All's Not Well At Luv

[funguy2]

markkus757--

Assuming US Airways fails, we know that Southwest, jet Blue, and AirTran have 150 airplanes coming in the next two years, and we did not even consider the "lesser" LCCs (like America West, Frontier, and Spirit), or the potential Virgin America. Thats a good chuck of US Airways mainline capacity already.

Also, the legacies have aircraft sitting idle in the deserts which can presumably be brought back from storage relatively quickly and at a small cost, plus furloughed employees to recall to operate them.

Lastly, US Airways lessors and debt holders will insist that the aircraft be placed with operators in order in order to liquidate their leins and recoup as much investment as they can. Certainly, some of these aircraft will end up overseas (like ATA's 737-800's), but certainly some will find homes in the USA (like ATA's 757-300's).

Thus, I am becoming increasingly convinced that an airline failure (US Airways or otherwise) would be only a short-term shot in the arm for the airline industry. Longer term, they will need to figure something else out.

Meanwhile, how do you exclude Southwest from such an analysis? That would be excluding the 800 pound gorilla in the room when looking for the nearest exit.

Back on topic... While Southwest may have some cost-creep issues... I expect that eventually, unit revenues will improve, thus helping to alleviate concern. Furthermore, I expect that Southwest's leadership will continue to evolve, and find creative solutions to their problems. This has seemed to work in the past.

 

[mweiss]

While Southwest may have some cost-creep issues...  I expect that eventually, unit revenues will improve, thus helping to alleviate concern.

That strategy is, in essence, the strategy that the legacies have taken. It works for a while, but eventually (and not an exceptionally long eventually) it necessarily fails as a newcomer with lower costs competes against the old airline.

Furthermore, I expect that Southwest's leadership will continue to evolve, and find creative solutions to their problems.  This has seemed to work in the past.

[post="242334"][/post]​

I hope you're right. Nonetheless, WN's strategy to date has been subtle tweaking. One of the core elements of WN's strategy is growth...not the desire, but rather the need, for growth. Since growth is inherently exponential in business, the amount of time available for domestic growth is, if you pardon the pun, growing short. This means that the need for more substantial change is growing near.

 

[BoeingBoy]

the amount of time available for domestic growth is, if you pardon the pun, growing short.

[post="242420"][/post]​

And that, Michael, might give a hint at where growth could come from at some point.

Jim

 

[mweiss]

Of course. But going international, after the half-dozen Canada and other half-dozen Mexico markets are done, will involve aircraft with a bit more range than the 737s. This will necessitate a significant change in the strategy of the company, period.

 

[SWAFA30]

Of course. But going international, after the half-dozen Canada and other half-dozen Mexico markets are done, will involve aircraft with a bit more range than the 737s. This will necessitate a significant change in the strategy of the company, period.

[post="242433"][/post]​

No doubt what's being discussed here has come up in the executive suites at WN. I think we're beginning to see a glimpse of what may be the ulterior motive behind the TZ/WN codeshare. Aside from the obvious, ie shoring up MDW, the deal lets WN management types see if there is revenue to be generated by such an arrangement. Right now, the two parties are just dating, if this thing works out...WN may very well pop the question. We may not see a full scale merger. However, TZ was tossing around the idea of scheduled service across the pond before they entered BK. They are already in the Carribbean and Mexico. I could see TZ exiting much of the domestic market...focusing primarily on Mexico, The Carribbean, and Hawaii...as they did so well fo so many years. WN picks up the slack on the domestic side feeding traffic to TZ's desirable leisure destinations via a greatly expanded code share. WN has the experience succeeding in the domestic market, TZ has the experience operating transborder and overwater...a match made in heaven? We shall see.

 

[uafa21]

I don't work for Luv, but I could see Luv exspanding to mex, cun and pvr. These locations from la, Chicago Midway, Houston Hobby and Dallas luv ( if they get the wright amendment repealed) would be a monster boon to luv.

It's all about lower cost tickets, service that gets you there on time and no bs. That's the future luv started back when and seems the way it's headed now.

 

[markkus757]

I personaly think Southwest will be seriously considering how they evolve as they start to directly compete with jetBlue. I think that they would even adopt a smaller fleet-type if they could not grow into new markets as quickly as the competition. I exclude Southwest in a lot of my ideas because they are run so much better than most of the rest of the industry. They are not going anywhere. If someone wanted to rid the industry of some of the smaller players (even Air Tran), they could. Just look at how NW defends their turf.
Funguy 2 - as far as directly adding seats on competing routes with US/ UA, airlines would try to envelop the market with enough seats to deter anyone from snooping, and I think it would be some time before anyone ventured out of the safe, no-brainer routes like to/from LGA, to/from DCA, and some routes out of BOS. I really don't think that US' route structure really offers anything else of major importance that isn't served by somone already or has "future SW route" written all over it.

 

[sfb]

Nonetheless, WN's strategy to date has been subtle tweaking. One of the core elements of WN's strategy is growth...not the desire, but rather the need, for growth. Since growth is inherently exponential in business, the amount of time available for domestic growth is, if you pardon the pun, growing short. This means that the need for more substantial change is growing near.

While I agree that Southwest's strategy must continue to evolve over time, I will respectfully disagree that domestic growth opportunities will dry up at any point in the near or mid term (and my horizon stretches to about 2020 or so here). At present, Southwest accounts for somewhere in the neighborhood of 10% of domestic RPM's; I'd venture that an upper bound on their potential size would be in the neighborhood of 30-40% of domestic RPM's, dependent somewhat on how successful other airlines are in matching their cost structure and revenue model. At a growth rate of 10% per year, and assuming some modest expansion in passenger demand of a few percent per year, WN won't hit that point until 2020 at the earliest.

You can look at some of LUV's recent moves and see how they will produce growth long-term: Growing PHL to the size of BWI accounts for at least three to four years of system growth, while growing PIT to the size of BNA would require about two years' worth of planes. And with large operations at PHL, BWI, PIT, MCO, TPA, and MDW, there are at least two dozen untapped markets east of the Mississippi which could support 10 or more daily departures on 737's. If US Airways does fail in the end, you might see WN go into a city like BOS. I think it's pretty clear that we're going to see continuing consolidation in the industry, and with that, hubs will disappear. The abandoned hubs will provide significant growth opportunities for LCC's. Without significant restructuring, the legacy carriers combined probably won't account for more than 40% of the domestic market.

And, to be honest, I don't really see exactly where the "innovation" lies with the other LCC's that will lead them to outcompete Southwest. TV? Assigned seats? Southwest has the wherewithal to add these to the product in future if they end up being needed (and IFE systems will decline in cost and weight with time). Red-eyes? Again, WN could fly red-eyes tomorrow if need be.

Southwest has immense long-term competitive advantages in its productive, motivated workforce and in its lack of significant debt. Are they unbeatable? No, but the biggest threat to their success, as with most companies, would probably be from within.

 

[mweiss]

At present, Southwest accounts for somewhere in the neighborhood of 10% of domestic RPM's; I'd venture that an upper bound on their potential size would be in the neighborhood of 30-40% of domestic RPM's, dependent somewhat on how successful other airlines are in matching their cost structure and revenue model. At a growth rate of 10% per year, and assuming some modest expansion in passenger demand of a few percent per year, WN won't hit that point until 2020 at the earliest.

You forget to take into account the power of compounding. First of all, they command 13% of domestic RPMs (according to the calculations I've done). Their average YOY RPM share growth has been 9% since 1990 (it would be higher, except that 1997 was an anomolous year in which their RPM share actually shrank by seven points).

Projecting the 9% YOY growth, WN would reach 30% in 2014, and 40% in 2017.

This, of course, is not an order of magnitude earlier than your projections, but it is earlier, nonetheless.

Of greater concern is recognition of the conditions that have allowed WN to grow virtually unfettered during this period. Simply put, their competition was legacies and the automobile. Other LCCs didn't enter into the equation.

With relatively stable and growing LCCs (FL, B6, and perhaps F9), WN is in a tougher spot...

there are at least two dozen untapped markets east of the Mississippi which could support 10 or more daily departures on 737's.

How many will belong to WN, and how many to FL or B6 or F9?

I don't really see exactly where the "innovation" lies with the other LCC's that will lead them to outcompete Southwest.

Perhaps the word "outcompete" is leading you astray. Certainly I don't believe that they will outcompete, but I don't think they should try to, either, because...

TV? Assigned seats? Southwest has the wherewithal to add these to the product in future if they end up being needed (and IFE systems will decline in cost and weight with time). Red-eyes? Again, WN could fly red-eyes tomorrow if need be.

But WN shouldn't try to be all things to all people, unless WN wants to follow in UA's footsteps. Segmentation is the key in the very long term. But if WN wants to remain the Wal-Mart of airlines (and there's nothing wrong with that), then a focus on the bottom line is key. Creeping CASM runs counter to that goal.

the biggest threat to their success, as with most companies, would probably be from within.

And that is the whole point of this thread.

 

[JS]

You forget to take into account the power of compounding. First of all, they command 13% of domestic RPMs (according to the calculations I've done). Their average YOY RPM share growth has been 9% since 1990 (it would be higher, except that 1997 was an anomolous year in which their RPM share actually shrank by seven points).

Projecting the 9% YOY growth, WN would reach 30% in 2014, and 40% in 2017.

This, of course, is not an order of magnitude earlier than your projections, but it is earlier, nonetheless.

Well, you can't just take prior % growth and stretch it out to the future. Otherwise, you will conclude that WN will have 103% of the market in 2028 and 289% of the market in 2040.

If you assume WN itself grows by 9% a year and everyone else stays the same, WN hits 30% market share in 2016 and 40% in 2021. Market share grows more slowly because you will never reach 100%. 50% is reached in 2026 and 90% in 2052.

However, this is unrealistic. WN will never have 90% of the entire domestic market (or if they do, something is wrong with the market). I would say an exponentially decreasing rate of growth is a good model. If the rate of growth slows 5% a year, 30% market share is reached in 2022 and 40% in 2041. After an infinite amount of time, market share stops at 46%.

If the rate of growth slows by 10% a year (not too pessimistic I think, if the legacies successfully complete their transformation plans), even the 30% market share is never reached, topping out at 26%.

At any rate, as long as labor costs remain under control, even with a maximum of 26% market share, WN will be profitable forever. The problem will be greedy unions who don't believe that history can be repeated with WN. We've already seen this with the flight attendant contract.

 

[mweiss]

Well, you can't just take prior % growth and stretch it out to the future.

Of course you can't. But you can approximate it in the middle of the S-curve. If WN tops out between 30 and 40%, then the S-curve should start to flatten around the 30% mark, or in about a decade.

Regarding your "greedy union" comment, I think you're being a bit too simplistic. Yes, costs have to remain under control, and yes, the last FA contract brouhaha suggests that labor costs may become problematic in the midterm...but it's not the union, per se, that's the problem there.

 

[JS]

If it's not the union, then who is it?

 

[sfb]

You forget to take into account the power of compounding. First of all, they command 13% of domestic RPMs (according to the calculations I've done). Their average YOY RPM share growth has been 9% since 1990 (it would be higher, except that 1997 was an anomolous year in which their RPM share actually shrank by seven points).

Projecting the 9% YOY growth, WN would reach 30% in 2014, and 40% in 2017.

Oh, I did consider compounding, and I assumed a 10% annual growth rate. According to BTS, domestic RPM's in October were 41.9 billion; Southwest reported 4.50 billion RPM's giving 10.7% share. Rule of 70 says that 10% annual growth means they double in size (to approximately 21%) in 7 years, or in 2011. They'd hit 40% in 2017 or 2018. Of course, if we assume the domestic market grows 3% per year, that means that the market increases by roughly half in 14 years, giving Southwest 28.5% market share in 14 years and just hitting 30% in 2018 or 2019.

Of greater concern is recognition of the conditions that have allowed WN to grow virtually unfettered during this period. Simply put, their competition was legacies and the automobile. Other LCCs didn't enter into the equation.

With relatively stable and growing LCCs (FL, B6, and perhaps F9), WN is in a tougher spot...

Well, I don't think I'd call Southwest's growth during any period "unfettered." While some of the responses to WN may have been ineffective in the end, they've been hit with United Shuttle, Metrojet, Delta Express, America West (with whom they share PHX & LAS), Muse Air, Braniff, Frank Lorenzo's Continental, etc. What's somewhat unique about the medium term here is that they actually stand to realize some significant gains from network carrier consolidation that they were never really in a position to take advantage of in the past. When Eastern and Pan Am went out of business, Southwest had no presence on the East Coast and saw very little benefit as a result. They did gain from the demise of Midway I, though it was a low-fare operator itself.

As for the other LCC's -- they face probably an even more pressing dilemma -- where to grow without getting into wars with Southwest.

How many will belong to WN, and how many to FL or B6 or F9?
Perhaps the word "outcompete" is leading you astray. Certainly I don't believe that they will outcompete, but I don't think they should try to, either, because...

Well, I suppose we're talking about a future in which the LCC's start to butt heads. And as for those "untapped markets" -- they can all go into each -- but WN has the far broader network to use to its advantage at present. This may change.

But WN shouldn't try to be all things to all people, unless WN wants to follow in UA's footsteps. Segmentation is the key in the very long term. But if WN wants to remain the Wal-Mart of airlines (and there's nothing wrong with that), then a focus on the bottom line is key. Creeping CASM runs counter to that goal.

Well, of course they shouldn't. The point of talking about adding to the product is to say that there may come a point some day when having seat assignments, to take a random (and unlikely IMO) example, ends up being critical to remaining competitive -- and the increased revenue outweighs the additional cost. I'm confident that their management will do a good job of the cost analysis, as they've done with the decision to equip the fleet with blended winglets.

The big question mark is the unions: Will pay that's higher than anyone else in the industry be enough?

 

[mweiss]

If it's not the union, then who is it?

[post="242681"][/post]​

It's the union members, rather than the leadership, who want money today at the expense of tomorrow. And this is not a distinction without a difference.

 

[mweiss]

Oh, I did consider compounding, and I assumed a 10% annual growth rate.

Ahh...now I see what you did. You assumed a 10% annual RPM growth rate. WN has actually averaged more than that, in part because of increasing average stage length.

So I see saturation occurring in about a decade, while you see it taking closer to two.

they've been hit with United Shuttle, Metrojet, Delta Express, America West (with whom they share PHX & LAS), Muse Air, Braniff, Frank Lorenzo's Continental, etc.

Exactly. Unfettered. The closest anyone has come is the "truce" with HP in PHX/LAS. The rest stopped WN as much as an ant on a railroad track stops a freight train.

What's somewhat unique about the medium term here is that they actually stand to realize some significant gains from network carrier consolidation that they were never really in a position to take advantage of in the past.

Absolutely. That effect has been evident for over half a decade, and it is powerfully reinforcing.

Well, I suppose we're talking about a future in which the LCC's start to butt heads.

Yes, we are. That will be the next phase.

And as for those "untapped markets" -- they can all go into each -- but WN has the far broader network to use to its advantage at present.

And it's an advantage, to be sure. But it's only an advantage to a particular segment of the population, just as live satellite TV is an advantage to a particular segment.