So I face
The final curtain
My friend,
I'll say it clear
I'll state my case
Of which I'm certain
The title of the song isn't quite what I had in mind, but nonetheless...
My time in graduate school is now drawing to a close, and so the end of this week will bring with it the end of my regular participation here, and my reintroduction to the professional working world. I've learned a great deal about the airline industry in the past months, thanks in part to many of you who contribute to this forum.
I have sparred with many of you, but it has helped me to better understand other perspectives. I may not agree with all of them, but at least I now understand them very well. I would thank you all personally, but I'm afraid that I'd miss someone, which would be terrible.
If you'd be so kind as to indulge me a bit, I'd like to close with a summary of what I've seen to date and what I expect to see in the future.
The business model of the late 80s can be summed up as a hybrid business model, with hubs acting as local monopolies extracting high rents and national oligopolies extracting more competitive rents. The monopolies generated the profits, while the oligopolies typically more or less broke even, as one would expect in a highly competitive market.
The dependence upon monopoly rents was the fatal flaw. In order to maintain the monopolies, the hubbing airlines had to saturate the capacity of their hubs to prevent other airlines from gaining a foothold and breaking the monopolies. This condition is inherently unstable. In Atlanta, the demise of Eastern paved the way for AirTran. The increase in capacity in Denver, coupled with Continental's drawdown, gave Frontier room to grow. Other hubs had secondary airports ranging from acceptable alternatives (e.g., MHT) to serious competition (e.g., MDW).
Add to the mix increased range from smaller aircraft and a growing demand for air travel, and the need for hubs decreases substantially. Far more markets have enough demand to support nonstop service than did in 1988.
Still, only one airline had proven to be able to withstand the onslaught of the deep-pocketed legacy carriers, in part by being everything that the legacies were not. With Southwest's methodical expansion in the 90s, it became clear that no legacy carrier was going to stop the juggernaut.
Over time, WN's growth sapped the sources of legacy carrier profits to use in beating back new competitors. At the same time these new competitors learned from Southwest's successes, but didn't form perfect copies. Rather, they innovated. Frontier carefully studied United's business practices, and figured out how and when to set pricing such that United didn't immediately try to crush them. JetBlue pioneered the new "killer app" of the industry, namely live satellite television.
So, whither the legacies? To find the answer, one must examine other competitive industries. There are two typical paths. In one, there is a constant leapfrogging in technology as a means of staving off the inevitable convergence to commoditization. In the other, the companies arrive at an uneasy truce, targeting different demographics, such that they effectively collude to prevent the convergence to commoditization.
Airline technology doesn't move quickly enough to support the former path. Clearly, then, the key to success is to take the latter approach. Southwest already has the Wal-Mart demographic nailed. JetBlue is staking out the Target claim. The legacy carriers, with their inherent abilities to provide a higher level of service, must go after the higher-end demographics.
We're already seeing this from United. They are introducing a new three-class product in the transcon market. It's an early experiment at going after the market that best suits United's business needs. The biggest problem the airline faces is a capacity that far exceeds the demand in that segment. It's as if Macy's had as many stores as Wal-Mart. For United to succeed in this transition, they must draw down capacity substantially.
Enter Ted. If United can fully separate the two brands, they can maintain the same overall capacity, while targeting two completely different demographics in a much more accurate fashion. Today it's as if GM were selling Cadillacs and Chevrolets with the Cadillac nameplate, but to some buyers at Chevy prices.
Customers aren't stupid. If airlines treat travel like a commodity, so will their customers. In that case, the winners will be whoever can get the passengers from Point A to Point B at the lowest price. Instead, by truly separating the brands, the demographics will self-select, with some choosing the higher level product at a higher price. This should generate a rise in customer satisfaction by all.
I'm not saying that it will definitely work. But this business plan would have a much greater chance for success than the old one.
So where does this leave US Airways? Gone, unfortunately. Wolf was probably on the right track with the rebranding. Had a corresponding restructuring occurred, such that the company became much less top-heavy, US would have been well positioned to go after that Macy's crowd. The great tragedy for those of you working at US is that very squandered opportunity.
It's too late to fix it now, though. The drawdown in PIT, coupled with the WN battle in PHL, leaves US with precious little dry powder. I remain skeptical that US will see 2005, barring some remarkable fate.
For that, I'm truly sorry. None of you did anything to deserve this. You placed your bets on what turned out to be a losing horse, but you weren't the jockies. But losing five bucks on the ponies is a far cry from losing your career. I don't envy you.
I, too, made a couple of unfortunate bets along the way. Fortunately, my career field is more forgiving, and so I will now reenter relatively unscathed, with little more than a couple of years in the pit stop and a very hefty chunk of my life's savings gone.
So, in closing, thanks to all of you for your indulgence over the past several months. I wish you all the best.
The final curtain
My friend,
I'll say it clear
I'll state my case
Of which I'm certain
The title of the song isn't quite what I had in mind, but nonetheless...
My time in graduate school is now drawing to a close, and so the end of this week will bring with it the end of my regular participation here, and my reintroduction to the professional working world. I've learned a great deal about the airline industry in the past months, thanks in part to many of you who contribute to this forum.
I have sparred with many of you, but it has helped me to better understand other perspectives. I may not agree with all of them, but at least I now understand them very well. I would thank you all personally, but I'm afraid that I'd miss someone, which would be terrible.
If you'd be so kind as to indulge me a bit, I'd like to close with a summary of what I've seen to date and what I expect to see in the future.
The business model of the late 80s can be summed up as a hybrid business model, with hubs acting as local monopolies extracting high rents and national oligopolies extracting more competitive rents. The monopolies generated the profits, while the oligopolies typically more or less broke even, as one would expect in a highly competitive market.
The dependence upon monopoly rents was the fatal flaw. In order to maintain the monopolies, the hubbing airlines had to saturate the capacity of their hubs to prevent other airlines from gaining a foothold and breaking the monopolies. This condition is inherently unstable. In Atlanta, the demise of Eastern paved the way for AirTran. The increase in capacity in Denver, coupled with Continental's drawdown, gave Frontier room to grow. Other hubs had secondary airports ranging from acceptable alternatives (e.g., MHT) to serious competition (e.g., MDW).
Add to the mix increased range from smaller aircraft and a growing demand for air travel, and the need for hubs decreases substantially. Far more markets have enough demand to support nonstop service than did in 1988.
Still, only one airline had proven to be able to withstand the onslaught of the deep-pocketed legacy carriers, in part by being everything that the legacies were not. With Southwest's methodical expansion in the 90s, it became clear that no legacy carrier was going to stop the juggernaut.
Over time, WN's growth sapped the sources of legacy carrier profits to use in beating back new competitors. At the same time these new competitors learned from Southwest's successes, but didn't form perfect copies. Rather, they innovated. Frontier carefully studied United's business practices, and figured out how and when to set pricing such that United didn't immediately try to crush them. JetBlue pioneered the new "killer app" of the industry, namely live satellite television.
So, whither the legacies? To find the answer, one must examine other competitive industries. There are two typical paths. In one, there is a constant leapfrogging in technology as a means of staving off the inevitable convergence to commoditization. In the other, the companies arrive at an uneasy truce, targeting different demographics, such that they effectively collude to prevent the convergence to commoditization.
Airline technology doesn't move quickly enough to support the former path. Clearly, then, the key to success is to take the latter approach. Southwest already has the Wal-Mart demographic nailed. JetBlue is staking out the Target claim. The legacy carriers, with their inherent abilities to provide a higher level of service, must go after the higher-end demographics.
We're already seeing this from United. They are introducing a new three-class product in the transcon market. It's an early experiment at going after the market that best suits United's business needs. The biggest problem the airline faces is a capacity that far exceeds the demand in that segment. It's as if Macy's had as many stores as Wal-Mart. For United to succeed in this transition, they must draw down capacity substantially.
Enter Ted. If United can fully separate the two brands, they can maintain the same overall capacity, while targeting two completely different demographics in a much more accurate fashion. Today it's as if GM were selling Cadillacs and Chevrolets with the Cadillac nameplate, but to some buyers at Chevy prices.
Customers aren't stupid. If airlines treat travel like a commodity, so will their customers. In that case, the winners will be whoever can get the passengers from Point A to Point B at the lowest price. Instead, by truly separating the brands, the demographics will self-select, with some choosing the higher level product at a higher price. This should generate a rise in customer satisfaction by all.
I'm not saying that it will definitely work. But this business plan would have a much greater chance for success than the old one.
So where does this leave US Airways? Gone, unfortunately. Wolf was probably on the right track with the rebranding. Had a corresponding restructuring occurred, such that the company became much less top-heavy, US would have been well positioned to go after that Macy's crowd. The great tragedy for those of you working at US is that very squandered opportunity.
It's too late to fix it now, though. The drawdown in PIT, coupled with the WN battle in PHL, leaves US with precious little dry powder. I remain skeptical that US will see 2005, barring some remarkable fate.
For that, I'm truly sorry. None of you did anything to deserve this. You placed your bets on what turned out to be a losing horse, but you weren't the jockies. But losing five bucks on the ponies is a far cry from losing your career. I don't envy you.
I, too, made a couple of unfortunate bets along the way. Fortunately, my career field is more forgiving, and so I will now reenter relatively unscathed, with little more than a couple of years in the pit stop and a very hefty chunk of my life's savings gone.
So, in closing, thanks to all of you for your indulgence over the past several months. I wish you all the best.
See you somewhere down the road!
