Ukridge
Senior
- Joined
- Aug 27, 2002
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This week past a colleague of mine with considerable cerebral powers and I were lunching. He is one who travels more than I and as he is wont to do, he turned discussion of recent travel from the mundane to the philosophical. Knowing that the European air industry is only a step or two off the pace of what is evolving in America, he attempted to draw an estimate of the future based on trends from both markets. I say his bent was philosophical because his real question was “To what end?†Meaning of course “where is all of this headed?†The real question to both of us then became whether “to what end†meant if it were possible for a large airline to ever survive and mature into a venerable institution or if market forces will constantly cull out those over a few years in age.
Taking United for example I find it interesting how shrill the press coverage has been over the past two years in describing the fall into bankruptcy. The more intellectually nimble reporters of course describe the unfortunate confluence of events both internal and external that led to this rather uncomfortable predicament. Yet there is also the chorus of hired hands whose prose is not only shrill, but also laden with invective and ill-will toward your esteemed institution. Socrates of course maintained that opinions had little value when compared to wisdom but yet these reporters opined anyway and added little more than sensationalism to the discourse.
Yet, couched deep within their reporting (and even within the plaintive and mournful bleatings of the increasingly divisive prose of Chip from which we know no surcease) is a question that is quite germane and ties in nicely with the thoughts of my colleague. The rise of the only partially correctly named ‘low cost carriers’ has been hailed as the singularly most important event to sweep the air travel industry. The reporter’s stance has been that the beleaguered ‘legacy’ carriers will continue to remain under assault as the LCCs march unimpeded into market after market. Their success has been christened as a birthright and the legacy carriers have been awarded the status of an endangered species.
Now, after this rather somnifacient introduction I ask two simple questions:
1. Why does the press constantly trumpet all benefits of the LCCs based solely on cost? Would it not be also true that with time as the legacy carriers make needed adjustment that it would be the legacies who hold the advantage? Though I am not familiar with AirTran or JetBlue, why would their limited route structure be able to outpace a new and reinvigorated United? Would not United’s long reach, its Star Alliance association, and potential overwhelming economies of scale in the end tip the scale in its favour? Basically what we discussed at lunch was why has the business press and Wall Street enthroned the LCCs as the rightful heir to the industry without weighing the advantages and disadvantages of each? Maybe I am blind to the advantages of the LCCs because my flying involves the Star across the water and into the major cities. Are not the legacy carriers able to marshal other resources to carry to the fight? Is cost simply the only issue? Yes, price is regent for the customer, but I am not yet assured of the inseparability of cost and price when other factors are present.
2. The second question touches on the original “to what end?†With the rapid proliferation of LCCs, how long then before even these markets become saturated? What happens when the JetBlues and Southwests mature? Will there simply not be a culling out of the LCCs where a few remain and of course immediately raise their prices? This of course would only start the cycle anew as the upstarts become saddled with the cost structures of a maturing company. I would believe that there would be a limit of market penetration that can be gained by both the small jets and the LCCs. The determination of this point is worthy of discussion.
Knowing that Socrates little valued opinion, I will take my first try on this board of stating mine. I would believe that once the larger legacy carriers trimmed the fat from the corpus of the airline (which I note United is doing smartly in their BK proceedings) that they should be more than a match for some, but perhaps not all, of the LCCs. I opine that they should be able to compete with cost being only one factor in a larger equation. In other words, what they cannot match exactly on a CASM basis may be made up in other areas. In sport, two top teams on the pitch need to be acutely aware of their own advantages and disadvantages and leverage them as best they can. United may not be able to match JetBlues CASM, but is there not another advantage that they can adroitly employ to compete?
Second, I will have to give Chip half-mark credit for his observation about transformation and consolidation. I only give half-mark however, because though I believe he is looking in the correct direction, his ken is not yet far enough afield. He seems to be myopically focused on his localized Airways-United theories and is missing the broader ramifications of the Star. The true economies of scale will come when the alliances start acting like cartels in their purchasing power and not like the loose federations that characterize their actions at present. There have been both rumours and reports of the Star making bulk purchases of aircraft and other supplies. This is where the significant savings should be gained. Frankly I am shocked that it has taken Star so long to move in this direction. I liken this to a large battleship. It takes a long time to turn in the water, but when the guns are finally brought to bear the result is impressive. This, in the ever so humble opinion of Ukridge is where the true advantage over the LCCs may finally be found. If United can gain cost advantages through the Star (i.e. purchase of Airbus aircraft, fuel in bulk, airport services – the list is almost endless) then it will be able to fight these assaults. Let us see if those who make the decisions are so inclined to work in this manner.
Cheers
Taking United for example I find it interesting how shrill the press coverage has been over the past two years in describing the fall into bankruptcy. The more intellectually nimble reporters of course describe the unfortunate confluence of events both internal and external that led to this rather uncomfortable predicament. Yet there is also the chorus of hired hands whose prose is not only shrill, but also laden with invective and ill-will toward your esteemed institution. Socrates of course maintained that opinions had little value when compared to wisdom but yet these reporters opined anyway and added little more than sensationalism to the discourse.
Yet, couched deep within their reporting (and even within the plaintive and mournful bleatings of the increasingly divisive prose of Chip from which we know no surcease) is a question that is quite germane and ties in nicely with the thoughts of my colleague. The rise of the only partially correctly named ‘low cost carriers’ has been hailed as the singularly most important event to sweep the air travel industry. The reporter’s stance has been that the beleaguered ‘legacy’ carriers will continue to remain under assault as the LCCs march unimpeded into market after market. Their success has been christened as a birthright and the legacy carriers have been awarded the status of an endangered species.
Now, after this rather somnifacient introduction I ask two simple questions:
1. Why does the press constantly trumpet all benefits of the LCCs based solely on cost? Would it not be also true that with time as the legacy carriers make needed adjustment that it would be the legacies who hold the advantage? Though I am not familiar with AirTran or JetBlue, why would their limited route structure be able to outpace a new and reinvigorated United? Would not United’s long reach, its Star Alliance association, and potential overwhelming economies of scale in the end tip the scale in its favour? Basically what we discussed at lunch was why has the business press and Wall Street enthroned the LCCs as the rightful heir to the industry without weighing the advantages and disadvantages of each? Maybe I am blind to the advantages of the LCCs because my flying involves the Star across the water and into the major cities. Are not the legacy carriers able to marshal other resources to carry to the fight? Is cost simply the only issue? Yes, price is regent for the customer, but I am not yet assured of the inseparability of cost and price when other factors are present.
2. The second question touches on the original “to what end?†With the rapid proliferation of LCCs, how long then before even these markets become saturated? What happens when the JetBlues and Southwests mature? Will there simply not be a culling out of the LCCs where a few remain and of course immediately raise their prices? This of course would only start the cycle anew as the upstarts become saddled with the cost structures of a maturing company. I would believe that there would be a limit of market penetration that can be gained by both the small jets and the LCCs. The determination of this point is worthy of discussion.
Knowing that Socrates little valued opinion, I will take my first try on this board of stating mine. I would believe that once the larger legacy carriers trimmed the fat from the corpus of the airline (which I note United is doing smartly in their BK proceedings) that they should be more than a match for some, but perhaps not all, of the LCCs. I opine that they should be able to compete with cost being only one factor in a larger equation. In other words, what they cannot match exactly on a CASM basis may be made up in other areas. In sport, two top teams on the pitch need to be acutely aware of their own advantages and disadvantages and leverage them as best they can. United may not be able to match JetBlues CASM, but is there not another advantage that they can adroitly employ to compete?
Second, I will have to give Chip half-mark credit for his observation about transformation and consolidation. I only give half-mark however, because though I believe he is looking in the correct direction, his ken is not yet far enough afield. He seems to be myopically focused on his localized Airways-United theories and is missing the broader ramifications of the Star. The true economies of scale will come when the alliances start acting like cartels in their purchasing power and not like the loose federations that characterize their actions at present. There have been both rumours and reports of the Star making bulk purchases of aircraft and other supplies. This is where the significant savings should be gained. Frankly I am shocked that it has taken Star so long to move in this direction. I liken this to a large battleship. It takes a long time to turn in the water, but when the guns are finally brought to bear the result is impressive. This, in the ever so humble opinion of Ukridge is where the true advantage over the LCCs may finally be found. If United can gain cost advantages through the Star (i.e. purchase of Airbus aircraft, fuel in bulk, airport services – the list is almost endless) then it will be able to fight these assaults. Let us see if those who make the decisions are so inclined to work in this manner.
Cheers
Pretty soon one will start to compare this with Old World Europe! Seriously, I can only ask what happens when the bloom is off the rose with JetBlue? I agree with that there seems to be a great deal of irrationality in the market. It costs a certain price to fly from A to B. This is immutable and I think the press has done everyone a great and grevious disservice by not reporting that the better mousetrap has not yet been invented even though everyone thinks that JetBlue is the embodiment of this elusive goal. The question is what would JetBlue charge if there were no legacy carriers left?
