of destinations on their favorite markets. As yields plummet on trunk routes as LCCs expand, the economic model falls apart. Paraphrasing the WSJ's Scott McCartney, most pax (I know there remain a few FFP loyalists) won't pay more to go from say CHI to CLE, just because that same airline could also take them from say CHI to Beijing or from CHI to Grand Rapids for that matter.

People will pay a premium for direct service. And it's cheaper to serve, so contribution per pax goes way up. And legacies could expand their pt-pt servivce and still maintain their precious beloved hub connectivity -- but it requires a rebalancing of gauge and schedule across the network, combined with using price to drive demand to use the assets efficiently. I have yet to see any evidence that legacy planning departments are being creative enough to tackle thr problem.

If you can, pick up the recent Airline Business that had Willy Walsh, CEO of Aer Lingus on the cover. There's a great story in there. On something, Walsh had gone with his hunch (simplified pricing, direct service to Nice, or something like that) against the recommendation of planning and their models. The action proved a huge success. The "planning" department no longer exists.

At the absolute minimum, DL, UA, AA, CO, and NW, need people in planning who are prepared to experiment in the market, take risks, and learn by doing, rather than rely on models that do not reflect today's traveler purchasing behavior.

 

[mweiss]

Segue and SVQLBA, you're both spot on. An economist might suggest that the issue is a shift from long-cycle (monopolistic) markets to standard-cycle (oligopolistic) markets will necessarily require a focus on niches and differentiation, coupled with a high-quality offering (defined as consistently providing the same product, time after time after time).

This is what Virgin Atlantic does. This is what Southwest does. It's what JetBlue does. Interestingly, it's what Song and Ted do; why on earth can't their parents do the same???