Topic Author
Posts: 1974
Joined: Sun Mar 18, 2001 1:20 pm

My Little Soapbox On The Legacy Carriers

Fri Oct 22, 2004 12:35 pm

In my airline management class, one of our current topics of discussion (obviously) is how are the legacy carriers able to compete in this low cost market? Well...I don't care about all the discussion that is put through, the fact is that most of these carriers are seeing the end as we know it. It's funny how Leo Mullin, former CEO of DL, said about 3 years ago that their competition was not from the other legacy carriers such as UA, AA, CO...and the like, but from Air Tran and the LCC. Well, how on God's green earth did they not bother to look into this earlier? I mean, you had Valujet operating succesfully there since 1993 and well, though they had their hiatus after the crash, the bulk of the flying public had been going to Valujet due to their cheaper fares...didn't Delta know this? Did they have to wait and see that 25% of the flying market in 2001 was controlled by LCC? Well, the fact is that it is too little too late...no leather seats will be able to save and bring back Delta and others to what they were...yes, maybe deregulation was a bad thing, but in a society of consumers, I believe that we wouldn't turn back time and change a thing. It's funny to see how people whine and cry about this carrier dissapearing or that carrier filing for Ch.11...well, in a way, we have all contributed to it, and I believe we would be hiprocrites to say that we haven't because look at the last time you had booked a flight...what were your main reasons for chosing a particular carrier over the other?? I can tell you that fare price was right up there...and yes, we all like to have some brand loyalty, but let's not indulge in that fact, because money rules the world. It is sad but we are in for some changing times...the industry seems to have caught up with the "legacies" after 26 years of ignoring them and this two-tier airline infrastructure seems to finally be merging.

In the bitter reality that we live in, it surely doesn't mean an end to aviation. It is the way that we chose to move from one end to the other, and yes, aviation will surely survive and even if all the legacies die, there is hope in the future, not only from Jetblue and Air Tran, because they too will see hard times ahead, as they find themselves unable to operate under these low fare structures. I found it interesting and well, almost like a beacon of hope in seeing that the first U.S. order for the 7E7 will be from Primaris. No one saw that coming, but it seems to me that we have to all bond as a community, yes, I see us as a family...whether you prefer Airbus over Boeing...or vice-versa...we have to all understand what has happened, from not being wise and restructuring in the 1980s, after the CAB had died...to greddy CEOs, to having Betty Crocker and Campbell soup representatives at airline Board of Director meetings; the legacy carriers thought they were invincible because of their size; and for a final thought, the attacks on the U.S. on 9/11/01 were not only targeted at this great nation, but also at our beloved family, aviation. Guys, I guess I just needed to write this, out of sadness...as I was sitting here reading about Delta's $651 million loss and wondering, where are we all gonna go, but just remember, we all go as a family.

Twinjets...if one fails, work the other one twice as hard!!!
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RE: My Little Soapbox On The Legacy Carriers

Fri Oct 22, 2004 12:37 pm

Well said... It will also make a nice debate on this website.  Smile
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RE: My Little Soapbox On The Legacy Carriers

Fri Oct 22, 2004 12:38 pm

Yip, I agree with you on the fact that we're all hypocrites. I would never want anything to happen to AA, but I'm happy there is competition to drive the prices down. Of course I am willing to pay a premium to fly AA (50-100$), but unfortuately, my cheap ass can't keep them in business alone.

AA Platinum Member - American Airlines Forever
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RE: My Little Soapbox On The Legacy Carriers

Fri Oct 22, 2004 1:03 pm

What a load of crap. Airline management knew how to deal with deregulation the day it came out. The problem is the unions want more than the last greedy union got. With this type of head in the sand mental state, the only solution is liquidation.
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RE: My Little Soapbox On The Legacy Carriers

Fri Oct 22, 2004 1:18 pm

Here's the problem that bothers me about the current situation. The legacy carriers can't blame all of their problems on the price of oil, but if oil were going for $34 a barrel, rather than $54, some legacy carriers would be making some money, and others would have much smaller losses.

But the LCCs won't go along when a legacy carrier tries to push even a modest increase of $5 or $10 OW. Even WN has to buy 20% of its fuel at market prices.

My father-in-law is a business professor, after having spent about 25 years in management at GM and another manufactuer. Normally, if a company sees an increase in the cost of a raw material or necessary commodity, its competitors will see similar increases. So, prices will increase by a similar percentage throughout the industry.

If, a company with a lower-cost structure has been fortunate enough to lock in prices for a raw material, it still ought to raise prices, although not necessarily as much as its competitors. It will still have a pricing advantage, and with higher prices, the company will have greater revenue and profits, which can be used for a variety of capital uses.

So, why do B6, WN, etc. keep nixing the attempts of AA and other legacy carriers to raise fares? B6 is paying more for fuel, because Wall Street expects Q3 of 04 to be half of Q3 03. Do the LCCs work on the notion that for every $5 or $10 increase in fares, their load factors go down by 1 or 2 points? I'm paying about $.35 more for a gallon of gas than I did in mid-August, but it hasn't affected my driving. So if an airline raises fares by $10 or $20 RT, that doesn't affect my travel plans.

Now, as for the legacies, they should learn how to price fares. Let's say it costs $X to fly a 737 from ORD to LGA (crew, fuel, landing fee at LGA, catering, baggage handling at ORD and LGA, and mechanic preparation at ORD) plus a percentage of the airline's overhead (executive salaries, heavy maintenance, weather forcasters, reservation agents, gate leases, etc.) which will be called $Y. Then add a figure which the airlines deems a reasonable profit, $Z The airline should charge $X+Y+Z/# of seats for each ticket.

Obviously, that formula can be tinkered with a bit to reflect load factor, first class and coach pricing, and advance purchase vs. walk-up fares. But I get the feeling that the legacy carriers don't price tickets based on the cost of getting planes from A to B plus some of the overhead or fixed costs.
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RE: My Little Soapbox On The Legacy Carriers

Fri Oct 22, 2004 2:07 pm

I will say and continue to say that the LCC's made flying a comodity. If anyone has ever taken economics class you will learn that a comodity is any product that is seen without differentiation and is completely price dependent. That is what flying is.
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RE: My Little Soapbox On The Legacy Carriers

Fri Oct 22, 2004 2:39 pm

What's interesting is that Alfred Kahn, the father of deregulation thought flying would never be a commodity. He thought there would be Cadillac airlines, Oldsmobile airlines, and Chevy airlines.

What I don't understand is that over the last 30 years, hotels in all price ranges have added features, whether its free HBO, shampoo, irons and ironing boards, breakfasts, gyms, or high-quality mattresses. And, the high-end hotels (Four Seasons, Pennisula, Westin, Hyatt, etc.) seem to be opening new hotels regularly.

Rental cars are a lot better. They used to be vinyl bench seats, crank windows, and AM radios. The last time I rented a Taurus from Hertz, it had leather seats, AM/FM/CD/Cassette, power windows and locks, and a moonroof. And covertibles are rather easy to find at most airport locations. I even got one in Calgary.

So, why do people view air travel as a commodity, but not rental cars or hotels?
Topic Author
Posts: 1974
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RE: My Little Soapbox On The Legacy Carriers

Fri Oct 22, 2004 8:07 pm


Mainly to answer your question is because it takes a lot more to operate an airline (not like running your typically mom and pop bagel shop) and also, the influx of people going for the "chevys" i.e. the LCC and not spending the money on the big boys.
Twinjets...if one fails, work the other one twice as hard!!!
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RE: My Little Soapbox On The Legacy Carriers

Fri Oct 22, 2004 8:21 pm

One thing the new LCCs don't have to contend with, for now are heavy maintenance costs. Southwest does to a certain point, but with the retirement of their older 73s they lower such costs. jetBlue will be in for a surprise as their fleet starts to age; no more warranty period from Airbus, and they have to absorb the MX costs 100%. All the legacy carriers are modernizing their fleets too, but not at a rate where heavy MX eats up a good part of the money.

Molon Labe - Proud member of SMASH
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RE: My Little Soapbox On The Legacy Carriers

Fri Oct 22, 2004 8:31 pm

One other thing to note is that some of these LCCs have a more junior workforce. Take JetBlue, for example. They're only 4 years old. Eventually those employees are going to have more seniority and ask for the wages to go with it. A 10-year A320 captain isn't going to be happy earning what he did when he started with B6 in 2000.

What I think was total oversight of legacy carrier management was why didn't they implement such cost cuts even before 9/11? Every indicator was there that the economy was slowing down in 2000. And then UAL said it wanted to buy US Airways. Not to be outdone, AA wanted purchase TWA and pay for some assets of US to keep market share and UAL was happy to do it to help its anti-trust case. Airlines are hard hit when the economy slows, so spending should not be an option. So AA went ahead with the TWA buyout. When it happened, one of my co-workers said to me, "What Wall Street Journal is management reading?" How could they be so stupid?

Another problem with legacy carriers is they fight to keep market share on routes that haven't been profitable for years. They need to take a hard look at JetBlue. They're more interested in what makes them money, not the fact they carry more passengers on a certain route than any other airline.

And lastly, I wouldn't blame the unions' greed exclusively. It was also airline management who agreed to such pay increases. When the last contract between the flight attendant union and AA was approved by the membership, on September 12, 2001, I couldn't believe how much I was making. You would have been crazy not to vote yes, but I could never figure out where AA was going to come up with the cash to pay us that much. I'm at the top of the pay scale at AA because I've been there 16 years, and the money we made at our job from the time the contract was approved until the pay cuts that narrowly passed during the near-bankruptcy filing in April 2003 was huge.

What's unfortunate is that now thousands have lost their jobs, and many more still may lose their career. And the future of AA, UA, DL, US and the others is in peril. It saddens me to think that an airline of DL's calibre is on the brink of Chapter 11, and that US (my beloved former Allegheny) could be liquidated. When I started at AA in 1988, I thought, "Oh, our management is too bright to ever end up like Eastern." Not.

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