Philly Phlyer
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Joined: Sun May 23, 1999 12:05 pm

Legacy And LCC - A History Lesson

Mon Jun 28, 2004 11:28 am

Sorry, but I just read another "I hate LCC's" / "they ruin the airline business" and couldn't take it anymore. First I will state that I am Chairman's Preferred on US Airways and Premier Executive on United, so I fly a lot and enjoy the perks of high tier programs. That said, I have no problems with the LCCs and realize that they are shaping the future of air travel IN A VERY POSITIVE WAY. I have flown Southwest on business regularly since the mid-80s and enjoy flying them when flying in the south and midwest. I welcome them to Philadelphia.

In the original days of passenger service on the scheduled carriers, they offered very high levels of service and worked the "glamour" angle to encourage people to overcome any reservations they had to fly. Prices were relatively high, but since capacity was low, that was fine.

For those of us who have been flying long enough, yes the "old days" were nice from a standpoint of perks and service, but due to high prices, only a few could fly. In those days before deregulation, routes were awarded and there was little or no competition. The prices were set, so the only way to get a person to fly you from point X to point Y was to offer a little better service or amenities. It was alright, because you could pass the cost on to the consumer. Employees could go on strike, and the airlines always would cave to wage and work rule demands, because they lost revenue not flying and, of course, they always could pass the costs on to the consumer. It was a pretty sweet time for the airlines and their employees. Flying under those conditions, was "special" because most people (and many small businesses) could not afford to it. This was not a free market and was not good for the consumer. I can remember driving to a lot of places because it was too expensive to fly.

I liken the airline business in those days to what happens in nature when a species has no natural predator and is allowed to grow fat and lazy. Sooner or later, disease sets in or a new predator comes along and the population gets put back to where it belongs. Nature always achieves a balance, one way or another.

For the airlines in the US, that change came with deregulation. Suddenly the old fat carriers were like the dinosaurs with the invasion of the mammals. The very slow-witted and footed of the herd (TWA, Eastern and Pan Am) became extinct. In a competitive environment, inept management no longer could make mistakes year after year and survive. Some that were quick of foot, made the wrong decisions (Branniff and pre-bankruptcy Continental) and paid the ultimate price. Like watching lions pull down an antelope or an animal that has wandered into quicksand, it is not pretty to watch and, definitely, not good for the poor employees who are the ones that paid the price. In nature, however, nothing is static and only the quick and smart survive.

Some of the legacy carriers that were smart, were able to cover their high costs by very complex yield management and pricing plans. They also introduced the frequent flyer programs to build consumer loyalty. All were schemes to allow them to mask their pre-competion costs and workrules so that they could compete with the low-cost start-ups. For many years these tools worked as many start-ups (People Express, Air Florida, Midway) were even more dumb than the legacy carriers and mismanaged themselves out of existence. In the US, however, there was one (Southwest) that had a good business model, stayed with the plan and slowly became a major player in the market. Finally, a few others saw the light and followed the lessons learned by Southwest and others to become strong in the market (Airtran and JetBlue). With the growth of these stable LCCs, the legacy carriers now have competition that will eat their lunch if they don't adapt. I feel badly for the employees of the legacy carriers who have lost jobs or taken substantial pay cuts, however, in many cases, their wages, benefits and work rules had been so far out of touch with the true market that the day of reckoning had to come eventually. [I'm surprised it took this long! Also, it isn't just the base pay, but the workrules and the defined benefit (not defined contribution) retirement plans. Not many companies have defined benefit plans these days - they are too expensive and nobody can afford them.]

At the same time, the LCCs will need to adapt and may have to add amenities to meet the demands of the market. Again, the lesson is that all carriers have to constantly evolve and change with the market or they also will face the same problems as the legacy carriers. In business, companies must change and evolve with the market. It is not pretty. It is not nice. It is, however, life.
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RE: Legacy And LCC - A History Lesson

Mon Jun 28, 2004 11:36 am

Right on the nail head Philly Phyler....
The good old days are gone... The long time coming "airline shake out" is upon us... high wages and bennies are a thing of the past.... things will get very interesting very soon for some of the old guard....
Wally Bird Ruled the Skys!
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RE: Legacy And LCC - A History Lesson

Mon Jun 28, 2004 11:45 am

Your post plays exactly into my theory 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, USAirways going through Chapter 11 and with the jury out on 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.

Unfortunately, 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.

Partly excerpted from
"The A340-300 may boast a long range, but the A340 is underpowered" -- Robert Milton, CEO - Air Canada
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RE: Legacy And LCC - A History Lesson

Mon Jun 28, 2004 11:45 am

Here here...

Airlines are so funny to me.. They will furlough employes.. and make sure that employees have jobs.. etc.. Which is all real good and dandy..

But in the real world outside aviation.. if a company is having a hard time with economics.. oh, they fire without a second thought? Furlough in the private sector? LOL.. now that is funny... Union in the private sector? Hehehee.. far and few between. Don't want to take a pay cut for the company? Then might they point you to the nearest unemployment line?!?!?! I know the aviation industry have their own mentality.. but come on.. it's time these airlines got into the real world. Loyalty to a company and to employees left the work force with the Commodore 6400. Time for these players to step up to the plate and play the real game of economics/business. Do what you got to do to survive. If not, it's gonna be a lot of Titanic's with wings sitting in the desert.
Aiming High and going far..
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RE: Legacy And LCC - A History Lesson

Mon Jun 28, 2004 2:19 pm

Very well put, Philly Phlyer. Nature always achieves a balance, indeed. As you and B747-437B note, currently successful carriers must stay on their toes, lest they be overtaken in the future by a new generation of more-efficient competitors.

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