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"Legacy" Carriers Going Low-cost.. Or Are They?

Fri Sep 19, 2003 11:55 am

With the recent announcement of United starting up a low-cost carrier, I must raise the question - is it a smart idea?

Air Canada started two separate carriers - one, a "discount" carrier - Tango, and the other - Zip, a "low-cost carrier". Zip has lost a lot of money for Air Canada in the past year. A LOT. The future of both are up in the air during the whole restructuring process.

Is it smart for a "legacy" carrier such as these two to start up a low-cost carrier? Will they be sucessful once (if) these airlines emerge from bankruptcy protection?
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RE: "Legacy" Carriers Going Low-cost.. Or Are They?

Fri Sep 19, 2003 1:12 pm

You raise a very good question. In my mind, legacy carriers are adjusting to the rising threat of the low cost airlines. There will continue to be a need for legacy carriers with full service, broad networks, international service and so forth. But their importance has diminished and may very well continue to do so. It is unrealistic for these big airlines to assume they'll be able to compete on a cost level, and they should not even attempt it. What they should do is streamline their operations and cut costs where they can and focus in areas where they can extract as much extra revenue as possible, such as premium services, meals, or what have you. But customers are much more cost sensitive, so these premium services will have to reflect the market.

Lots of people I'm sure are willing to spent a bit more money on their air travel if they get greater comfort, more perks, etc, but they are no longer willing to spend double or triple the price for what is perceived to be small differences in service or comfort.

Legacy carriers are focussing way too much attention on market share, while their yields are non-existent. There is no way they can compete in the long-term that way. They must be innovative with their products, and not let the new entrants to provide better service for less. Look at Jetblue, they give you a snack, give you free TV, and service with a smile, in brand new aircraft. The goal is to provide that and more for a little more money, plus the extensive networks, frequent flyer programs, etc, but without charing an arm and a leg.

Is this possible? Have unions become too powerful?

These are just my opinions, I'm not pretending to have all the answers.
"it's kind of like an Airbus, it's an engineering marvel, but there's no sense of passion" -- J. Clarkson re: Coxster
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RE: "Legacy" Carriers Going Low-cost.. Or Are They?

Fri Sep 19, 2003 2:15 pm

It is unrealistic for these big airlines to assume they'll be able to compete on a cost level, and they should not even attempt it.

I disagree! The industry is becoming commoditized. The spoils will increasingly go to the low cost provider. In order to survive, the legacy carriers MUST reduce their costs to the LCC level.
I dumped at the gybe mark in strong winds when I looked up at a Porter Q400 on finals. Can't stop spotting.
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RE: "Legacy" Carriers Going Low-cost.. Or Are They?

Fri Sep 19, 2003 3:37 pm

At first blush, it makes sense for legacy carriers to have low-cost brands. GM, Ford, and Toyota each sell more than one line of cars, to cater to different segments of the market. Black & Decker sells DeWalt, geared towards the professional, while B&D is geared towards the do-it-yourselfer.

But amenities are a small portion of the cost of getting a flight in the air. The two largest costs are labor and fuel. Other significant costs are the aircraft itself, maintenance, gate leases, and landing fees. On a plane with 120 seats, the cost of replacing turkey sandwiches with roast beef is less than adding an additional flight attendant.

I think that the legacy carriers have to understand that business flyers will no longer pay fares that are 3 to 10 times the lowest leisure fares. The legacy carriers should also realize that instead of trying to attract the leisure traveler with low fares, and then hoping that business flyers will make flights profitable, they ought to price walk-up fares at reasonable levels. Then, leisure fares should be marked at a percentage off the business fares, but not as cheap as Southwest or JetBlue.

Look at this way, Brooks Brothers will have a sale to clear out seasonal clothes, but they are still going to be more expensive than Wal-Mart.

In 1994, I used to pay $230 for a leisure fare from ORD-ATL. In 1995, it dropped to $118. Today, I can still fly for as little as $165. The price of jet fuel has gone up since 1994. So has the cost of labor, even with concessions. So why do American, United, and Delta match AirTran? If AA, UA, and DL were to charge $500 roundtrip for a walk-up fare and 40% off for a leisure fare, $300, that would make some sense. If a leisure flyer thinks that's too much, there's AirTran to ATL or Southwest to Birmingham.

But, if the legacy carriers decide to truly cater to the business flyer, they must add amenities, like free meals that taste good and more leg room than Southwest.

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RE: "Legacy" Carriers Going Low-cost.. Or Are They?

Fri Sep 19, 2003 3:52 pm

Am I alone in hoping that there will be some choice along the way?

I keep getting reminded on this bulletin board that competition will lower prices and offer more choices - well I'm seeing plenty of the former and none of the latter.

Looking at Australasia: DJ entered the Australian domestic market and attacked QF from a lower cost-base. QF responded by lowering service standards and matching the DJ price but flooded the market with economy class seating. QF is further and further reducing the instance of Business Class on its domestic services.

Across the Tasman, NZ introduced Freedom Air followed by the Tasman Express service. DJ is now entering that market and QF has announced that it will only fly operate economy class on Trans-Tasman and NZ domestic services. Again, the prices have fallen but there is less choice. (OK, so EK and MS have entered the market but their flights are so few it's not a real choice).

Where will this all end? Can we look forward some day to lunch boxes (or even BYO) on the Kangaroo route in 10 years time? I for one hope not, but I'm realistic enough to understand that the carriers will do whatever is necessary in order to maximise profits - and both QF and NZ are certainly not suffering in this department right now!!


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