UA744Flagship From , joined Dec 1969, posts, RR: Posted (5 years 11 months 2 weeks 5 days 11 hours ago) and read 5019 times:
I felt compelled to start this topic because of ConcordeBoy's reply in the topic United Low Cost Ambition With 40 Aircraft.
His reply to my statement that United does not have overcapacity: actually, all 6 of the majors do... the primary reason they're in the predicament that they're currently in
OVERCAPACITY IS NOT THE PRIMARY REASON FOR THE US MAJORS' WOES.
The opinion of most analysts have changed since airlines have continued to reduce capacity in the aftermath of the war in Iraq and SARS-related travel concerns. Before they were saying that the elimination of one major's capacity was needed to cure the rest of the majors' financial woes. They are no longer saying that the collapse of a major carrier is the right solution.
While undoubtedly the elimination of a major (ie United) would solve the remaining 5 carriers' problems by reducing competition in many markets and giving them increased pricing power, it does not solve the fundamental problem of the major carriers: their inability to lower their costs so that they can charge an average fare that will be profitable at the market price.
Let me state the problem again: The problem of the 6 US Majors is their inability to reduce their cost structure to levels where the market price for an average fare allows them to be profitable or break even at the least.
Even if the majors became profitable at the demise of one of them, they would soon find themselves unprofitable again once the LCCs have expanded to more domestic routes where the majors, as of yet, cannot compete with LCC costs. What would result is less consumer choice, less traveling by the flying public, and less growth in the economy in the meantime -- until LCCs expand capacity to the point where consumers have a choice for lower fares.
THERE IS NO OVERCAPACITY.
Enough service cuts have been done by the majors to reflect the dropoff in business travel. Leisure travel remains as strong as ever.
United alone has gone from 100,000 + employees post 09/11 to less than 65,000 today.
In economic terms, the demand for air travel has simply moved down the demand line. In economic terms, overcapacity means that the demand curve has changed *at every price level*. Year over year, just about the same amount of people want to fly -- just at a lower price level. If overcapacity existed, even at a lower price level, less people would want to fly. This is simply not the case. Therefore, overcapacity does not exist. If you are confused and want me to provide several economic diagrams, I'll gladly do it.
The reason why load factors have been high for the majors is that capacity is now in line, but at the market price. Since the market price for an average fare is less than the cost to a major of providing said fare, the majors are losing money. They cannot raise fares, because they have no pricing power.
The fact that the majors no longer have pricing power is A GOOD THING. The lack of pricing power means there is enough competition from LCCs on many routes that the majors can no longer charge a premium for the same service. Eliminating a major would bring back pricing power -- until the LCCs inevitably expand. This would hurt consumers and decrease flying in the short run, at the expense of propping up the remaining majors with bloated cost structures.
THERE IS NO OVERCAPACITY.
The problem for the majors is that for their cost structure, their supply curve does not mesh with the consumer demand curve -- what consumers are willing to pay at the current (and correct) level of industry capacity.
How do we know there is NO OVERCAPACITY? Look at all the aircraft US LCCs have on the orderbooks. The capacity is right -- the LCCs will just keep taking more passengers from the majors until the majors can compete with the LCCs either by lowering their costs to enable them to operate profitably with low fares or by adding enough value to make consumers pay a little extra.
Reducing capacity is not the answer. If a major cut a major amount of capacity, it would still lose money per flight -- just not lose as much in total.
The issue is costs, costs, costs.
The issue is THE BUSINESS MODEL.
US Majors are reluctant to change
US Majors are maintaining traditional "yield-management" based cost structures which cost more to operate by the increased infrastructure required to administer the many fare rules, fare types, and complex products
US Majors are crippled by arhaic union contracts that reduce productivity
The US majors must find a way to address these three points.
The first point is the easiest to address -- and not one major yet has committed to a major change of its business plan.
UA744Flagship From , joined Dec 1969, posts, RR: Reply 1, posted (5 years 11 months 2 weeks 5 days 11 hours ago) and read 4927 times:
Please note that the only "Top 10" carrier (note: not Big Six Majors) that *did* radically change its business model is America West.
You'll notice that America West reported arguably the best results of the carriers that maintained traditional "yield-management" fare structures prior to September 11.
What did they do?
Reduced capacity and costs, just like everyone else
RADICALLY changed their fare structure
Simplifying their fares ended up reducing costs even more
America West seems to have been able to transition from complex fare structure to simple fare structure with considerable succes.
An excerpt from an earlier press release.
America West Sees 2003 Costs Down 3%-5% Year-On-Year
NEW YORK (Dow Jones)--America West Holdings Corp.'s revenue per available seat mile rose 4% in the second quarter, and 10% in June
AMAZING! The carrier reported costs going down, and revenues going up!
Why? Because it started charging fares it could afford to charge, and it refused to charge needless complicated and expensive fares.
Luv2fly From United States, joined May 2003, 11216 posts, RR: 58 Reply 2, posted (5 years 11 months 2 weeks 5 days 10 hours ago) and read 4872 times:
When I read this I kept thinking to myself you still did not get it, tho once I got to the end I changed my mind. Yes you have hit the nail on the head. Until the majors understand this, there problems will remain, and like you pointed out only get worse and worse. Thanks for the insight and well written post.
StevenUhl777 From , joined Dec 1969, posts, RR: Reply 3, posted (5 years 11 months 2 weeks 5 days 10 hours ago) and read 4825 times:
EXCELLENT JOB! I laughed at what ConcordeBoy wrote, and always laugh at the idiot analysts who think they know it all, but have never worked a day in the industry. All one had to do is look at what the airlines have been agressively doing, especially UA and AA, in just the past few months. Already, United has trimmed their losses and either met or exceeded their DIP coventants, something the "experts" didn't think would happen. The economic arguments you presented makes perfect sense to me, having a degree in it, though I don't think trying to post graphs will help! Well written, I might add! If you haven't done so already, drive over to Elk Grove Village just north of O'Hare and see if United needs any extra help. They might be in denial, but they sure as hell do. The idiots in their finance group who thought it was a such great idea to pay $60/share to buy USAirways (who was already well on their way to bankrupcty at the point anyway) are still there, and need to be quickly shown the door. Luckily, Jim Goodwin is already gone. CEO's don't make bold predictions about their airlines might perish...he in effect convinced the bankers and capital markets to shut their doors on United. Had there been a real CEO in there at the time, even Tilton, United might have been OK and either avoided or delayed their Ch. 11 filing.
Couple of things:
- regarding the archaic union contracts: managements at various airlines have always been tough as nails on employees, i.e. Bob Crandall (and Don Carty for that matter) at AA, Wolf at UA, Lorenzo at EA/CO, and on and on. If you were a worker faced with taking a huge pay cut that affected your family's quality of life, you would (hopefully) a.) try to find other, higher paying work outside the industry if available, or b.) side with the union who is trying to fight off the cuts as long as possible, and at the same time actively questioning why management continues to be so inefficient and refuses to change and fix chronic problems.
- NWA and DL still have high pilot labor costs, well above UA and AA. That will have to come down, and so far, ALPA hasn't been in a big hurry to sit down and work something out. If the current revenue trend continues industrywide, and it most likely will for the next 2 years, NWA and DL might find themselves closer to Ch. 11 than they expected if they don't address these cost isses.
- United and American have won huge concessions from their employee groups in the past few months, specifically in the area of work rules, some of which they have sought for DECADES. Employee morale is in the toilet and will remain there for some time, and this is a huge liability to the airlines, it will be a make/break issue for both UA and AA. Just becuase costs are lower doesn't mean the airline is running well...angry employees who no longer care can negate the cost savings. To the airline employees, it finally came down to take a huge cut in pay and benefits, along with a change in rules, or lose their jobs altogether through Ch. 7, etc. I had heard through my Dad at UA that several employees already had thrown in the towel, and hoped for a buyout by AA or DL, but as long as they pulled the plug on UA. People get tired of riding the roller coaster after a while.
- Hub and Spoke: You could probably write your thesis on this subject alone...but my quick take is that one major airline will have to take the bold, dramatic step and completely abandon their system. So far, that will probably be AA, but I'm not holding my breath. United will probably have to close one, or more, or perhaps substantially reduce several, similar to what AA did in STL.
BAGSMASHER From United States, joined Jul 2003, 165 posts, RR: 0 Reply 4, posted (5 years 11 months 2 weeks 5 days 9 hours ago) and read 4766 times:
THE REAL REASON FOR THE MAJORS PROBLEMS ARE THE FARES. FARES ARE FAR CHEAPER NOW THAN 20 YEARS AGO IN EVERY MARKET. AT THE SAME TIME FUEL PRICES HAVE RISEN DRAMATICALLY AS WELL AS THE COSTS OF AIRCRAFT, INSURANCE, SERVICE ITEMS AND EVERYTHING CONNECTED TO THE INDUSTRY. NOT TO MENTION THAT THEY GIVE AWAY THE CORPORATION TO EVER GREEDY CONSUMERS THAT CONSTANTLY DEMAND MORE. AS EMPLOYEES WE ARE TOLD THAT WE ARE OVERPAID AND WE MUST GIVE BACK. REALLY? EMPLOYEE WAGES HAVEN'T KEPT UP WITH INFLATION BY A LONG SHOT. IM NOT COMPLAINING ABOUT WHAT I MAKE. I AM PAID FAIRLY I WILL GLADLY PASS UP A RAISE FOR JOB SECURITY. BUT WHAT IS MOST SHOCKING IS THAT ALMOST NO ONE SAYS THE CUSTOMER SHOULD BE PAYING MORE. OUR COMPANIES TELL US THAT CONSUMERS DEMAND LOW FARES. THATS NICE BUT CAN I GO TO THE CADILLAC DEALERSHIP AND DEMAND A BRAND NEW ESCALADE FOR $5,000 OR SOME OTHER RIDICULOUS REQUEST? THE ANSWER HAPPILY FOR GENERAL MOTORS IS NO. UNFORTUNATELY, THE AIRLINES SAY YES. THEY GIVE AWAY UPGRADES TO FIRST CLASS FOR ALMOST NOTHING. THEY GIVE AWAY TICKETS FOR 20,000 MILES. THE INDUSTRY HAS DONE IT TO THEMSELVES. UNLESS THEY CAN FIGURE OUT A WAY TO CHARGE CONSUMERS ENOUGH TO AT LEAST BREAK EVEN WE ARE DOOMED. ALL OF US WHO WORK FOR THE BIG-5 WILL NOT BE HERE IN TEN YEARS, MAYBE LESS. MEANWHILE THE CEOS ARE STILL GETTING THEIR BONUSES!! OKAY IM FINISHED. BAGSMASHER IN AZ.
Artsyman From United States, joined Feb 2001, 4734 posts, RR: 56 Reply 5, posted (5 years 11 months 2 weeks 5 days 8 hours ago) and read 4743 times:
While I agree with many of the comments that have been made, people have to remember that the major carriers created this industry, they created the demand, helped design the airliners and created air travel as a service within the reach of the average consumer.
To be a LCC in this day and age is really just cherry picking. Competition means that the LCC and anyone else 'these days' can now get aircraft for a lot less than what the majors had to pay for them over the years. The LCC now also get to look at the entire map, look at where markets have been developed and pick from the best ones, where as the majors had to cover everywhere and do all that work already.
They also have the benefits of young fleets, new employees and generally cheaper product.
When the majors try to reduce the costs that they can control (wages, leases) everyone cries foul, "The airline backstabbed me, why should I take cuts etc.
While I do think there is still overcapacity (does BA really need 8 trips across the pond everyday ?) along with many by Continental, United, AA, DL etc, never mind all the others. The other problem is that as soon as the majors pull out of the smaller markets, everyone complains that they are losing service and how unfair it is.
At the end of the day, all will make changes or the will go the way of the dodo bird, but while the majors costs will continue to go down, the costs of the LCC will only go up.
B747-437B From , joined Dec 1969, posts, RR: Reply 6, posted (5 years 11 months 2 weeks 5 days 8 hours ago) and read 4715 times:
Time for me to rehash a post I had made last year on a very similar topic. Few arguments with Hass about the root of the problems, but I disagree about the ease of implementing the solutions. Anyway, read on (and remember that this was written in August of 2002 so specific examples may be a bit dated).....
--
This theory makes a fitting corollary to my thesis which states that "Without a complete overhaul of operating costs every decade, an airline cannot remain competitive in a deregulated environment."
Historically, this has proven to be very accurate. The first round of industry deaths was seen in the early 80s with consolidation being the fate of those unable to control operational costs, with a few shutdowns (Braniff). A decade later saw a spate of bankruptcies, some resulting in liquidation (Eastern, PanAm) and others in restructuring (Continental, TWA). This time round, the ranks are being thinned again with TWA already biting the dust, with the jury out on USAirways and United.
How do the survivors keep themselves viable? Their methodology varies. In the first round, some sought to survive by acquisition, seeking instead to increase revenue rather than cut costs. PanAm acquired National, TWA acquired Ozark, Northwest acquired Republic and Texas Air acquired pretty much everyone else. Others went the way of labor concessions, which took the form of B-scales at American, "Blue Skies" at United and the infamous Lorenzo bankruptcy at Continental. American's B-scales were the only truly long-term solution to the problem, which bought them an additional generation of savings and allowed them to consolidate their strong position. Similarly, Continental's abrogation of labor contracts achieved the same end, but killed the golden goose while doing it. In the second round, some achieved their targets by acquisition again (Delta acquiring Europe, AA acquiring LatAm), with United using ESOP as a means towards their target for that generation. Continental used bankruptcy yet again, as did TWA. Throughout this, USAir continued to acquire many small carriers and built themselves up into the major carrier than they became. Northwest played conservatively and chose to avoid major capital expenditures while increasing revenue streams through the introduction of the first comprehensive marketing alliance. Fleet renewal programs at most of the carriers also slashed direct operating costs.
In their own way, each of these carriers thus were able to overhaul operational expenditure every decade. Usually, this was done at the expense of the labor groups, but occasionally at the expense of creditors or other airlines.
With maturity comes seniority, and seniority brings with it the related pitfalls of higher labor costs and less efficient workrules. A new entrant, by definition, does not have any of this baggage. Additionally, a well-funded new entrant has the advantage of choosing the most beneficial markets for infrastructure investment and vendors for capital acquisition, benefits that existing operators utilized generations earlier and are now irrevocably tied into, despite possible changes in the operating environment. In the short term, provided sufficient capital exists, and provided the appropriate markets are targeted, it is very easy for a new entrant to be succesful, often to the detriment of the incumbent who is handicapped by pre-existing baggage outlined above. However, as new entrants themselves consolidate and become incumbents, the next generation of operational streamlining comes knocking and the cycle continues.
UA744Flagship From , joined Dec 1969, posts, RR: Reply 7, posted (5 years 11 months 2 weeks 5 days 7 hours ago) and read 4702 times:
I'm pleased that all the responses have been insightful so far.
StevenUhl777
First, thanks -- it has always been my intention to work for United. I've developed some internal company contacts, having interned for the company, worked for a UAX carrier, and consulted for the company through my university's aviation program research project. I intend to do my best in college, then hopefully start shaking things up at WHQ!
Regarding your points, all quite valid. Unless an employee is extremely loyal to the company, the obvious choice is to side the with the union. These days, the competitive environment necessitates the need for management and unions to work together to make the experience of airline employees less volatile -- flattening out the bumps through profit-sharing is the best solution. Also, I agree with the hub disintegration theory. I would hope more airlines are looking "rolling" their hubs like AA. United is in a peculiar situation in that its Dulles has historically resembled AA's downsized St. Louis hub (less than 99 flts/day but with mega regional service). My ideal solution is for United to turn IAD into its Starfish hub, grabbing a share of the fastest-growing market: low fare transcontinental service. Make IAD like B6's JFK or WN's BWI.
Artsyman
You too bring up some very keen observations.
You said: To be a LCC in this day and age is really just cherry picking. Competition means that the LCC and anyone else 'these days' can now get aircraft for a lot less than what the majors had to pay for them over the years. The LCC now also get to look at the entire map, look at where markets have been developed and pick from the best ones, where as the majors had to cover everywhere and do all that work already.
A very good point -- it's unfair that people critcize the major airlines as 'dinosaurs' when they created the industry. Let's not be apologetic for them however.
After all, this is the way of capitalism, the private enterprise system, and American business. So what if the majors had to "do all that work already"? Netscape/Mosaic spearheaded the market for internet browsers, yet Microsoft has taken over practically the whole market. Is anoyone apologetic for Netscape? No. Microsoft took Netscape's good idea -- and improved it. And it improved it so much, hardly anyone uses Netscape anymore.
This comment particularly intrigued me: "...the majors had to cover everywhere and do all that work already."
Southwest wasn't born yesterday. Growing steadily (and profitably) since 1971, Southwest was along for the ride of deregulation as the majors formed today's route network structures. Southwest didn't cover everywhere during the last 30+ years. It only covered markets where it knew it could operate profitably. It has done its SWOT analysis over and over again.
"They also have the benefits of young fleets, new employees and generally cheaper product."
All successful businesses aim to have new tools, new talent, and provide the highest quality at the lowest possible price. Why should airlines be any different? Successful business are also focused on growth -- as such, growth fuels the acquisition of said resources.
And finally: "while the majors costs will continue to go down, the costs of the LCC will only go up."
While the majors' costs have grown EXPONENTIALLY in real terms since the 1980s, Southwest's have remained relatively stable in real terms. Southwest has been there along, controlling its costs. One of the major keys to successful business is continuously controlling costs. WN has done that for over 30 years. Why can't the majors? Who's to say the "NG" LCCs can't?
Will the majors' costs continue to go down? According to the latest (and "landmark") concession agreements, labor costs are the lowest they are going to be. According to the contracts, it's only raises from now on. Also, note that with United's new contract, United 737/Airbus pilots are compensated LESS than WN 737 pilots. Do you think they'll give back more?
Nearly guaranteed rising wages within the major airlines are another crises waiting to happen, since LCC growth is deliberately and relentlessly taking away US majors' traditional business. Domestic revenues are nearly guaranteed to be going down at the majors as LCCs grow..
While people claim AirTran and JetBlue will lose much of their relative cost advantage as they add new fleet types, they already dismiss the fact that these LCCs have a proven track record, and explicitly detail in their business plans, the goal of continuous cost containment. After all, it's been the key to their success. Why would they stop trying to go by that guiding principle?
I'm not saying the majors need to become LCCs. But they need to learn how to control their costs and simplify their product -- you can still be "full service" without having XXX different ways of getting into first class or hundreds of fare rules and restrictions. In fact, one would think "full service" meant you didn't have to deal with their impractical fare systems.
UA744Flagship From , joined Dec 1969, posts, RR: Reply 8, posted (5 years 11 months 2 weeks 5 days 7 hours ago) and read 4691 times:
Hey Sean,
Please remember that I praised your post back then!
Since then I have talked with other industry consultants and tracked various aviation consultancy reports -- all sharing the same call for dramatic change.
I agree, overhauling the "Network Carrier" modus operandi is *no small task*. I would gladly be willing to throw myself in though, as soon as I have the qualifications and experience.
The one airline that is able to defy the "incumbent-new entrant" vicious cycle is Southwest -- it has been the benchmark for low costs, organizational peace, and controlled growth for the last 30 years.
UA744Flagship From , joined Dec 1969, posts, RR: Reply 9, posted (5 years 11 months 2 weeks 5 days 1 hour ago) and read 4555 times:
BAGSMASHER,
The reason why the majors do not have the pricing power that auto makers have is that there is NO COMPETITIVE DIFFERENTIATION.
The reason why Escalades sell for 35K+ is because they are big, flashy, powerful, and luxurious. The difference between that and a 14K Toyota Corolla is readily obvious, as the SUV is differentiated by its size, styling, ride, and comfort. They are different as night and day in our minds.
The Major airlines have lost sight of the essence of their product: getting you from point A to point B by air much faster and more convenient than any other way. Because the product is a SERVICE, and not a physical, take home item... the only way to differentiate is through different SERVICE.
Unfortunately, the majors chose the lure of freebies in rewards programs to differentiate themselves rather than upgrading their overall service. The best they have done is to offer "better service" by way of high frequency.
The result? The basic product is almost exactly the same as the LCC's product. In fact, there is little to no difference in the economy or coach classes of a major or LCC within the US these days. And LCCs now come close to matching the majors' frequency on routes where frequency matters, thus negating the majors' last major advantage and appealing to business pax.
Yet -- an LCC defied the "no frills" convention and decided to offer a tangible, physical SERVICE improvement to differentiate itself. Of course I'm talking about jetBlue with its in-seat satellite TV.
What you're seeing is an erosion in effectiveness of the marketing tool airlines have been using as COMPETITIVE DIFFERENTIATION for the last 20 or so years. That tool, of course, is the frequent flyer program.
So far, jetBlue has not made its FF program very frequent flier friendly at all. Why? People don't keep flying jetBlue to get a free ticket or free upgrade. Most people who fly jetBlue come back because of the ONBOARD PRODUCT and because of the CONSISTENCY OF FARES. When very frequent jB fliers finally earn free tickets, it comes as icing on the cake and just another delight.
The majors are still trying to use Frequent Flier Programs (FFPs) as competitive differentiation. However, in a service industry, competitive differentiation is more effective through SERVICE DIFFERENTIATION rather than PROMOTIONAL DIFFERENTIATION.
You cannot really call "First Class" a SERVICE DIFFERENTIATION. Why? The price of it is not within the reach of 90% of the population, and of the 10% of the population who uses the differentiated product, only a minority pay full price. The others, of course, upgrade and in doing so pay a fraction of the advertised cost for a first class ticket, and contribute little to offsetting the cost (both direct and opportunity costs) of providing first class service on that particular flight.
If majors would like for people to pay more, they need to engage in COMPETITIVE DIFFERENTIATION through SERVICE DIFFERENTIATION.
That is how Motel 6 can charge $60 night and be successful while The Ritz Carlton can charge you pretty much the right to your first born child. Ritz Carlton doesn't make money by seeking people who buy smaller rooms at $60 a night several times and then rewarding them with a fancy suite. Ritz Carlton charges >$60/night, and it can because its service differentiation has value.
How can the majors charge more? There is no clear cut answer, and this is the biggest conundrum the airline face.
Meals are apparently not the answer -- time and again PRICE is the major factor in choosing a carrier. But maybe high quality buy-on-board (BoB) meals are part of a solution, as some airlines think. The success is still up in the air.
Some ideas focus on offering sets of add-ons or a class of service that does not cost as much as it takes to provide today's first class, at a price that doesn't cost 100% more, but at a reasonable surcharge above a regular ticket.
Example: offer the option to "buy up" to priority check-in, pay a modest fee for extra legroom, or reasonably price day passes to airline clubs.
Whatever the case, airlines must find a way to price their product at a premium, but not at a dramatic premium, over LCC fares, so that people will perceive value in the extra price.
These days, less frequent flyers on business go out of their way to stick with a major and instead opt to pay less for a walk-up fare and choose not to be penalized with restrictions or change fees by riding an LCC. The time has come where even a free upgrade is not worth nearly as much as knowing you'll never be charged over $299 for a flight, and the freedom to change your travel plans with little or no penalty.
After all, the service that airlines provide is FREEING OUR TIME. Airlines get you from point A to point B faster than anyone else. They save us time. They save business time. For many passengers, more time is usually more preferrable than more miles. Having to deal with complex fares, fare rules, and steep change fees makes flying less easy and saves us less time.
Bestwestern From Ireland, joined Sep 2000, 4762 posts, RR: 60 Reply 10, posted (5 years 11 months 2 weeks 5 days ago) and read 4506 times:
Why are Fares Cheaper?
Because the airlines are trying to stimulate demand to fill otherwise empty seats?
Why are high spenders flying less?
Economic Downturn - companies reducing travel budgets dramatically
Increased security - making daytrips more difficult and time consuming
Reduced onboard service - making flying more of a chore
Competition - Amtrack - it can be quicker to drive
Business flying is not fun anymore - Thanks to Mr Greenspan, The Airlines and the TSA's.
Does God get peeved if you dont use a capital 'g' ?
Goingboeing From United States, joined Dec 1999, 4874 posts, RR: 37 Reply 11, posted (5 years 11 months 2 weeks 5 days ago) and read 4489 times:
bagsmasher - the consumer does demand low fares...so why do airlines charge last minute fares that are so outrageously high? In the days following 9/11, Southwest lowered their one way fares to $199 and the net effect was that they saw the average price paid for a ticket increase.
The pricing structure is way out of whack. The airlines are still offering highly restricted fares that give away the farm, but the last minute business travellers (read - suckers) are no longer willing to pay the outrageous fares. Look at the Dallas area - Nortel used to own several buildings in "Telecom Corridor" and they had a whole lotta people traveling. Now, almost all those buildings are vacant (because Nortel laid off most of their staff), and they are really watching their travel dollar closely. Airline owned "services" like Priceline and Hotwire further undercut the last minute sales. Bob Crandall had the vision for value pricing way back in the early 90's. Too bad that another airline decided to run a "fire sale", and even worse was AA's decision to "teach them a lesson". Had value pricing been allowed to survive, I doubt the airlines would find themselves in the dire straits that they are in today.
UA744Flagship From , joined Dec 1969, posts, RR: Reply 12, posted (5 years 11 months 2 weeks 5 days ago) and read 4472 times:
Why are high spenders flying less?
They are spending less because MANY ARE NO LONGER WILLING TO SPEND HIGH.
The market has shifted -- forever. We are NOT in a recessionary economy, as people like to think. (The bureau responsible for determining this has states that the recession was short lived and only lasted through 2001).
Output in our economy is stilll high -- therefore there is still nearly as much demand for air traffic as before, albeit at a lower price. The low fare carriers are already flying very full -- they're not adding capacity as fast as demand meets it, which is why they have very aggressive growth plans currently.
No, business flying is not fun anymore. But thanks to LCCs, who are tapping the unmet demand for low fare flying, business flying on low fares is being stimulated.
High spending flyers are not going to return to the US majors in anywhere the amount they existed before. They have discovered viable lower cost substitutes in the LCCs, or more convenient substitutes in fractional biz jets.
Both the LCC and fractional biz jet industry are undergoing explosive growth -- and another industry (jet Air Taxi) is poised to explode when the small 4-seater jets (ie Eclipse jets) roll out over the next 5 years, taking away even more market share from the majors' traditional "best customers".
AA717driver From United States, joined Feb 2002, 1563 posts, RR: 15 Reply 13, posted (5 years 11 months 2 weeks 5 days ago) and read 4412 times:
The majors will not change voluntarily. In the late '80's at TWA, after near failure and the arrival of Icahn, change still didn't come voluntarily.
TWA had been as large(relatively) as AA in the 60's and 70's. By the time Icahn arrived, it had reduced its route structure(especially domestically) but didn't shrink its infrastructure. It wasn't until the second bankruptcy that the middle management(most of whom were left over from the "glory days") got cleaned out. Those were the people who clung to the "old ways"(we do it that way because we've always done it that way...). Not until those people left did TWA become more effecient--although the IAM was always damming the flow of effeciency.
Today, AA is TWA in 1985. Bloated middle management, huge infrastructure and the NIH(Not Invented Here) aversion. There is a belief that if an idea doesn't eminate from Centerport, it can't be much good. This is the most oversupervised workforce since Germany in WWII. They spend so much time persecuting agents for closing the door 1 minute late, that they now close the door 10 minutes early--and AA STILL doesn't lead the industry in on time performance.
If you watch a pushback, it is still moving at a 1960's pace. You would think they were launching the Shuttle rather than getting an MD80 out of town. Compare that to SWA's operation. It's the mindset, stupid!
AA will have to adapt or perish. Passengers are no longer tied to one particular airline and will choose the company that suits them best. Slow, ineffecient and surly doesn't cut it.TC
Ssides From United States, joined Feb 2001, 3795 posts, RR: 29 Reply 14, posted (5 years 11 months 2 weeks 5 days ago) and read 4394 times:
I think there is some overcapacity, but the majors' problem can be summed up in two words: labor unions.
A rough look at the US market indicates that the percentage of unionization on an airline is pretty much inveresely proportional to its profitability. It's simply not smart to pay a pilot $300,000 per year when s/he works 40 hours per MONTH.
Yyz717 From Canada, joined Sep 2001, 15020 posts, RR: 66 Reply 15, posted (5 years 11 months 2 weeks 4 days 23 hours ago) and read 4339 times:
Overcapacity is absolutely part of the equation!
Any reduction in capacity in a market or route, will drive those passengers onto other/existing routes which will drive up load factors and yields.
Similarly, any increase in capacity in the absense of market demand growing (or the maintenance of excess capacity) will force airlines into seat sales to fill those seats which drives down yield.
While not ignoring operating costs (both fixed and variable) in the profit equation, it is possible to make money with a high cost structure if the yields are there. The biggest impact of the post 911 world has beent he precipitous drop in yield caused in large part by reduced business travel. The lower yields came so quickly that the majors could manage down expenses quickly enough.
N863DA From United States, joined Sep 2004, 48 posts, RR: 8 Reply 16, posted (5 years 11 months 2 weeks 4 days 23 hours ago) and read 4305 times:
Yes, labor unions are a problem; but they are not the only cause. They are, perhaps a symptom (or part) of the cause. We are misreading what exactly the "causation" of this trouble, is.
Overall, labor unions cause a production factor - that of labor - to be higher than that of non-unionized competitors. Therefore, the net result of labor unions is an increase in product cost; that, in turn, is part of the problem.
Airlines "produce" seats flying from point A to point B at a certain cost to them - which are, incidentally, almost impossible to assign on a per seat-mile basis, because of the huge company-wide overheads seen at airlines, by the very nature of the equipment, supplies etc. required. Then, once the flight is scheduled into the system, 90 days before flight departure, the airline is legally bound to operate that service. Since those costs of operating the flight are now sunk - that is to say, unrecoverable, no matter what - the task for fare analysts is to maximize the total REVENUE from each flight, and hope that it, and for all other flights, covers company-wide expenses for all flights.
The notion that, "it's all the consumer's fault" because the fares are too low, does not stand up to essentially-basic economic scrutiny. The air travel market - as with any other market - is one of Supply and Demand. As yet, it would seem that, with tweaking, this balance in the supply and demand is the best that, at this point, can be struck between airlines and travelers.
This balance is constantly changing due to millions of external and personal factors, but the point is that airlines - as in any market with variable price discrimination (aka revenue maximization) - charge the maximum that customers are willing to pay. Since different customers are willing to pay different amounts, they segment the market by certain constraints (such as time-sensitivity and price-sensitivity) and vary the price accordingly.
This is what Yield Management is all about. The basic economic principle is that air travel is notoriously highly elastic for those that pay lower fares (the leisure traveler). That is to say that, for a 10% increase in fare prices, you will lose more than 10% of your leisure travelers - and the total revenue generated goes down. Therefore, if you raise fares, you risk (and will likely end up) losing more business (and revenue) than the additional revenue gained from hiking fares.
Therefore, to blame all airline woes on airline fares, while plausible, is merely to discount the very principle of economic theory. It may work great in your head to blame all these problems on fares (and it's true - higher fares, all else being equal, would raise revenues) but in the end, all else is not equal and raising fares in an increasingly elastic overall air travel market would detrimentally effect not only the flying public but also the very airlines you are attempting to save.
A compounding problem, nowadays, is that business travellers - previously time-sensitive and price-insensitive - AKA the highest fare passengers - are now becoming increasingly price sensitive. This is undermining the previous high reliance of airlines on so-called, "Road Warriors," who accounted, at UAL in 1998, for example, for 40% of company-wide revenues while only accounting for 8% of passengers. This is another example of the increasing elasticity of the business traveler - hence affecting the price that these travelers are willing to pay. (That is to say, they are no longer willing to pay such high prices. This is undermining the fare revenue upon which airlines rely most.)
Air Travel is no different - be it a product, a service, or a service-product, than any other market of buyers and sellers, when it comes to fundamental economic principles.
William From United States, joined Jun 1999, 889 posts, RR: 0 Reply 19, posted (5 years 11 months 2 weeks 4 days 22 hours ago) and read 4194 times:
While the LCCs are unioned some,wait till the economy rebounds,and the shrunkend Majors reinstate the give backs. Hmmmm,how many do not think the FA unions at JB and Air Tran will also want a piece of the pie. SWA are in long negotiatings right now with their FAs and everything is jusssst peachy........
You can't get something for nothing,and so for for the last three years the consumer has. Everything is cyclical. Kinda remind me of the days of People Express, New York Air,and the like. People swore times had changed then too.
Ladevale From , joined Dec 1969, posts, RR: Reply 20, posted (5 years 11 months 2 weeks 4 days 22 hours ago) and read 4180 times:
An interesting twist on the overcapicity-pricing problem. Instead of defining overcapicity in terms of seats/planes, you chose to define overcapicity in terms of pricing.
If that is the case, isn't there still an overcapicity problem? In other words, isn't there, by your own line of reasoning, just too much capacity at the higher price points (e.g., Y, B, First Class and Business), and not enough at the lower price points? Furthermore, aren't LCC's, such as JetBlue, just doing a better job of providing the right kind of capacity?
After all, it is not like the majors are seeing the same traffic gains as the LCC's. Quite the opposite, they seem to be losing traffic at the expense of the LCC's. So, until the traffic numbers return to the pre-9/11 levels for the majors, it they ever do, what we really are witnessing is a shift in capacity from the majors to the LCC's. (In that sense, you may be right, but only if you are claming that overcapacity is not a problem for the LCC's.)
So, what do the load factors mean for the majors? Do they really mean that there is no overcapicity problem for them? Maybe, maybe not. It does tend to suggest that reducing capacity alone, in this competitive environment, is no longer the cure that it once was. So far, reducing capacity has not led to greater pricing power and higher yields.
If this is the central topic of your premise, then I agree. But, somehow, it seems that your central premise ("There is no overcapacity.") confuses the situation which led to high load factors with the present situation with high load factors. Plus, your premise still does not account for the fact that while there may no longer be as many pockets of overcapacity within a particular airline's system, there could very well still be a great deal of overcapacity among various airlines in particular high frequency markets.
Now, in an environment where systemwide load factors are high, the overcapacity situation in such high frequency markets is only a problem if the high number of flights means no one really makes money. Hence, when analysts of all stripes have conjectured about the possibility of the majors being allowed to merge or about the possibility of one major being forced to liquidate, what seems so compelling about either scenario is that it would finally remove some of the impediments to profitability on routes with a high number of frequencies, regardless of capacity.
You clearly wanted to counter some of those analysts and dismiss the proposition that one major (e.g., United) had to liquidate in order to rectify the current situation. This proposition may only seem like an auxillary premise in your argument, but it is clearly your main premise. Funny, how it is that since the ancient Greeks "to be or not to be" arguments always transform themselves into overcapacity or overpopulation arguments. As with those classical arguments, a sense of self-sufficiency is regained either by calling for the annihilation of other groups or races, or by simply denying that the "other" exists in such a high proportion to threaten one's identity. In "Hamlet," Shakespeare tried to find a new solution to the problem, but he failed in tragically satisfying way.
Your tactic seems to have been to deny that the "other" exists in such a high proportion. You tried to carry out this argument by redefining what overcapacity is. That was a brilliant move. But, after it all is said and done, such that you've almost convinced us that United does not have die, there is still that vexing problem that none of the majors are consistently making a profit with what capacity they have.
Consequently, forgive us for not wondering anew what would happen if the assets of United airlines were not redistributed to the other carrier's through the process of liquidation. Also, forgive us for not thinking that in a way the US regulators long ago set up the majors for failure by not allowing the majors to achieve appropriate economies of scale through mergers and acquisitions. In the name of preserving competition, the US regulators have basically created the conditions that make it nearly impossible for the majors to compete against the LCC's. Quite a difference from what they have allowed to take place in the banking industry.
However, the recent approval of various code-share pacts seems like a move in the right direction by federal regulators. If these pacts (i.e., AA/BA, NW/CO/Delta, and US/UA) one day lead to full mergers, then, there is the real possibility that the majors will finally start to compete on an equal footing with the LCC's. As it stands now, the LCC's continue to take advantage of a situation in which the majors are forced to cannibalize each other's high yielding routes, and abandon the rest to the LCC's.
UA744Flagship From , joined Dec 1969, posts, RR: Reply 21, posted (5 years 11 months 2 weeks 4 days 20 hours ago) and read 4106 times:
Ladevale
You said: After all, it is not like the majors are seeing the same traffic gains as the LCC's. Quite the opposite, they seem to be losing traffic at the expense of the LCC's. So, until the traffic numbers return to the pre-9/11 levels for the majors, it they ever do, what we really are witnessing is a shift in capacity from the majors to the LCC's. (In that sense, you may be right, but only if you are claming that overcapacity is not a problem for the LCC's.)
This is exactly what I've been claiming.
Maybe, maybe not. It does tend to suggest that reducing capacity alone, in this competitive environment, is no longer the cure that it once was. So far, reducing capacity has not led to greater pricing power and higher yields.
Spot on.
I also heartily agree that the governement needs to take a "laissez faire" attitude towards M&A and consolidation in the industry.
It's the only way the majors can buy more time to radically alter their ways.
Heck, if it means AA and UA merging (and keeping the AA name), I'm for it. (Of course that is an unrealistic scenario). I'm not saying let the majors abuse the customers that they have a lock on (keep anti-trust regulation applicable), I'm just saying that market share no longer equates to dominance that enables an airline to become filthy rich. On the contrary, greater market share seems to lead to greater competition.
What matters is that industry growth is tied to the growth of our GDP. As long as GDP remains high in real terms, and achieves stable real growth, the airlines will become viable once they change their business model to reflect the changed pattern of *TRAVEL CONSUMPTION* in the new economy.
Tango-Bravo From United States, joined Jun 2001, 3250 posts, RR: 33 Reply 23, posted (5 years 11 months 2 weeks 4 days 18 hours ago) and read 4003 times:
One of the better starter threads and replies I've seen in a while!
The premise is totally correct -- the problem besetting the hoplessly deluded U.S. major airlines who continue to envision themselves as a cartel is NOT overcapacity. Their problem remains the high costs they senselessly and needlessly choose to impose on providing whatever level of capacity they choose to offer while failing to differentiate their coach class product in any meaningful way from the no-nonsense LCCs who have wisely avoided needless costs for which pax are not willing to pay more. Some of the replies have made note of some of the leading examples of areas in which the U.S. would-be cartel airlines impose on themselves overwhelming costs and/or extend senseless largess (also very costly) to their customers: 1) frequent flier programs, 2) elite programs, and 3) pricing.
What I have seen from the U.S. Big Six airlines is another of their typical knee-jerk reactions to a non-issue. In this case the non-issue they are reacting to is overcapacity. Accordingly, they are IMO slashing capacity in their futile hopes of being able to "teach consumers a lesson" by manipulating the market to an extent that they can somehow force customers to pay what they are not and will not be willing to pay. As long as government stays out of the way, the only thing at which the U.S. majors will succeed is forfeiting yet more of the market to LCCs and others who "get it."
In reality, for airlines who understand and offer what customers really want -- and are willing to pay for there are ample opportunities for profitable capacity growth; and all the more so as the high cost "network" airlines continue their arbitrary reductions in response to a non-issue.
Luv2fly From United States, joined May 2003, 11216 posts, RR: 58 Reply 24, posted (5 years 11 months 2 weeks 4 days 18 hours ago) and read 3958 times:
My 2 cents. Another down fall to the airlines is/was the internet! Prior to the internet being such a tool to sell and buy travel you relied on a travel agent. A lot of them had relationships with certain airlines and naturally pushed those carriers, be it for over rides in commission or what ever. And you Companies travel department had unpublished fares for your company to use, of course these so called fares were hush hush and is asked the airlines denied such deals even existed at all. Now with the internet you know who charges what, who flys where and when and can search somewhat easily to find the fare you can live with. Also the days of gouging your last minute business flyers is long gone and the airlines need to realize that, ASAP!
Ryefly From United States, joined Jun 2000, 1344 posts, RR: 1 Reply 25, posted (5 years 11 months 2 weeks 4 days 18 hours ago) and read 3954 times:
The majors have major problems due in part by LCC and Sept. 11th. What's happened is the majors were feeling the sting before 9/11 but not really addressing them correctly. The only thing that separated the two were frequency of flights and international service. Everything else is identical if you fly coach. First class. business select and FF miles are crap and people know it. Maybe 2% of the population is willing to spend $1,400.00 to fly two hours in a wider seat and eat a salad, but everyone else just wants to get there safely and quickly at a fair price. Flying the same aircraft type from the same city or one in close driving distance should be the same fare no matter who you fly, but if it cost 2 or 5 times as much on a major over a LCC, that's just a good old fashioned rip off.
People are taking notice of this and are willing to adjust schedules, make a connection, or drive a little farther to a neighboring airport to get the better deal. Lets face it, after Sept 11th, flying is practically an all day event no matter what airline you fly anyway. Security checks and arriving two hours before departure killed most of the last minute high fare shoppers that always arrived ten minutes before departure. September 11th leveled the playing field for domestic flying, and although more frequency of flights does give the majors an advantage, their nest egg of cash reserve is gone now. The only thing they could do is make reductions, but the more they cut the more they are shrinking towards the LCC sizes, which in part will mean the LCC will soon offer the same frequency of flights between any given city against the majors without investing in a major expansion themselves. So the answer seems to be buy a ton of regional jets to add frequency but lower the cost. That may work in some markets for a while, but it makes matters worse for the majors in the long run. Because now your still paying twice as much as a LCC and flying on a express affiliate carrier over a full sized jet on a LCC.
If major airlines can't reduce their cost and price to fly them, then make their service that much better then LCC. But if it is going head to head with a LCC it better be damned worth it for the consummer. Otherwise, join them and start removing first class on all domestic flights. Make hubs affordable to fly out of for once. Only then will people choose to drive to the hub over going to a neighboring airport to catch a LCC. Either cut or drastically reduce the price of short hop flights, because who is going to fly when they can drive or ride by train at a much cheaper price for the same amount of time wasted.
26 N863DA: Ryefly, Yes, that's the fundamental principle behind this. That makes sense. However, it is also only part of the whole picture. As I (and many others
27 DCA-ROCguy: The arguments that consumers are "greedy" and "want something for nothing" are complete rot. Consumers in markets without LCC's were gouged for years,
28 William: Enjoy it while you can........when the union that represent the employees of these upstarts start seeing a pattern of profitability,look out. The majo
29 DCA-ROCguy: Enjoy it while you can........when the union that represent the employees of these upstarts start seeing a pattern of profitability,look out. The majo
30 Miller22: You're all assuming, falsely at that, that majors can just buckle down and reduce their cost structure to that of SWA. The unions are there to prevent
31 UA744Flagship: Management and labor are BOTH responsible for the resistivity to change of the US majors. It is pointless to try to divy out the blame between managem
32 Atpcliff: HI! I just read an article that explained a good portion of the reason why the "major" carriers can't make a lot of money. 5? 10? years ago, about 25%
33 Airzim: It must be nice to be able to stand outside the industry and start name calling management incompetent and telling them that the entire premise under
34 Scottb: I have to disagree with the statement that there is no overcapacity. While the majors are indeed showing healthier load factors this summer, this is d
35 Artsyman: One of the other things is that some of the majors, and especially Continental already have LCC competition on 76% of all their routes. This means tha
36 UA744Flagship: True, while WN fares are often more than US major discount fares, the glaring difference between the LCCs and the majors in pricing is PRICING CONSIST
37 Airzim: UALFlagship, I don't intend this next statement to be rude, but you are really not one to talk since you are both still in school and cannot honestly
38 Scottb: Airzim- It would be helpful if you got your facts straight. Southwest has indeed been recognized in Fortune's 100 best companies to work for; in fact,
39 UA744Flagship: Amen, Scottb. I was going to post about WN being a great place to work by Fortune's standards, but yout took care of that. Again, yield management wor
40 UA744Flagship: One more thing: Also studies have shown that once a flight goes over 300 miles people start wanting meals, movies, upgrades etc. Yeah, but over the la
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From , joined Dec 1969, posts, 
From United States, joined May 2003, 11216 posts, 
Well written, I might add! If you haven't done so already, drive over to Elk Grove Village just north of O'Hare and see if United needs any extra help. They might be in denial, but they sure as hell do. The idiots in their finance group who thought it was a such great idea to pay $60/share to buy USAirways (who was already well on their way to bankrupcty at the point anyway) are still there, and need to be quickly shown the door. Luckily, Jim Goodwin is already gone. CEO's don't make bold predictions about their airlines might perish...he in effect convinced the bankers and capital markets to shut their doors on United. Had there been a real CEO in there at the time, even Tilton, United might have been OK and either avoided or delayed their Ch. 11 filing.
From Ireland, joined Sep 2000, 4762 posts, 
From Canada, joined Sep 2001, 15020 posts, 
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