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MVAair
Topic Author
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Joined: Fri Feb 06, 2015 5:59 pm

Southwest Performance In ATL

Fri Feb 06, 2015 6:39 pm

Southwest Airlines, Air Tran and Atlanta: Some Facts
A lot has been written here since 2010 about WN’s purchase of FL (most of it wrong).
There has been a lot of criticism of Southwest’s approach to Atlanta and the merger overall. Some of it justified (technology side). Some of it unjustified (Shrinking ATL).
In honor of FL’s passing, I will write a brief history of Airtran, Southwest since the buyout and where Southwest might be heading in the future. I am doing this because I think there are some serious misconceptions about what FL’s business model was, what WN’s business model is and the role of ATL in a WN network.

I approached this exercise with no preconceived notions and was somewhat surprised by what I found.

AirTran: I wont go into a history going back to 1993. But I will say that FL, while It was doing OK in ATL, was not thriving when WN offered to buy them 4 years ago.
According to T100 Annual Data, FL peaked in daily departures in 2007, with 239 daily departures. The monthly peak occurred in July 2007, at 259 daily departures. By 2010, FL was down to 195 daily departures with a July 2010 peak of 209. So well before WN’s acquisition, Air Tran had shrunk by approximately 20%. In 1999, ATL accounted for 95% of all AirTran systemwide departures. By 2010, ATL accounted for 54% of systmewide departures. So it is clear, that AirTran was having trouble with new opportunities in ATL and was finding better opportunities outside ATL. In other words marginal revenue from ATL was less than marginal revenue from other opportunities. In itself, this isn’t a bad thing, but it does mean that FL may have fully exploited their ATL opportunities.

The Airtran business model was two fold:
1) Appeal to budget constrained business travelers in the Atlanta catchment area. Assigned seating, A+ Rewards Program and generous upgrades to Business Class were the tools that were used. However, it should be noted that AirTran introduced J class as a way of getting way from the old Valujet model. The late 1990s was a bad time for LCCs and AirTran wanted to get away from an image of Valujet. No other LCC carrier has since introduce a business class product (except B6 on transcon markets from JFK).
2) Cram as much price sensitive traffic through their hub in ATL as possible and make a small profit on that traffic. It was not unusual to see routings such as MSP-ATL-HOU or DTW-ATL-LAX. Air Tran’s mix of Atlanta traffic was approximately 30% local and 70% connect.
In 2008, Air Tran lost $274m. In 2010 Air Tran made $38.5m. So it should come as no surprise that FL management jumped at the chance to sell FL, which was trading at $10 per share, for $16 per share. This was at a time when Delta was emerging as a stronger competitor, having just closed a merger with Northwest Airlines, resulting in Delta becoming the largest carrier in the world. Surely AirTran management saw that consolidation was going to happen and AirTran’s future was questionable.

Southwest Airlines: For many years Southwest wanted into the Atlanta market. ATL was consistently the highest requested new market by WN customers. However, given gate limitations in ATL and two other competitors, the ability to recreate what they did in Denver did not exist in ATL (Lack of gates and stronger competition).
The first item about Southwest that everyone should know is COSTS. Their costs are significantly higher than AirTran’s were. In taking with FL mgmt , they told me their 117 seat 717 had lower CASM than WN’s 137 seat 737-700s. This instantly makes Air Tran’s network as it stands, unprofitable for Southwest.
So what to do? Well realign the “hub” to focus more on local traffic because WN cannot make money carrying a 30/70 local/connect mix at AirTran or even Southwest fares (My understanding is MDW has the highest percent connect in the WN system at 50%). Certain markets that did not appeal to the local traveler had to be discontinued. And there were a lot of them. From small ones like BMI to larger ones like MEM and CLT, a number of markets were cut from ATL. This doesn’t mean, as some A.netters think that WN is a failure in ATL or that Delta is eating their lunch. In fact I will show later that WN is indeed meeting its financially stated goals in ATL. It also means that some markets will see reduced frequency. Markets such as ATL-SFO, have fallen from 3-4 daily flights to 1-2 daily flights. With a much larger network, WN doesn’t need 4 daily flights ATL-SFO to route traffic the way FL did to flow traffic.

Thus far it appears that WN is meeting its stated goals of increasing local traffic and raising average fares paid:
According to DOT data on a 4 quarter rolling basis between 4Q 2010 and 3Q 2014, Southwest/Air Tran local passengers per day are up 15%. Average fare is up 35% and daily revenue is up a whopping 55%. What about relative to Delta? Afterall, the entire industry saw improvements during this period. In terms of daily local passengers Delta is unchanged at 0%, average fare paid is up 26% and total daily revenue is up 26%. Thus Southwest far from getting their lunch eaten by Delta has closed the gap significantly, as they need to do and on less capacity.
Since purchasing Airtran, Southwest has closed a local passenger gap, fare gap and revenue gap with Delta. Numbers are for domestic passengers. International passengers are not included.
Numbers are 12 month rolling 4Q 2010 compared to 3Q 2014.
Local passenger gap: 294% more on Delta to 256% more on Delta.
Avg fare paid gap: 151% more on Delta to 141% more on Delta
Total revenue gap: 444% more on Delta to 361% more on Delta.

Southwest Challenges:
So just because WN appears to have significantly improved its revenue performance over Air Tran on less capacity, does not mean WN faces issues in Atlanta.
1. More markets will be cancelled. There will be some markets that will not meet Southwest’s new business model for Atlanta. I admit I was surprised to see BDL added then cut. But other markets on the future cut list might include OKC and CAK. I was surprised to see RIC and RDU performing quite well. ORF and SDF were cut but performing well.
2. Southwest is now directly competing with Delta for upper income higher fare passengers. Air Tran with its weak FFP, limited network and more circuitous passenger itineraries was not competing with Delta as directly for those passengers.
3. Lower income, infrequent travelers are not having their travel needs met by Southwest, which opens up an opportunity for Spirit or Frontier in Atlanta.
4. Southwest has no other example of competing successfully with as strong a carrier as Delta in its home market. The example of Denver doesn’t really hold in that United in Denver has never had the dominance that Delta does in Atlanta.
Conclusion: Southwest far from failing in Atlanta appears to be transitioning successfully to a business model that more suits its financial goals. However, there are serious challenges for WN in Atlanta going forward. A few more markets will be cut, there is risk of a ULCC expanding into ATL and Delta is a stronger competitor than United is in DEN.
 
ordbosewr
Posts: 625
Joined: Thu Jun 09, 2011 8:30 pm

RE: Southwest Performance In ATL

Fri Feb 06, 2015 7:23 pm

I like it, and I am curious to see the course this thread takes  
Quoting MVAair (Thread starter):
4. Southwest has no other example of competing successfully with as strong a carrier as Delta in its home market. The example of Denver doesn’t really hold in that United in Denver has never had the dominance that Delta does in Atlanta.

This is all true. UA was never as strong in DEN as many like to think.

I do think SWA does know how to compete, they have done it in Chicago (all be from MDW vs ORD) and they do a very good job. (@MDW SWA is by themselves, but they compete in the market against the hubs on the other side of town).
They also have to compete against AA at DFW via DAL.
(are they different yes, but Atlanta is a unique in that it is a large metro area that has a single airport. We can't say that about many of our top metro's (ie NYC, Chicago, San Fran, LA, Dallas, Houston, etc).
 
MVAair
Topic Author
Posts: 298
Joined: Fri Feb 06, 2015 5:59 pm

RE: Southwest Performance In ATL

Fri Feb 06, 2015 8:34 pm

Quoting ordbosewr (Reply 1):
I like it, and I am curious to see the course this thread takes

It might be a bit too much to read.
 
Sightseer
Posts: 998
Joined: Mon Jan 12, 2015 6:04 am

RE: Southwest Performance In ATL

Fri Feb 06, 2015 8:46 pm

This is a pretty pragmatic assessment, in my opinion. One thing I hope WN is wary of is reducing its schedule to a point where DL's network & frequency advantages really come into effect for local passengers. I think their current setup is probably competitive enough - about 135 flights to 40 destinations, give or take - but I'm less sure about, say, 100 flights to 25 destinations (not that I think that's where they're necessarily headed).

Quoting MVAair (Thread starter):
According to DOT data on a 4 quarter rolling basis between 4Q 2010 and 3Q 2014

Just out of curiosity, what are the percentages for equivalent quarters (3Q10 and 3Q14, for example)? And is all this information available online?
 
MVAair
Topic Author
Posts: 298
Joined: Fri Feb 06, 2015 5:59 pm

RE: Southwest Performance In ATL

Fri Feb 06, 2015 9:10 pm

Thanks,

Quoting Sightseer (Reply 3):
Just out of curiosity, what are the percentages for equivalent quarters (3Q10 and 3Q14, for example)? And is all this information available online?

Interestingly in 3Q 2010, AirTran carried about 5% more ATL locals than WN carried in 3Q 2014. However total daily local revenue was about 25% less for FL than for WN.

Rolling up the quarters smooths out any seasonality. Air Tran was MORE seasonal than WN is. FL did carry more ATL locals in the peak season than WN is currently carrying. However, FL carried much less off peak traffic in the 1st and 4th quarters. This tells me WN is carrying more business and FL carried more leisure. Avg fares seem ot reflect that.

This data is online at the DOT website I think. But it is hard to pull and decifer. I rarely use it.

[Edited 2015-02-06 13:21:32]
 
airplaneboy
Posts: 725
Joined: Sat May 15, 2004 11:59 am

RE: Southwest Performance In ATL

Sat Feb 07, 2015 3:40 am

Thank you for the data MVAair. Hopefully this will put to rest the notion that WN shrunk FL's "growing profitable ATL operation." Your analysis shows:

1- AirTran's ATL operation was already being *reduced* prior to WN's announcement of intent to acquire AirTran in 2010 (of which the transaction itself didn't even occur until May of 2011).

2- AirTran's "heyday" in ATL saw the operation catering to a primarily connecting traffic hub consisting of *low yield* leisure passengers.

3- AirTran's profitability was declining in ATL, which is why they were reducing ATL and growing other focus cities (i.e. MKE) and also deferring aircraft orders (73G).

4- Southwest has redesigned the ATL hub to focus primarily on higher yielding business traffic and is achieving a yield premium- even though there are fewer flights.

I think Southwest has done a great job with doing what it does best- being efficient. By dismantling AirTran's connecting hub- where most of the facilities sat empty except for the traditional 3 connecting banks of flights, they have been able to consolidate their operations into one concourse with flights arriving and departing throughout the day.

[Edited 2015-02-06 19:42:47]
 
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knope2001
Posts: 3036
Joined: Wed Jun 01, 2005 5:54 am

RE: Southwest Performance In ATL

Sat Feb 07, 2015 6:47 pm

Thanks for all this work MVAair. I agree that this is among the clearest, most level-headed assessment of what Southwest has done in Atlanta.

I've been monkeying with MKE numbers for WN/F/L now that Milwaukee's 2014 stats are out and have some fairly similar directions which I posted in the MKE thread. I didn't go into the revenue side yet since the DoT stats I have access to are nearly a year old, and of course the ATL situation has big differences in size, scope and competition. Yet AirTran ran an operation which relied quite a bit on low costs and high connecting volume in both cities, and the move to more local O+D with fewer frequencies is similar in both cities.
 
MIflyer12
Posts: 8760
Joined: Mon Feb 18, 2013 11:58 pm

RE: Southwest Performance In ATL

Sat Feb 07, 2015 11:06 pm

Quoting MVAair (Thread starter):
According to T100 Annual Data, FL peaked in daily departures in 2007, with 239 daily departures. The monthly peak occurred in July 2007, at 259 daily departures. By 2010, FL was down to 195 daily departures with a July 2010 peak of 209. So well before WN’s acquisition, Air Tran had shrunk by approximately 20%.

Mid '07 coincides with the start of the recession. Lots of carriers saw traffic decline '07 to '10.

Quoting MVAair (Thread starter):
In 1999, ATL accounted for 95% of all AirTran systemwide departures. By 2010, ATL accounted for 54% of systmewide departures. So it is clear, that AirTran was having trouble with new opportunities in ATL and was finding better opportunities outside ATL.

One can call that diversification. ALK presentations point to systemic growth outside of SEA. Does it reflect weakness in SEA, years before DL's build-up? No, it doesn't You'll also find that JFK accounts for a declining share of B6 departures over the period. Concentration in a single hub is an invitation to disruption.

Quoting MVAair (Thread starter):
In 2008, Air Tran lost $274m. In 2010 Air Tran made $38.5m. So it should come as no surprise that FL management jumped at the chance to sell FL, which was trading at $10 per share, for $16 per share. This was at a time when Delta was emerging as a stronger competitor, having just closed a merger with Northwest Airlines, resulting in Delta becoming the largest carrier in the world. Surely AirTran management saw that consolidation was going to happen and AirTran’s future was questionable.

DL's acquisition of NW contributed virtually nothing to DL's strength in Atlanta. NW out of ATL had little more than DC-9s to MEM/MSP/DTW. NW's strategic contribution was the Asia network - not relevant to AirTran's competitive position.

Quoting MVAair (Thread starter):
Air Tran’s mix of Atlanta traffic was approximately 30% local and 70% connect.

So what? DL's ratio is similar. AA's ratio in CLT is even less O&D. Those aren't weak hub operations. To some extent one can see that O&D mix representing the physical and economic geography of the U.S. Southeast, with lots of mid-sized cities on the way between the Northeast and Florida, and traffic between cities of the Southeast.

Quoting airplaneboy (Reply 5):
4- Southwest has redesigned the ATL hub to focus primarily on higher yielding business traffic and is achieving a yield premium- even though there are fewer flights.

Where's the evidence of a yield premium? The OP didn't claim one - he claimed WN had some success closing the gap on DL's fares - not that WN had achieved a premium.

We can't know WN is successful focusing on higher yielding business traffic without knowing the distribution of fares. It's just an assertion.
 
airplaneboy
Posts: 725
Joined: Sat May 15, 2004 11:59 am

RE: Southwest Performance In ATL

Sun Feb 08, 2015 12:23 am

MIflyer12, with all due respect please re-read the original poster's analysis- from beginning to end. Your counter to MVAair's post is not supported with evidence via statistics and facts. MVAair's analysis is clearly supported by data. Cheers
 
MVAair
Topic Author
Posts: 298
Joined: Fri Feb 06, 2015 5:59 pm

RE: Southwest Performance In ATL

Sun Feb 08, 2015 1:35 am

Quoting MIflyer12 (Reply 7):

WN has achieved a significant yield premium over where FL was in 2010. Also WN has seen its daily loal revenue in ATL rise at double the rate that DL has experienced.

The 70/30 connect/local mix simply means that FL's business model didn't fit with WN's business model. To make ATL fit WNs business model, markets that don't appeal to the local ATL will be cut. That doesn't mean that DL is eating WNs lunch. Dropping ATL-CLT isn't weakness on WNs part. It is that ATLCLT has little local traffic. Southwest can't be both a low fare carrier and a carrier that carries lots of connecting traffic. The two are incompatible at WN costs.

With regards to FL shrinking in ATL, while the recession may have had something to do with it, a low fare low cost carrier shouldn't need to shrink as much in a recession. Also I said FL shrunk in ATL, not system wide.

Wrt consolidation. Air Tran saw what was happening in the industry. NWA may have added nothing to Delta in ATL, but as the entire industry consolidated, FL might gain some slots in the short term, but long term FL saw the writing on the wall. The story is Kevin Healy tenatively accepted Gary Kelly's offer immediately. Also don't forget FL had a lot of 737s coming with no where to put them.

The bottom line is differing business models should not be interpreted as failure on the part of WN. There are still two more markets to be cut from ATL, my guess is OKC and CAK. If WN starts cutting markets with significant local, then they have a problem.
 
deltal1011man
Posts: 5375
Joined: Mon Sep 19, 2005 9:17 am

RE: Southwest Performance In ATL

Sun Feb 08, 2015 1:37 am

Quoting MVAair (Thread starter):
2. Southwest is now directly competing with Delta for upper income higher fare passengers. Air Tran with its weak FFP, limited network and more circuitous passenger itineraries was not competing with Delta as directly for those passengers.

WN is(trying to) competing for HVCs by cutting flights and destinations?

If that is the case now I understand why every time Delta is asked about WN in Atlanta they have zero fear.

Quoting MVAair (Thread starter):
. I was surprised to see RIC and RDU performing quite well. ORF and SDF were cut but performing well.

Lol I always love when people say that.
I don't believe for a second WN or any other airline are cutting profitable routes unless they are profitable by a small margin. If ORF or SDF were performing well they would still be here.
 
lpdal
Posts: 1966
Joined: Sat Mar 24, 2012 9:49 pm

RE: Southwest Performance In ATL

Sun Feb 08, 2015 1:58 am

Quoting MVAair (Thread starter):
No other LCC carrier has since introduce a business class product (except B6 on transcon markets from JFK).

This is false, Sun Country is a LCC and has first class. They have a fleet of 21 737 frames and are hubbed in MSP. ICAO Code SCX, IATA SY.

-LPDAL
TWU represented. All of my views and posted content are mine alone, and should not be viewed as official communication from my employer, its subsidiaries thereof, or any other entities or airlines.
 
MVAair
Topic Author
Posts: 298
Joined: Fri Feb 06, 2015 5:59 pm

RE: Southwest Performance In ATL

Sun Feb 08, 2015 5:06 pm

Quoting Deltal1011man (Reply 10):
WN is(trying to) competing for HVCs by cutting flights and destinations?

You obviously dont understand the business plan that WN is following. If a market doesnt have sufficient local traffic, it is cut yes. Cutting FNT, BMI MEM and CLT doesnt hurt WN's local market position in ATL becasue there is NO LOCAL TRAFFIC or at least not enough. ATL-MEM on FL was less than 30% local. That surprised me, but it is true.

Quoting Deltal1011man (Reply 10):
I don't believe for a second WN or any other airline are cutting profitable routes unless they are profitable by a small margin. If ORF or SDF were performing well they would still be here.

Believe it. What if they needed planes for DCA and DAL expansion? What if DAL-MDW is projected to make a 10% profit margin and ATL-ORF makes a 1% margin?

Quoting LPDAL (Reply 11):
This is false, Sun Country is a LCC and has first class. They have a fleet of 21 737 frames and are hubbed in MSP. ICAO Code SCX, IATA SY.

SY isnt a low cost carrier. Their CASM is well above that of WN, B6, F9 etc. Low fares and low costs arent the same thing.
 
XT6Wagon
Posts: 2734
Joined: Tue Feb 13, 2007 4:06 pm

RE: Southwest Performance In ATL

Sun Feb 08, 2015 5:22 pm

Quoting Deltal1011man (Reply 10):
WN is(trying to) competing for HVCs by cutting flights and destinations?

FL had a hub there. FL provided more city pair possiblities by promoting connecting traffic.

That
Is
Not
How
WN
Operates.

WN "hubs" are simply larger markets that can be used for a stop in maximizing one stop, non-connecting flights. WN wants you to get on one plane, and only one plane from start to finish. There is no reason to fly passengers to ATL to get a connecting flight to another city if there is no local demand for those cities.

The fact that FL was using ATL as their sole hub is the reason that the merger sailed through anti-trust, as that resulted in only IIRC 4 routes in the whole US where WN and FL competed. FL flew almost everyone to ATL before flying them somewhere else... and WN flew exactly 0 people to ATL.

Appearences of WN gutting the FL network is just that. It is removing flights that are counter to the WN planning ideals, and using those aircraft on routes that do. What is lost to ATL is the passengers who had no desire to fly to ATL anyway.
 
deltal1011man
Posts: 5375
Joined: Mon Sep 19, 2005 9:17 am

RE: Southwest Performance In ATL

Sun Feb 08, 2015 7:27 pm

Quoting MVAair (Reply 12):

You obviously dont understand the business plan that WN is following. If a market doesnt have sufficient local traffic, it is cut yes. Cutting FNT, BMI MEM and CLT doesnt hurt WN's local market position in ATL becasue there is NO LOCAL TRAFFIC or at least not enough. ATL-MEM on FL was less than 30% local. That surprised me, but it is true.

No I do understand the business plan WN is using in Atlanta completely.
If it is in the red cut it.

Most of the places WN has left have a high amount of VFR and low yielding traffic. Yes it is local but it isn't traffic that Delta is really upset about losing.

Quoting MVAair (Reply 12):

Believe it. What if they needed planes for DCA and DAL expansion? What if DAL-MDW is projected to make a 10% profit margin and ATL-ORF makes a 1% margin?

Then that isn't doing well like you said. That isn't close to doing well.

Again, airlines don't cut routes that are solidly profitable.
 
Sightseer
Posts: 998
Joined: Mon Jan 12, 2015 6:04 am

RE: Southwest Performance In ATL

Sun Feb 08, 2015 8:01 pm

Quoting XT6Wagon (Reply 13):
The fact that FL was using ATL as their sole hub is the reason that the merger sailed through anti-trust, as that resulted in only IIRC 4 routes in the whole US where WN and FL competed.


WN and FL had quite a bit of overlap in BWI and MCO, did they not?

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