Chip Munn said:
Thus, the question is how can they be lowered to a point to provide sustained profitability.
Was it coincidental US & UA executives both gave speeches last week and discussed the need for increased inter-carrier cooperation, coordination, and consolidation?
In order:
Short of a major change (and by that, I mean adopting LUV as the pinnacle of employee compensation in the industry and working
down from there) the costs will never be low enough to stem the LCC tide.
The classic tradeoff then becomes what to do.
I see one several common approachs between the two carriers in question (UA and US) and several that are drastically different.
UA and US both using Chapter 11 to lower costs (for now). There is a school of thought that merely lowering labor costs won't do the trick. I'm starting to buy that line of thinking.
Then the issue becomes one of how to offset the lossage incurred to fight the LCCs. The most obvious approach to this is to garner higher profitability flying to places they do not. In U's case, you have the Carribean and a small/medium European presence. In UA's case, you have the entire world. I see this as a small advantage for UA. You can argue that alliances offset some of this imbalance, however, the revenue as a result of that synergy (U flying someone PIT-ORD and handing them off to UA for the hop to HNL, for instance) will not offset the loss taken on routes in direct competition with the LCCs (keeping in mind that U does not make any real profit from the ORD-HNL leg in the example). Let's call this a draw. I'll be returning to this a bit.
Domestically, the same fundamental problem confronts both carriers. It would be easy to say that US flies to many more small and midsize communities (EAS or otherwise) and can thus gain large profits in these places, by reducing capacity. Indeed, this would seem to be the driving factor behind the RJ purchases, the EMB-170s in particular. It's also tempting to think that U can use the larger "small jets" to some big non-core markets (see the current U schedule in ATL) and maintain both perks for it's VFFs and frequency. There are two problems with this approach, both of which will be fatal: the current LCCs who can fly a 737 for a similar cost as U can fly a "small jet" comes to mind first. However, the real problem is the next phase of LCC growth: what Airtran, Fronteir, and particularly Jetblue are doing: taking their own operational excellence and thinking and applying it to smaller communities with smaller jets. Their excellence in planning and execution will allow them to overcome the issue of mutiple fleet types (indeed, remember when pundits predicted the demise of LUV for more than one 737 variant)? Both of these issues are going to bite U before they bite UA.
So:
1. Both carriers have had the bite at the bankruptcy apple, and have used it (or perhaps not, in U's case--time will tell) to lower labor costs. Perhaps not low enough.
2. LCCs are expanding, and will expand into smaller markets. This hurts both carriers, but the smaller market trend hurts U far worse.
3. UA, by virtue of it's route network, will capture a larger share of the "can't get there on an LCC so I'll pay whatever it takes" crowd, as LCCs expand domestically into smaller and smaller markets.
For these reasons, I like the UA long term prospects. I am also completely unimpressed with the current crop of U management, for reasons that have been debated to death in other threads. Clearly, the word is still out on UA's management, however, thus far they have eliminated the "Bronner" type of vulture for exit capital and used as much of the Chapter 11 process as they can, instead of a "rush" trip to court. I think this speaks volumes.
The natural reaction to the postulation above is that a UCT would in fact allow both carriers to better compete. However, even if my theory-laden post comes to pass, at the end of the day the labor issues, fleet issues, and cost of any transaction are prohibitive for both carriers, with our without financing from an outside source for UA. The house of disarray that would result from a UCT at this point would make the PI and PSA years at US look good. For that reason, I believe that if UA or US or some combination thereof is going to exist in the future, it will be in one of the following scenarios:
1. UA emerges, gains financing, and grows itself organically, partially by utilizing the code share to gain some traction. No UCT ever takes place.
2. UA emerges. Due to the pressure on US from LUV, operational mismanagement, and lack of fare rationalization, Bronner decides to pull the plug. Sells chunks to the highest bidder (perhaps even UA).
3. Bronner decides he wants out now, the issue is forced by little Dave in the guise of further cost reductions, and U heads into Chapter 11 again, but comes out in Chapter 7.
If US obtains some leadership with a bit of vision, I might see an additional scenario. I'm not holding my breath. Or, to put it another way, if little Dave had any operational acumen, or Bonderman decides to buy out Bronner, I'll go so far as to listen to your UCT scenarios.
To address the second point:
Yes, it was coicidence. They have both given speeches that discuss the need for labor cost reductions, bankruptcy as an option (before either filed), and the general doldrums the industry finds itself in. A trained money if put before the Aero Club, for instance, could have reached the same conclusions and statements that Austin Dave arrived at.
Regarding Dulles--Jonny O. has stated that he can't buy jets fast enough, and has a stack of resumes that just keeps coming, despite the food-stamp compensation of junior Mesa pilots. He's one of the few people with a winning plan right now (assuming that the majors keep clamoring for welfare flown RJs). I have no doubt that if UA wants to get that deal done, and Mesa wants to play ball, it will happen.
YMMV, of course.
