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Air Transport
US Airways Relies on 'Transformation' in Battle for Low-Fare Business
Aviation Week & Space Technology
05/03/2004, page 44
David Bond
Washington
Having failed to beat its low-fare competition, the No. 7 U.S. carrier will try--again--to join them
US Airways 'Transforms'
US Airways, still running in the red, is turning to yet another long-term solution to an increasingly near-term problem, exemplified by what many in aviation see as its ultimate confrontation--the launch of Philadelphia service May 9 by low-fare rival Southwest Airlines.
The solution is "transformation," described only sketchily on Sept. 27 as the company announced another set of poor financial results, these for the first-quarter 2004. The initiative still is being shaped by talks between the new CEO, Bruce Lakefield, and US Airways' unions, creditors, suppliers and other stakeholders.
Transformation absorbs US Airways' continuing attempts to reduce costs beyond what it achieved through its eight-month Chapter 11 bankruptcy reorganization, which ended a year ago. Even though yields have collapsed throughout the industry during the past three years, the carrier still has unit revenues that would produce profits at almost any other airline, even its big network competitors (see table). At US Airways, however, high costs created a $143-million operating loss and a $177-million net loss during the quarter that ended Mar. 31.
BUT TRANSFORMATION has a revenue component, too--finding ways to bolster US Airways' share of a growing low-fare market. "Customers increasingly have more options for low, simplified fares, resulting in strong traffic at lower yields," Ben Baldanza, senior vice president for marketing and planning, said in a conference call with securities analysts. "Our transformation plan will capitalize on this market trend by allowing us to profitably offer consistently low fares to our customers."
Baldanza described a few revenue-side implications of a lower-fare, higher-traffic future, touching on their application at Philadelphia:
*Capacity increases in low-fare markets. Assuming Southwest's entry at Philadelphia will increase origin-and-destination traffic there, US Airways scheduling and marketing teams have developed plans to replace Airbus narrowbodies at the Charlotte and Pittsburgh hubs with newly delivered 70-seat regional jets, moving the mainline aircraft to Philadelphia. Replacing turboprops with RJs has been in the carrier's plans for years, and in the long run, 70-seat RJs will get increased emphasis over 50-seaters. Over time, US Airways will try to boost aircraft utilization beyond 10 hr. per day.
*More emphasis on nonstop service. US Airways is "overreliant" today on moving passengers through hubs on one-stop itineraries, and much of its added service in Philadelphia will be for point-to-point customers, like Southwest's. As lower fares stimulate traffic increases throughout the day, US Airways will de-peak its Philadelphia arrival and departure banks.
"Volume does not seem to be a problem in the industry," Baldanza summarized. "It's yields that are under pressure, and so that's why the transformation plan is built around rebuilding the airline to carry more passengers at lower average yield."
Depeaking hub operations offers significant cost reductions and has been applied that way elsewhere, by American in Dallas/Fort Worth and Chicago, for example, Delta in Atlanta and Continental in Newark. Similarly, increasing aircraft size usually reduces unit costs--the trip cost of a larger aircraft doesn't usually increase by the same percentage as the number of seats. Delta relied on this last year when it replaced its old Express operation's 737s with Song's 757s. But in each case, US Airways is aiming at a better Philadelphia product as well as lower costs.
It also seems to have abandoned the airline-within-an-airline, in use today by United's Ted as well as Delta's Song. US Airways tried that approach and failed badly with it after Southwest moved into the eastern U.S. at what used to be a US Airways stronghold, Baltimore, in 1993. Today, Southwest is No. 1 at Baltimore.
THERE IS A DANGER in increasing capacity under current conditions, however. Unit revenue equals fare yield times the load factor, and if yields are low, increasing revenue and covering costs will depend on flying the larger aircraft even fuller than the smaller ones.
One of US Airways' key accomplishments in Chapter 11 was winning agreement from its Air Line Pilots Assn. unit on a scope clause allowing much greater use of RJs by regional subsidiaries and affiliates. The carrier quickly ordered RJs from both Embraer and Bombardier. It had 123 RJs on Mar. 31, 13 of them new during the first quarter. Its RJ capacity was 47% higher in first-quarter 2004 than it was a year earlier.
Big Seven Airlines' Unit Revenues and Costs
First Quarter 2004
[Sorry folks, the numbers aren't lining up making it hard to read. The numbers after each airline are RASM/Operating CASM/Operating Profit (Loss)]
Revenue per Operating Cost per Operating
Available Seat Mile Available Seat Mile Profit (Loss)
(cents) (cents) ($ millions)
American 8.64 9.49 42
(mainline)
United 8.40 10.18 (211)
Delta 8.88 10.71 (388)
Northwest 8.99 10.23 (108)
Continental 8.55 9.76 (135)
Southwest 8.07 7.82 46
US Airways 10.62 11.68 (143)
(mainline)
Source: Company reports
US Airways Relies on 'Transformation' in Battle for Low-Fare Business
Aviation Week & Space Technology
05/03/2004, page 44
David Bond
Washington
Having failed to beat its low-fare competition, the No. 7 U.S. carrier will try--again--to join them
US Airways 'Transforms'
US Airways, still running in the red, is turning to yet another long-term solution to an increasingly near-term problem, exemplified by what many in aviation see as its ultimate confrontation--the launch of Philadelphia service May 9 by low-fare rival Southwest Airlines.
The solution is "transformation," described only sketchily on Sept. 27 as the company announced another set of poor financial results, these for the first-quarter 2004. The initiative still is being shaped by talks between the new CEO, Bruce Lakefield, and US Airways' unions, creditors, suppliers and other stakeholders.
Transformation absorbs US Airways' continuing attempts to reduce costs beyond what it achieved through its eight-month Chapter 11 bankruptcy reorganization, which ended a year ago. Even though yields have collapsed throughout the industry during the past three years, the carrier still has unit revenues that would produce profits at almost any other airline, even its big network competitors (see table). At US Airways, however, high costs created a $143-million operating loss and a $177-million net loss during the quarter that ended Mar. 31.
BUT TRANSFORMATION has a revenue component, too--finding ways to bolster US Airways' share of a growing low-fare market. "Customers increasingly have more options for low, simplified fares, resulting in strong traffic at lower yields," Ben Baldanza, senior vice president for marketing and planning, said in a conference call with securities analysts. "Our transformation plan will capitalize on this market trend by allowing us to profitably offer consistently low fares to our customers."
Baldanza described a few revenue-side implications of a lower-fare, higher-traffic future, touching on their application at Philadelphia:
*Capacity increases in low-fare markets. Assuming Southwest's entry at Philadelphia will increase origin-and-destination traffic there, US Airways scheduling and marketing teams have developed plans to replace Airbus narrowbodies at the Charlotte and Pittsburgh hubs with newly delivered 70-seat regional jets, moving the mainline aircraft to Philadelphia. Replacing turboprops with RJs has been in the carrier's plans for years, and in the long run, 70-seat RJs will get increased emphasis over 50-seaters. Over time, US Airways will try to boost aircraft utilization beyond 10 hr. per day.
*More emphasis on nonstop service. US Airways is "overreliant" today on moving passengers through hubs on one-stop itineraries, and much of its added service in Philadelphia will be for point-to-point customers, like Southwest's. As lower fares stimulate traffic increases throughout the day, US Airways will de-peak its Philadelphia arrival and departure banks.
"Volume does not seem to be a problem in the industry," Baldanza summarized. "It's yields that are under pressure, and so that's why the transformation plan is built around rebuilding the airline to carry more passengers at lower average yield."
Depeaking hub operations offers significant cost reductions and has been applied that way elsewhere, by American in Dallas/Fort Worth and Chicago, for example, Delta in Atlanta and Continental in Newark. Similarly, increasing aircraft size usually reduces unit costs--the trip cost of a larger aircraft doesn't usually increase by the same percentage as the number of seats. Delta relied on this last year when it replaced its old Express operation's 737s with Song's 757s. But in each case, US Airways is aiming at a better Philadelphia product as well as lower costs.
It also seems to have abandoned the airline-within-an-airline, in use today by United's Ted as well as Delta's Song. US Airways tried that approach and failed badly with it after Southwest moved into the eastern U.S. at what used to be a US Airways stronghold, Baltimore, in 1993. Today, Southwest is No. 1 at Baltimore.
THERE IS A DANGER in increasing capacity under current conditions, however. Unit revenue equals fare yield times the load factor, and if yields are low, increasing revenue and covering costs will depend on flying the larger aircraft even fuller than the smaller ones.
One of US Airways' key accomplishments in Chapter 11 was winning agreement from its Air Line Pilots Assn. unit on a scope clause allowing much greater use of RJs by regional subsidiaries and affiliates. The carrier quickly ordered RJs from both Embraer and Bombardier. It had 123 RJs on Mar. 31, 13 of them new during the first quarter. Its RJ capacity was 47% higher in first-quarter 2004 than it was a year earlier.
Big Seven Airlines' Unit Revenues and Costs
First Quarter 2004
[Sorry folks, the numbers aren't lining up making it hard to read. The numbers after each airline are RASM/Operating CASM/Operating Profit (Loss)]
Revenue per Operating Cost per Operating
Available Seat Mile Available Seat Mile Profit (Loss)
(cents) (cents) ($ millions)
American 8.64 9.49 42
(mainline)
United 8.40 10.18 (211)
Delta 8.88 10.71 (388)
Northwest 8.99 10.23 (108)
Continental 8.55 9.76 (135)
Southwest 8.07 7.82 46
US Airways 10.62 11.68 (143)
(mainline)
Source: Company reports
