Delta creditors hard for US Air to corral-adviser

[Itestwell]

If you don't like the facts, tell the DOJ - I don't make this stuff up.

Maybe you can tell us where the proposed $950 million per year in revenue synergies is going to come from if average fares aren't going to go up in these small markets after a US/DL merger.

Jim

syn·er·gy (s?n'?r-j?) Pronunciation Key
n. pl. syn·er·gies
The interaction of two or more agents or forces so that their combined effect is greater than the sum of their individual effects.
Cooperative interaction among groups, especially among the acquired subsidiaries or merged parts of a corporation, that creates an enhanced combined effect.

To me, planned synergies within a merged company has nothing to do with raising fares. Besides, if what DP says is true, and they have lowered fares in all these markets, and the synergies have exceeded their expectations, how did they do that without raising fares?

 

[BoeingBoy]

To me, planned synergies within a merged company has nothing to do with raising fares.

Then where will the extra $900 million/year (my mistake saying $950 million before) in revenue from combining overlapping route's come from? There are absolutely cost synergies from combining companies, but we're talking additional revenue here.

Besides, if what DP says is true, and they have lowered fares in all these markets, and the synergies have exceeded their expectations, how did they do that without raising fares?

I guess you haven't actually looked at the fare reduction announcements or attempted to determine how many passengers were affected. Announcing that fares have been reduced in "1000 markets" sounds impressive until you look at how many markets we serve - over 26,000. The much heralded reductions also had significant black-out periods. Finally, the reductions were in markets that had relatively few passengers. The result was that only a very, very small fraction of passengers realized the fare reductions.

Meanwhile, there have been something like 10-12 general fare increases over the last 15 - 18 months. Increases that affected a much larger share of our passengers.

There's nothing wrong with just regurgitating the company PR spin without even attempting to analyse it. But if you're going to argue that the company's PR spin is "the truth, the whole truth, and nothing but the truth", at least try to back it up with some facts.

Jim

 

[Elevation]

Then where will the extra $900 million/year (my mistake saying $950 million before) in revenue from combining overlapping route's come from? /quote]

How about passengers lost to other airlines because of better schedules and flying places that US doesn't fly to. Flying bigger planes on routes that are fuller going to more places. Don't know about the 900 mil number but its called ECONOMY OF SCALE. As Gordo says all you need to run an airline is 6th grade math.

 

[Gilding the Lily]

You left out the discussion of diseconomies of scale.

See interesting article after the jump.

 

[BoeingBoy]

From only the US perspective, you're right. That was pretty much the rationale behind the US/HP merger - the combined airline could take people places that neither individual airline could, meaning an increase in passengers which would increase revenue. It was supposed to be worth about $200 million a year, if I remember anywhere close to correctly.

However, how many "more places" will the "new DL" go that the "old DL" doesn't. Bigger airplanes - they already exist in the two separate companies. More aren't just going to materialize out of thin air because of the merger. There could be some reshuffling of where the widebodies flew, but that's not adding widebody flying but rather decreasing widebody service in one market to add it somewhere else.

There could be some incremental increase in passengers because of those who used the * Alliance who would be able to get there on US after a merger. Offsetting that, however, is the potential for incremental loss of higher yield DL FF's when US remakes DL into
another HP.

Unlike the US/HP merger, the whole purpose of this merger appears to be the reduction of capacity on routes where US and DL compete, thus changing the mix of fares paid - less of the lowest fares and more of the higher fares, causing the average fare paid to increase. You'll note that the actual fares won't necessarily increase, just the mix of fares paid.

That's where most of that $900 million/year will come from.

Jim

 

[RowUnderDCA]

Unlike the US/HP merger, the whole purpose of this merger appears to be the reduction of capacity on routes where US and DL compete, thus changing the mix of fares paid - less of the lowest fares and more of the higher fares, causing the average fare paid to increase. You'll note that the actual fares won't necessarily increase, just the mix of fares paid.

That's where most of that $900 million/year will come from.

Jim

I was going to make that point. I surely would not expect an airline executive to say to the public, that fares will go up, when he really plans to increase yield and l/f by a rationalization of fare structure to reduce the top fare and increase the net mix of fares. I don't know if LCC execs are lying, but it's certainly rational to presume that that is what they are attempting to talk about when they mention revenue 'synergies' with 'lower fares.'

I think it has some basis in logic. If there is going to be the coming revolution or rationalized legacy systems and pricing, I'd sure prefer to be the 'mega-carrier' with rational fares with large market presence in the mega-markets, instead of trying to compete with a 'mega-carrier' with a hub in Atlanta and NYC and Los Angeles, from CLT, PHX and PHL.

 

[Elevation]

You left out the discussion of diseconomies of scale.

See interesting article after the jump.

You mean like AMR and SWA.

 

[Elevation]

(example is for clarity only.)

3 flights a day both from USA and DAL between KABC and KXYZ. Each fly 100 seat planes. 600 seats a day (6 planes) between these city pairs at 70% load factor= 420 pax. Replace all of the 6 planes with 3 150 seat and 1 100seat plane (550total seats)= 76% LF. Now you have 2 100 seat planes that appeared out of thin air.

Where do these 150 seat planes come from? We already have them. We right size all the markets by pushing larger airplanes down and the left overs get flushed out through BK code (i.e. MD80's), Also do this at the regional level and replace RJ's with EMB's/737, part of the magical 10% reduction, which most of it will affect Comair or the other regional partners.

 

[BoeingBoy]

(example is for clarity only.)

3 flights a day both from USA and DAL between KABC and KXYZ. Each fly 100 seat planes. 600 seats a day (6 planes) between these city pairs at 70% load factor= 420 pax. Replace all of the 6 planes with 3 150 seat and 1 100seat plane (550total seats)= 76% LF. Now you have 2 100 seat planes that appeared out of thin air.

And what will fly the 3 routes that were previously flown by those 3 150-seat planes? Are you going to fly them with only the 2 planes that "appeared out of thin air?"

All you're mostly doing is shuffling planes around, although there could be some advantage gained at the smaller end of the airplane size spectrum - the planes you say will be parked and thus not "extras" to be used.

Still, this is all about your "economies of scale". Notice that first word - economies. That means that getting bigger allows you to produce X% more product while costs increase less than X%. Doesn't say anything about the revenue side of the equation.

As in your example, you're still carrying the same 420 people. At a lower cost to be sure, but where's the extra revenue unless the average fare increases?

So I'll ask the same question again - where does the $900 million/year in additional revenue come from if not higher average fares?

Jim

 

[Gilding the Lily]

So I'll ask the same question again - where does the $900 million/year in additional revenue come from if not higher average fares?

Jim

I am far from a 'route expert', but I assumed that Parker thinks the $900m in 'revenue synergies' (not cost saving synergies) is going to come from a more comprehensive global route network that would hypothetically attract new customers that were not easily able to use either DL or US to get to a particular destination before a US/DL deal.

Of course, I suppose that hypothetical figure would be adjusted if the DOJ were to request that some pieces of the combined 'optimized network' to be sold and, thus, keeping some "New DL' patrons from easily reaching that destination through the preferred route.

 

[BoeingBoy]

And you would assume right if the "new" DL had service to many points that neither DL nor US currently serve. Again, the whole rationale behind revenue synergies in the US/HP merger.

Unfortunately, the "new" DL will serve very few destinations that the "old" DL doesn't serve. Obviously, there would be some consolidation of routes so not as many planes were used on those routes as the two individual carriers used. In theory, that would free up planes to add some additional destinations. But somewhere, 10% of capacity is supposed to come out - meaning some of those planes that could have been used for additional destinations.

As I alluded to somewhere above, there could definitely be benefits from the "new" DL serving destinations that US doesn't serve. Passengers that previously used the * Alliance to reach those destinations could fly "new" DL instead, thus increasing revenue. I just have a hard time thinking there's enough of them to make a big dent in the forecast revenue synergies.

Jim

 

[Gilding the Lily]

As I alluded to somewhere above, there could definitely be benefits from the "new" DL serving destinations that US doesn't serve. Passengers that previously used the * Alliance to reach those destinations could fly "new" DL instead, thus increasing revenue. I just have a hard time thinking there's enough of them to make a big dent in the forecast revenue synergies.

Jim

Agreed... I think the forcasted 'revenue synergies' are highly idealogical. There would be some additional revenues from the more comprehensive network... but $900m might be a stretch.

I think more synergies would come from 'cost-saving synergies', such as reduced capacity and eliminating redundant systems. However, the proposed synergies in that regard may also be a stretch.

 

[BoeingBoy]

My assumption all along has been that both sides - US and DL - are picking the facts that best support their case. Neither side is outright lying (although Parker's "no furloughs since the HP/US merger" is a stretch). They're just ignoring inconvenient facts.

Consequently, I figure the truth is somewhere in between the "Everything will be great and everyone will benefit" of Parker and the "The sky's falling" of Grinstein.

Jim

 

[Gilding the Lily]

My assumption all along has been that both sides - US and DL - are picking the facts that best support their case. Neither side is outright lying (although Parker's "no furloughs since the HP/US merger" is a stretch). They're just ignoring inconvenient facts.

Consequently, I figure the truth is somewhere in between the "Everything will be great and everyone will benefit" of Parker and the "The sky's falling" of Grinstein.

Jim

How true Jim! How True!

And something that I didn't mention in my last post regarding the 10% reduction in capacity and adding new routes that may lead to 'revenue synergies': Perhaps Parker is suggesting there is significantly more overlap to be cut as compared to the potential additional destinations that Parker would want to add. Thus, it is possible that Parker thinks he could first reduce capacity by 18% by knocking out overlap and redundancy. Then, add the additional destination routes using 8% of the capacity that would be cut. This would meet the 10% capacity reduction while hypothetically adding revenue synergies through the new routes. Thereby increasing the butt-per-seat ratio.

This is speculative and I do not necessarily support the math if that is the case. Interestingly, Parker mentions 'cost-saving' synergies and 'revenue synergies' in the same sentence all the time, nearly bleeding them together. So maybe that is how Parker sees the cost-saving synergies and revenue synergies, as one leading to the other.

 

[BoeingBoy]

Interestingly, Parker mentions 'cost-saving' synergies and 'revenue synergies' in the same sentence all the time, nearly bleeding them together. So maybe that is how Parker sees the cost-saving synergies and revenue synergies, as one leading to the other.

And the media lumps them together as "cost savings" 99% of the time....

Jim