j3flyboy
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Why Are Discount Airlines So Profitable?

Tue Mar 06, 2007 12:12 pm

Hi,

I am writing an economics paper on LCCs in the U.S., and one of the requirements is to have an observation. I was wonder what you all think is the major factor that determines a LCC's profitability. Any posts are appreciated!

Thanks,
j3flyboy
 
JAL777
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RE: Why Are Discount Airlines So Profitable?

Tue Mar 06, 2007 12:16 pm

Revenue > Costs = Profits....

LCC work not because of huge increses in revenue but because of huge decreases in costs.
 
jetdeltamsy
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RE: Why Are Discount Airlines So Profitable?

Tue Mar 06, 2007 12:26 pm

LCC's consistently provide excellent, reliable, low cost service. Paying customers LOVE consistency. That keeps them coming back over and over.

The established airlines are flying apart at the seams trying to get competitive with these LCC's.

While the JetBlue debacle in New York shows that sometimes smaller isn't always better in the airline business, smaller usually means better training and better customer focus. It also means less bitter employees because they have not had to endure the years of pay and benefit cuts the employees of the mainline carrier have.

A great day at any airline is an exercise in controlled chaos. When things go amok due to weather or other factors, it's UNCONTROLLED chaos behind the scenes.

Smaller airlines get less messed up because they are smaller and have less to get messed up and are able to recover more quickly.

My 2 cents.
Tired of airline bankruptcies....EA/PA/TW and finally DL.
 
StarGoldLHR
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RE: Why Are Discount Airlines So Profitable?

Tue Mar 06, 2007 12:36 pm

It costs around $10k per 1000miles.

150 seats * $100 = $15K revenue

where as for the majors

100 * $200 = $20K revenue

less seats, higher revenue, in a perfect world...

but
However the majors have older staff, who are paid more, and gamble on reaching a 50% payload to reach profitability.
The LCC's bank on nearly 75% payload to reach profitability.

For the majors, reaching 100% on a Short Haul, could deprive long haul flights of connection/feed revenue, which is worth much more, however LCCs offer no connections at all, therefore sacrificing S/H revenue in the hope of L/H connecting feeds is worth much more

a Long Haul at 400 * $800 = $320K.. a much bigger risk to lose if there's no connecting seats as there all sold out on a low revenue s/h flight than selling out a 150 seats on a short haul, hence they dont care as much on revenue for S/H tickets.

Finally the financials...

LCC's make more money as the predominantly fly 1 type of plane.. A320, 737 etc..
Majors fly several types.
A LCC captain will earn much less as it's a new airline, less seniority and viewed as less technical
A Major's captain and crew may earn much more as 20 years experience pays more.

One way the majors try to save.. is downsizing (which happened a lot in the US in the last few years)...
get rid of those old expensive 727's with a middle aged crew of 20 years experience, replace this with an Embraer RJ with a crew of 20 year olds, you save half your costs... but this takes time.

Today LCC's have the lowest costs, in 10 years...they will have old A320's and crews with 10 year experience and the Majors will have Long Haul A380's and Shorthaul RJs.. all with newer crews.. whos making the money then ?
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sccutler
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RE: Why Are Discount Airlines So Profitable?

Tue Mar 06, 2007 12:41 pm

Different carriers have differing results; indeed, some LCCs have failed.

Looking at Southwest, however, they are profitable because:

1. They focus, first and always, on treating their pax with respect. No confiscatory fares, no forfeitures if a cancellation of travel occurs, plenty of frequency so a completed trip is a greater possibility, and in the event of unexpected changes in conditions, they inform the customers early and often what is going on.

2. They contain costs, by listening to their employees and executing on good ideas for more-efficient operations; and they reward their exceedingly-efficient employees with industry-leading pay;

3. Aircraft are maintained in world-class condition by the best mechanics in the business, because well-maintained aircraft are safe, and well maintained aircraft...

4. ...fly a lot, meaning, greater utilization of aircraft for a more effective use of a very costly asset.

5. Unmatched financial management, allowing for use of assets in effective ways... like (for example) hedging against energy cost increases.

All these characteristics, and a whole lot more, have allowed Southwest to thrive and become the airline of choice for many of the most committed "road warriors," business travelers who recognize that time spent waiting, waiting for connections, waiting for less-frequent flights, sitting around in F lounges, is time not spent at the business destination making money, or back at home with teh wife and kids.
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777STL
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RE: Why Are Discount Airlines So Profitable?

Tue Mar 06, 2007 12:48 pm

Quoting SCCutler (Reply 4):
All these characteristics, and a whole lot more, have allowed Southwest to thrive and become the airline of choice for many of the most committed "road warriors," business travelers who recognize that time spent waiting, waiting for connections, waiting for less-frequent flights, sitting around in F lounges, is time not spent at the business destination making money, or back at home with teh wife and kids.

That's quite the assumption. I'd contend more committed, serious business travelers tend to fly the legacy carriers due to the availibilty of premium classes, more services, better loyalty programs, international routes, international alliances, etc.
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jetdeltamsy
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RE: Why Are Discount Airlines So Profitable?

Tue Mar 06, 2007 1:22 pm

Quoting 777STL (Reply 5):
That's quite the assumption. I'd contend more committed, serious business travelers tend to fly the legacy carriers due to the availibilty of premium classes, more services, better loyalty programs, international routes, international alliances, etc.

Well Southwest has certainly found some kind of niche with business travelers. Business travelers LOVE flying Southwest precisely for the reasons the author stated. They are reliable, reliable, reliable.

Legacy carriers have become less and less consistent and reliable in the past five years. Their training and customer service has gone down the toilet. And people have voted with their pocketbooks by flocking to Southwest. Southwest carriers more domestic passengers than any other airline in the USA.

Many people do prefer the legacy's first class and international networks. But enough people are unimpressed with these expensive offerings at the legacies and have defected to good old, down home Southwest. This has made and kept Southwest enormously profitable and the envy of every legacy carrier shareholder out there.
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steeler83
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RE: Why Are Discount Airlines So Profitable?

Tue Mar 06, 2007 2:14 pm

Quoting JAL777 (Reply 1):
Revenue > Costs = Profits....

LCC work not because of huge increses in revenue but because of huge decreases in costs.

Often, lower costs to maintain aircraft and to fly them between selective markets can also mean lower fares, which entice more pax to fly their airline (higher loads), which will increase profits. I think I went into a lot of detail about this in a thread regarding B6...

Lower costs generally mean simple aircraft fleet. Look at WN, B6, FL, F9... they generally fly one type of aircraft (WN), or stick with one manufacturer (FL with Boeing) This is typical, though, given that B6 and F9 have looked to other manufatcturers for different aircraft for their more regional flights...

Oh, and USA3000 flies only A320 aircraft...
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RiddlePilot215
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RE: Why Are Discount Airlines So Profitable?

Tue Mar 06, 2007 5:43 pm

You're also forgetting these LCC's have margins that make even the best Fortune 500 companies jealous.

You keep your costs ridiculously low, while charging a discount premium for a product, you're going to make money. As a matter of fact, lots of it.

Coupled with things like hedging (especially fuel) costs, it explains a lot as to why Southwest can charge what it does, and still be able to make a profit on an airplane that less than 65% full
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silentbob
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RE: Why Are Discount Airlines So Profitable?

Tue Mar 06, 2007 6:05 pm

Quoting StarGoldLHR (Reply 3):
A LCC captain will earn much less as it's a new airline, less seniority and viewed as less technical
A Major's captain and crew may earn much more as 20 years experience pays more.

That's probably the biggest factor right there.

Quoting SCCutler (Reply 4):
5. Unmatched financial management, allowing for use of assets in effective ways... like (for example) hedging against energy cost increases.

Didn't WN lose money on ops last year, only to be bailed out by hedging profits, or was that only for one of the quarters?

Quoting Jetdeltamsy (Reply 6):
Well Southwest has certainly found some kind of niche with business travelers.

I know dozens of people who travel for business and none of them fly WN. In fact, most of them would not fly WN no matter what. I would offer that many businesses who use WN do so simply because of the fares and not because of the services.

Quoting 777STL (Reply 5):
That's quite the assumption. I'd contend more committed, serious business travelers tend to fly the legacy carriers due to the availibilty of premium classes, more services, better loyalty programs, international routes, international alliances, etc.

That has also been my experience as well.

Quoting StarGoldLHR (Reply 3):
Today LCC's have the lowest costs, in 10 years...they will have old A320's and crews with 10 year experience and the Majors will have Long Haul A380's and Shorthaul RJs.. all with newer crews.. whos making the money then ?

Once the playing field levels in 10-15 years or so, it should get really interesting.
 
airbazar
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RE: Why Are Discount Airlines So Profitable?

Tue Mar 06, 2007 10:45 pm

Quoting Silentbob (Reply 9):
Once the playing field levels in 10-15 years or so, it should get really interesting.

The playing field will never be leveled, certainly not in 10-15 years. These are 2 completely different business models. The LCCs we're talking about here will never operate 777's to far away places like Asia and Africa, and the Legacies will find it hard to dump their very expensive Unions.
 
ltbewr
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RE: Why Are Discount Airlines So Profitable?

Tue Mar 06, 2007 11:29 pm

My observations:
But for WN, which started in the early 1970's, the other LCC's in the USA and elsewhere do not have unionized staffs. That gives them more power over their employees, greater utilization, more hours within the limits, less problems with scheduling, no long term costs for labor (traditional retirement programs) and usually lower base pay and pay for long term employees. Usually them may not have employees stay for 20+ years at higher health insurance costs too.
No long term legacy costs for pension programs. But for WN, none of the LCC's employees have traditional pensions, where they have to basiclly pay for employees long gone from their employ.
Limited fleet ranges as to brands, models and variants. WN only has 737's, with few variants, and in fact they are almost custom sub-models for them only. They tend to be only very efficient narrow bodies models. Few models of aircraft also means less maintenance costs, lower staffing costs.
Good start up and continuing finances. That means lower borrowing costs for major capital expenses especially aircraft and for major purchases like fuel they may be able to hedge, make deals for cash and not on credit. Some can also make deals with either Boeing or Airbus if there is anticipated a significant number of aircraft to be sold to them.
Less greedy management. They tend to pay their top management people a lot less or more in connection with profits and they may have far less generous benefits packages, especially for retirement benefits.
Targeting routes where they can do best and not all over.
Offering direct and non-stop flights where with a major they may have to transfer via a hub (like ATL w/Delta), on less desirable commuter divisions and their smaller a/c. In some cases, some pax will pay more that with a major to travel with a LCC if it is more efficient or comfortable for them or their employer.
For newer LCC's, great use of yield programs (originally done by AA back in the 1980's), so don't sell too many cheap seats and can get more yield on fuller flights.
Very efficient turnarounds at airports, with WN as little as 30 minutes from flight in and back out again.
High utilization of aircraft. WN gets 12+ hours of flight time out of most aircraft, and even overnight when they don't run scheduled pax service, they do charter work for the USA Military and others, getting more utilization.
Offering flights between the peak times or just off the busiest peak times of the majors. F9 has that as a major part of their scheduling at DEN since started. That means fewer delays, offering flights when the majors don't thus gaining some that don't want to fly at those times.
Attitude of staff. They can be more selective as to who they hire and keep especially with critical customer service positions with an attitude that the customer comes 1st, 2nd and 3rd, they will do what within reason to keep the customer pleased. Those away from the pax also will make it happen, when it has to, not whenever.
 
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RE: Why Are Discount Airlines So Profitable?

Tue Mar 06, 2007 11:41 pm

Are JetBlue and Frontier really that profitable?? I thought they lost money in some recent quarters. Anyone have figures readily available for AirTran? I'm not doubting, I'd just like to know.
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EDICHC
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RE: Why Are Discount Airlines So Profitable?

Wed Mar 07, 2007 12:08 am

FR probably have the lowest cost base of any LCC. As a reult of passing these savings on to their customers they have stimulated a larger market, which with a degree of brand loyalty, they have capitalised on. There is a downside to all this however as anyone who has been subjected to a delay or worse, a cancellation with FR has discovered to their cost.
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steeler83
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RE: Why Are Discount Airlines So Profitable?

Wed Mar 07, 2007 12:35 am

Quoting RiddlePilot215 (Reply 8):
Coupled with things like hedging (especially fuel) costs, it explains a lot as to why Southwest can charge what it does, and still be able to make a profit on an airplane that less than 65% full

Yeah, I put that in the category of cutting costs. That is another point I forgot to mention, as that is a considerable contribution to WN's fortune...
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BN727flyr
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RE: Why Are Discount Airlines So Profitable?

Wed Mar 07, 2007 4:19 am

Quoting J3flyboy (Thread starter):
I am writing an economics paper on LCCs in the U.S., and one of the requirements is to have an observation. I was wonder what you all think is the major factor that determines a LCC's profitability. Any posts are appreciated!

If you're writing an Economics paper, then you should focus on the economic models that are used by, say, a representative 3 LCCs. WN should be one of the 3 you select. WN has adopted a cost-minimization model, whereas many of the other LC carriers and nearly all of the legacy carriers approach their ops and mgmt from a revenue-maximization model standpoint. They are not the same model; there are completely different sets of objectives for each approach, and, correspondingly, there are different policies in each carrier governing purchasing, fleet planning, yield management, all kinds of labor-related matters, etc., etc. All of the points discussed by earlier contributors to this thread - like fleet commonality - are all aspects of the economic model chosen by the carrier. Stated a different way, WN has only one a/c type (737 family) because their model dictated that it was the best decision based on minimizing costs. Got it?  Smile
 
silentbob
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RE: Why Are Discount Airlines So Profitable?

Wed Mar 07, 2007 4:26 am

Quoting Airbazar (Reply 10):
The playing field will never be leveled, certainly not in 10-15 years. These are 2 completely different business models. The LCCs we're talking about here will never operate 777's to far away places like Asia and Africa, and the Legacies will find it hard to dump their very expensive Unions.

That cuts both ways as those international flights offer much better revenue generation than domestic flights, but that wasn't the point of my statement. I apologize for the vagueness.

My point was simply that once a large number of legacy pilots start to retire in the next decade or two, the employee costs for the legacies will go down and make them more competitive. At that time, many of the LCCs will have significantly increased employee costs when compared to the current marketplace.
 
cf6ppe
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RE: Why Are Discount Airlines So Profitable?

Wed Mar 07, 2007 5:02 am

The legacy carriers tend to have large fixed costs associated with their maintenance bases and maintenance operations.

Typically the LCC's do their own A and B checks, while farming out the higher checks to contract maintenance operations. The same applies to powerplant (engine) and component maintenance overhauls/repairs.

Not having hangars and staff for aircraft heavy maintenance, shops for powerplant overhaul/repair and component maintenance is a big fixed cost item avoided.

In the end you can have the aircraft or the maintenance facilities; the aircraft can make the bucks while the maintenance facilities consume money.
 
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Tugger
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RE: Why Are Discount Airlines So Profitable?

Wed Mar 07, 2007 5:20 am

Quoting SCCutler (Reply 4):
like (for example) hedging against energy cost increases.

Actually hedging is not to "protect against" cost increases per se, it is to remove volatility from the equation. it is expected that you will win some and lose some. No one does this trying to guess the market, you'd lose too much too often. You use it to plan future cost.

Quoting Jetdeltamsy (Reply 6):
Quoting 777STL (Reply 5):
That's quite the assumption. I'd contend more committed, serious business travelers tend to fly the legacy carriers due to the availability of premium classes, more services, better loyalty programs, international routes, international alliances, etc.

Jetdeltamsy: Well Southwest has certainly found some kind of niche with business travelers. Business travelers LOVE flying Southwest precisely for the reasons the author stated. They are reliable, reliable, reliable.

I think you will find more "small business" business travellers utilize SWA as their primary airline for the reasons SCCutler noted:

Quoting SCCutler (Reply 4):
"road warriors," business travelers who recognize that time spent waiting, waiting for connections, waiting for less-frequent flights, sitting around in F lounges, is time not spent at the business destination making money, or back at home with the wife and kids.

For the corporate traveller this is less of an issue as they prefer the luxuries and perks as FF's of the legacies, their ticket cost and time not directly working is borne by the company and does not affect their pocket.

Quoting Silentbob (Reply 9):
Quoting SCCutler (Reply 4):
5. Unmatched financial management, allowing for use of assets in effective ways... like (for example) hedging against energy cost increases.

Didn't WN lose money on ops last year, only to be bailed out by hedging profits, or was that only for one of the quarters?

See my comment above. IF they lost money on one side they were able to plan for and control it due to the hedge. Normally you buy and sell hedges as a matter of routine operations, using it to smooth out the cost of something critical to your operation, in this case fuel (oil). Southwest just got lucky and had picked up a bunch from AA a few years ago and normally would have sold them back into the market sooner than later but then oil started to climb and financially it made sense to hang onto them for as long as possible. It obviously gave them significant market power to be able to hold costs down while the rest of the sector was dealing with increasing (if not skyrocketing) costs. Southwest has, I can assure you, planned for the increasing costs as their hedges run out. But again they are able to PLAN for them.

Quoting Silentbob (Reply 9):
I know dozens of people who travel for business and none of them fly WN. In fact, most of them would not fly WN no matter what. I would offer that many businesses who use WN do so simply because of the fares and not because of the services.

See my comments on this above. I will add though: "Duh!" to the idea that business would use them simply because of the lower (on average) fares. That is a smart idea for almost all businesses, isn't it?

Quoting LTBEWR (Reply 11):
But for WN, none of the LCC's employees have traditional pensions, where they have to basically pay for employees long gone from their employ.

I may be wrong but I don't think that SWA has a pension plan at all. As far as I know they have a employee funded, company matched 401k, and profit sharing. That's it. It's up to the employee's to set up their own retirement. Which since they aren't the lowest paid people in the industry, they can actually afford to do (personal circumstances not withstanding)

Tug

[Edited 2007-03-06 21:43:28]
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N1120A
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RE: Why Are Discount Airlines So Profitable?

Wed Mar 07, 2007 5:34 am

It is unfortunate, really, that most of the people in this thread other than Jetdeltamsy have gotten so much wrong about how things work.

Quoting JAL777 (Reply 1):
LCC work not because of huge increses in revenue but because of huge decreases in costs.

Not especially. LCCs need revenue to survive just as much as legacy carriers. At this point, most legacy carriers have had near cost parity with the LCCs for the past few years.

Quoting Jetdeltamsy (Reply 2):
While the JetBlue debacle in New York shows that sometimes smaller isn't always better in the airline business, smaller usually means better training and better customer focus. It also means less bitter employees because they have not had to endure the years of pay and benefit cuts the employees of the mainline carrier have.

Well remember, at its current rate of growth, Southwest may well become the largest airline in the world by passengers carried in the not too distant future. Also, their employee involved system of management has reaped the benefits of labor peace and prosperity.

Quoting StarGoldLHR (Reply 3):
The LCC's bank on nearly 75% payload to reach profitability.

Incorrect. Southwest has among the lowest load factors in the US airline industry and among the highest profits.

Quoting StarGoldLHR (Reply 3):
however LCCs offer no connections at all

Incorrect for every single US LCC with the possible exception of Allegiant, who still offer almost a scheduled charter service. Southwest does lots of connections, jetBlue does connections, Frontier's model is based on connections to a large degree and AirTran heavily markets connections.

Quoting StarGoldLHR (Reply 3):
A LCC captain will earn much less as it's a new airline, less seniority and viewed as less technical
A Major's captain and crew may earn much more as 20 years experience pays more.

First, in the US a major is designated as an airline with $1 billion or more in revenue per year, which includes every major LCC. Second, at a nearly 40 year old airline like Southwest, and even 10 and 15 year old airlines like jetBlue and Frontier, there are plenty of senior employees.

Quoting StarGoldLHR (Reply 3):
Today LCC's have the lowest costs, in 10 years...they will have old A320's and crews with 10 year experience and the Majors will have Long Haul A380's and Shorthaul RJs.. all with newer crews.. whos making the money then ?

Shorthaul RJs don't make money for legacy carriers, they are one of the biggest componants of the losses they have taken over the past 5-6 years. Further, Southwest still flies the first 737-300s that came into service with them in 1984 in the same fleet where they can't take brand new 737-700s faster than Boeing can make them, while employing countless senior employees. The key is to keep growing, or at least not contract, which means you keep your people a balanced group of experience and youth.

Quoting Jetdeltamsy (Reply 6):
Business travelers LOVE flying Southwest precisely for the reasons the author stated. They are reliable, reliable, reliable.

Absolutely. They also like the extreme flexibility of the airline. They can get a walk up fare to anywhere in the US that won't give them and their superiors a heart attack and they can buy a cheap, non-refundable without worrying about a loss in value if they have to change or cancel. It is the best of all worlds and why Southwest attracts the best economy class yields in the industry.

Quoting Silentbob (Reply 9):
Didn't WN lose money on ops last year, only to be bailed out by hedging profits, or was that only for one of the quarters?

No and no

Quoting Airbazar (Reply 10):
and the Legacies will find it hard to dump their very expensive Unions.

Southwest is the most unionized airline in the industry. Frontier is union. AirTran is union. The only major US LCC that is non-union is jetBlue.

Quoting Airbazar (Reply 10):
The LCCs we're talking about here will never operate 777's to far away places like Asia and Africa,

Those 747s and 777s to far away places are the only thing keeping legacy carriers alive. If there is any downfall to the LCC model it is that LCCs have to maintain profitability while operating the routes that are the highest in cost and the lowest in revenue, short-medium haul. JetBlue has experienced this the hard way, as they had relied so much on transcontinental flying that they took a big hit when their CASM inevitably went up with an increase in short haul flying. Meanwhile, WN was highly profitable with hundreds of mature short haul markets and are able to lower systemwide CASM simply by adding more and more transcons.

Quoting LTBEWR (Reply 11):
But for WN, which started in the early 1970's, the other LCC's in the USA and elsewhere do not have unionized staffs.

Wrong. Only jetBlue is non-union in the US. Frontier is union. AirTran is union.

Quoting BN727flyr (Reply 15):
WN should be one of the 3 you select. WN has adopted a cost-minimization model, whereas many of the other LC carriers and nearly all of the legacy carriers approach their ops and mgmt from a revenue-maximization model standpoint.

Actually, WN attracts some of the best economy revenue yield of any US domestic carrier because of their highly effective and efficient fare structure. While their costs remain low due to their being more efficient than any carrier in existence, it is their revenues that drive the airline.

Quoting CF6PPE (Reply 17):
The legacy carriers tend to have large fixed costs associated with their maintenance bases and maintenance operations.

American's maintenance division is self sufficient and completely bucks that logic. Further, the major European legacies all insource their MX and are highly successful with it. Insourcing both creates new revenue driving devices and allows economies of scale that just aren't possible if a carrier is subsidizing the costs and profits of an outsourcing partner.

Quoting CF6PPE (Reply 17):
Typically the LCC's do their own A and B checks, while farming out the higher checks to contract maintenance operations.

The major trend in the US has been for legacy carriers to outsource heavy MX of much of their fleet as well. The carrier in the US that has flown in the face of that is American, which also happens to be one of the most profitable legacy carriers and uses their maintenance division as a revenue driver.


In the final analysis, as my great friend Planet Phil would say, the reason LCCs, particularly Southwest, are profitable is because they don't try to screw some to the benefit of others. In the US anyway (my opinions on many EU LCCs, FR in particular, are very different), LCCs treat their whole business plan as if everyone involved, from customers to employees are partners in the management of that airline. With the exception of jetBlue's screwing the pooch a couple weeks ago, they have maintained just that. That is why you don't have labor problems at heavily unionized LCCs. That is why customers keep going back. If the legacy carriers ever figured out how to organize a domestic fare structure, and the ways to make employees efficient without alienating them from the cause, it is scary just how much money they could make.
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EXAAUADL
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RE: Why Are Discount Airlines So Profitable?

Wed Mar 07, 2007 5:35 am

Are they really consistently profitable?????

One reason is they arent straddled with Legacy costs, like retirements and high seniorites
 
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RE: Why Are Discount Airlines So Profitable?

Wed Mar 07, 2007 5:45 am

Quoting Jetdeltamsy (Reply 6):
Business travelers LOVE flying Southwest precisely for the reasons the author stated. They are reliable, reliable, reliable.

Short-haul business travelers (e.g. DAL-HOU, BWI-PVD, LAS-PHX, LAX-SMF, etc.) love to fly WN. However, you don't see as many business travelers on the longer-haul WN flights such as BWI-LAX or BNA-LAS. Business travelers appreciate WN's reliability and frequency on the short-haul routes, but not the lack of front cabin and other amenities on the longer-haul routes.
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N1120A
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RE: Why Are Discount Airlines So Profitable?

Wed Mar 07, 2007 5:49 am

Quoting Tugger (Reply 18):
I may be wrong but I don't think that SWA has a pension plan at all. As far as I know they have a employee funded, company matched 401k, and profit sharing. That's it. It's up to the employee's to set up their own retirement.

In reality, a 401k is a pension with a different name, it is just set up in a different way. Further, their profit sharing scheme along with a rather strong shareholder's dividend means that they create value at least on par with a traditional pension. There is nothing wrong with tradition pensions if they are run right and paid up. The problem is, the legacy carriers weren't holding up their end of the obligation and paying the accounts what they owed.

Quoting Silentbob (Reply 16):
At that time, many of the LCCs will have significantly increased employee costs when compared to the current marketplace.

Again, you have a completely mature employee base when it comes to WN. Their workforce can't get anymore senior, not to mention that they make more than at the legacy carriers.

Quoting EXAAUADL (Reply 20):
Are they really consistently profitable?????

Lets see. 30 years minus 1 quarter? Sounds like it to me.

Quoting EXAAUADL (Reply 20):
One reason is they arent straddled with Legacy costs, like retirements and high seniorites

I take it you mean saddled? Again, Frontier is 15 years old, they have plenty of seniority. Southwest is going on 40. They are as maxed out as the legacies, they just happen to keep growing their own airline as opposed to subsidizing the profits of regional flying that was never designed to do such a thing. Further, the legacies have made massive cuts in direct labor costs but have done very little at all to improve efficiency, which is really where the problem has always been.
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N1120A
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RE: Why Are Discount Airlines So Profitable?

Wed Mar 07, 2007 5:53 am

Quoting Ssides (Reply 21):
Short-haul business travelers

Absolutely. That is WN's profit center and why they buck the trend and make buckets of money on short haul flights. The most you are going to pay is about $230 if you want complete flexibility and even if you go cheap, it isn't going to cost you a dime of the money you have already spent to change the ticket. In fact, if there is a lower fare, you will get a credit. Even weekend leisure travelers see the advantages of that kind of honest pricing and they also buy those fares. That is the kind of value and flexibility that business travelers hunger for and why WN's RASM is so damn strong.
Mangeons les French fries, mais surtout pratiquons avec fierte le French kiss
 
silentbob
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RE: Why Are Discount Airlines So Profitable?

Wed Mar 07, 2007 5:55 am

Quoting N1120A (Reply 19):
Quoting Silentbob (Reply 9):
Didn't WN lose money on ops last year, only to be bailed out by hedging profits, or was that only for one of the quarters?

No and no

So this article is incorrect?
http://www.usatoday.com/travel/fligh.../2006-04-20-southwest-profit_x.htm

Or is the WN investor information inaccurate?
http://phx.corporate-ir.net/phoenix....e&ID=950931&highlight='%20target=

Quote:
Net income for fourth quarter 2006 was $57 million....Excluding these special items, fourth quarter 2006 net income was $96 million....Even with a superb fuel hedging position and $118 million in fourth quarter 2006 cash hedging gains.....

Without the gains from hedging, they would have lost money on the core business of flying.

I'm not knocking them, as they are making a profit. At some point though the hedges will run out and they will have to compete on a more level playing field.
 
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Tugger
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RE: Why Are Discount Airlines So Profitable?

Wed Mar 07, 2007 6:01 am

Quoting N1120A (Reply 22):
In reality, a 401k is a pension with a different name, it is just set up in a different way. Further, their profit sharing scheme along with a rather strong shareholder's dividend means that they create value at least on par with a traditional pension. There is nothing wrong with tradition pensions if they are run right and paid up. The problem is, the legacy carriers weren't holding up their end of the obligation and paying the accounts what they owed.

 checkmark  Agreed.
I guess the point I was trying to make is that Southwest essentially expenses their "pension" costs every year and are done with them. They don't have to carry it on the books and pay the expenses involved with managing it (and they don't have the temptation to "rob Peter to pay Paul" either!). I personally think it is a good idea and many other carriers would be wise to follow it.

And might I add: Excellent posts N1120A on reply19 and reply22. Though by your RR I am not surprised.

Thanks,

Tug
I don’t know that I am unafraid to be myself, but it is hard to be somebody else. -W. Shatner
 
N1120A
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RE: Why Are Discount Airlines So Profitable?

Wed Mar 07, 2007 6:10 am

Quoting Silentbob (Reply 24):
Without the gains from hedging, they would have lost money on the core business of flying.

Incorrect, but who am I to disagree with fuzzy logic? Read further down.

WN's Income (in millions):

Operating income, as reported $174
Net Income, as reported $57

$174 - $119 = $55 million in operating profit assuming no fuel hedges and no other adjustment to their structure to deal with any of that.
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N1120A
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RE: Why Are Discount Airlines So Profitable?

Wed Mar 07, 2007 6:13 am

Quoting Tugger (Reply 25):
I personally think it is a good idea and many other carriers would be wise to follow it.

Sure, but that would be something that might make sense, which isn't a really strong suit for them. They actually have begun converting over by hook or by crook. It is not as if employees are averse to 401k plans, you just have to tell them when they sign up for 30 years with you that that is how you do things and not rob them of what you promised when they came to work for you.

Quoting Tugger (Reply 25):
I guess the point I was trying to make is that Southwest essentially expenses their "pension" costs every year and are done with them. They don't have to carry it on the books and pay the expenses involved with managing it

Sure. In reality though, the economies of scale involved with a major pension make sense with a large employer like an airline. It just is a matter of running things the right way. You are right though, if you don't want to take on the responsibility, create value in another way.
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Tugger
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RE: Why Are Discount Airlines So Profitable?

Wed Mar 07, 2007 9:24 am

So who is "The Boyd Group"?
I was checking to see what else I could find and came across this:
Airline Industry Bankruptcies - Facts V Myths - Cutting Through The Lore (Originally Posted October, 2005) http://www.aviationplanning.com/asrc20.htm.
Its about a year and a half old but it is entertaining, if for nothing else, fuel for the debate. I can see that they are an aviation consulting group and I assume they do what all consultants do but they sure don't take a fond view of SWA or LCC's here. I would guess that they are (or were) hired by a legacy to show that legacy airlines have not become "lame ducks" (which I don't think they are but they need to get/stay smart).

I am not trying to hijack this thread, I was looking for info on LCC's but now I am wondering who these guys are.
Thanks.

Tug
I don’t know that I am unafraid to be myself, but it is hard to be somebody else. -W. Shatner
 
jetdeltamsy
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RE: Why Are Discount Airlines So Profitable?

Wed Mar 07, 2007 3:57 pm

Quoting Silentbob (Reply 9):
Quoting Jetdeltamsy (Reply 6):
Well Southwest has certainly found some kind of niche with business travelers.

I know dozens of people who travel for business and none of them fly WN. In fact, most of them would not fly WN no matter what. I would offer that many businesses who use WN do so simply because of the fares and not because of the services.

You may know dozens of people...but tens of millions of people have voted with their pocketbooks to support Southwest.

You can't argue with the fact that they fly more domestic USA passengers than any other airline.'

They are clearly doing what the public, in general, wants.
Tired of airline bankruptcies....EA/PA/TW and finally DL.
 
N1120A
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RE: Why Are Discount Airlines So Profitable?

Wed Mar 07, 2007 6:15 pm

Quoting Jetdeltamsy (Reply 29):
You can't argue with the fact that they fly more domestic USA passengers than any other airline.'

Not just that, but based on their growth pattern, they are going to pass AA for total passengers carried

Quoting Jetdeltamsy (Reply 29):
They are clearly doing what the public, in general, wants.

You have to look at it this way too. In some ways, Southwest even provides superior in-flight service. United, despite finally being profitable, decided to cut even free pretzels/snack mix from flights under the arbitrary distance of 759 miles. What the hell for? AA with the olive was one thing, but dropping your service levels to those below the supposedly "no-frills" competitor is asinine, and this is coming from a Premier Executive at United. Northwest had the audacity to charge a dollar for a little bag of pretzels. US legacy carriers are acting like EU LCCs that seem to cut service for the sake off seeing just how bad they can be. Insanity.
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WDBRR
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RE: Why Are Discount Airlines So Profitable?

Wed Mar 07, 2007 9:38 pm

Anyone want to comment why some of the startups in the 1990's
did not survive? differences? Carnival Airlines, Kiwi, Vanguard?
 
jetdeltamsy
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RE: Why Are Discount Airlines So Profitable?

Thu Mar 08, 2007 1:03 am

Quoting WDBRR (Reply 31):
Anyone want to comment why some of the startups in the 1990's
did not survive? differences? Carnival Airlines, Kiwi, Vanguard?

PPM. Pi$$ poor management. Not enough start-up money. Growing too rapidily. etc....
Tired of airline bankruptcies....EA/PA/TW and finally DL.
 
steeler83
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RE: Why Are Discount Airlines So Profitable?

Thu Mar 08, 2007 3:16 am

Quoting Jetdeltamsy (Reply 32):
Quoting WDBRR (Reply 31):
Anyone want to comment why some of the startups in the 1990's
did not survive? differences? Carnival Airlines, Kiwi, Vanguard?

PPM. Pi$$ poor management. Not enough start-up money. Growing too rapidily. etc....

How about Nations Air circa 1995 or so. Where were they based out of, wasn't it PHL. I believe they had service to PIT and used the C concourse. How about aircraft type, high CASMs because of that. I wonder what else brought the sudden death of Nations...
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HAWK21M
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RE: Why Are Discount Airlines So Profitable?

Thu Mar 08, 2007 1:33 pm

The Fine print:-
1.Lower Salaries
2.Fewer Staff
3.No Catering
4.No Commitment of Hotel in case of Delays
Unnecessary Expenses are less.

regds
MEL
I may not win often, but I damn well never lose!!! ;)