Exit Financing & The Future

[UseYourHead]

You need to do your homework...SWA is BIG in FLL, and FLL is building a new customs facility for US that will increase PAX flow through customs from 400 pax per hour to 1200 pax per hour.


>FLL has no available gate space, and going through the wholly inadequate customs there with all these new Caribbean flights, its going to make PHL look like a walk in the park.<

 

[funguy2]

Ok... Let's take a look at the bigger picture...

Question: How do LCC's work?
Answer: They use mainline sized aircraft (usually), simple and inexpensive business models, and efficiency driven processes to operate their companies. By being efficient, costs are low, and thus fares can be relatively low. The relatively low fares stimulate demand, thus growing the market and "ensuring" the LCC success... because they are not dependent on stealing customers from the competition, but rather create market growth and position themselves to soak it up. (Although Southwest has been known to do both... create growth and steal market share... AirTran has had good examples of this, like their service to Bloomington/Normal, Akron, and Newport News... They have lowered fares, stimulated demand, and then had enough capacity there to capture the stimulated demand. JetBlue has some good examples too... like NYC-FLL, and their transcon service.)

Question: How does US Airways use of 70-seat RJ's promote efficiency, cost-effectiveness, or growing markets?
Answer: Thus far, US Airways has not used the 70-seat RJ's to grow or enter new markets, rather they have been used as a down-sizer. Examples are PHL-IAH, PHL-MCI, and PIT-DFW. Upgrading 50 seat RJs to 70 seat RJs from DCA is likely to be a successful strategy, as the number of departures from DCA is limited.

If somebody made the argument that the 70-seaters are for lower total cost / lower-risk entry into large O&D markets, with an ultimate plan to upgrade the 70-seat RJs to 319s as markets are developed... I would say, that sounds like a reasonable plan. But that does not seem to be what is occurring.

LCC's make money, in part, by growing consistently to keep costs down... Yet US Airways contraction does not yet seem to be complete (since we know at least 15 "mainline" aircraft are going back to GECAS).

While I appreciate mweiss' long explanation and detailed discussion of supply and demand, it appears to me that there is a disconnect. And that disconnect is this... If you follow mweiss' example in this thread... That states that the path to profitability is to downgrade an increasing number of flights to smaller aircraft, squeeze supply in and effort to move RASM up. Which is a fine business plan, and fits with all the economic principles I know.

However, this is not what US Airways has told us the plan is. US Airways has told us the plan is to transform into an LCC. An LCC has the attributes I described above, and so far, US Airways' tranformation is not even close. The only markets which I can see which have had appreciable increases in capacity are from DCA, like DCA-BUF/ROC/SYR, which are all seeing mainline service for the first time in years. Of course, this seems to be more of a market share response to FlyI at IAD and LUV/AirTran at BWI bleeding passengers away from US Airways and DCA. I have seen no evidence of US Airways successfully growing even one market on the basis of lowering fares, creating growth, and adding capacity to scoop up that growth. Thus far, I am excluding the FLL experiment, although, if its successful, and truly a low-fare operation, then it may fit the bill. However, I suspect the strategy here is to go hide in a market with relatively higher RASM and less true LCC competition than other parts of the network.

So, as I have been saying, something just doesn't add up. If US Airways wants to be an LCC, they need to do more than beat concessions out of their employees, and thus far, examples of US Airways acting like an LCC are few and far between.

 

[whlinder]

If US Airways wants to be an LCC, they need to do more than beat concessions out of their employees, and thus far, examples of US Airways acting like an LCC are few and far between.

[post="242322"][/post]​

Bravo!

 

[mweiss]

funguy2, you hit the nail on the head. Either strategy has a chance of success, but US's behavior has been to do neither. Why is beyond me.

 

[RowUnderDCA]

U's use of 170s at DCA: good;
U's use of 170s and rjs at PHL and PIT: bad.

 

[funguy2]

RowUnderDCA... Try again...

U's use of 170's at DCA to upgrade CRJ/ERJ (and thus lower CASM, lower fares, and stimulate demand) and/or try new experimental, low-fare, point-to-point service good.

And some evidence that US Airways is doing exactly that:

US Airways Offers Introductory Fares on New Nonstop Service to and From Washington, D.C.

Geez... Ask and you shall receive. I view this as a positive announcement. It is not the end-all be-all, everything will be fine now... But again, a sign that the light down the tunnel is not necessarily a train.

U's use of 170's at PHL to reduce capacity, increase CASM is bad, if your stated goal is to lower fares and go with volume. Especially since the market is being stimulated by low fares (from US Airways, supposedly, Southwest, and other LCCs). If US Airways reduces capacity, they reduce their own ability to take part in the growth of the stimulated market.

U's use of 170's at PIT depends on the strategy. 170's might make sense due to the reduced flow traffic. However, if you keep the mainline jet, lower fares, stimulate the market, you could keep mainline service there. If US Airways truly goes low-fare, and Southwest enters the market, demand in PIT could be stimulated to fantastic results... And the airlines with the ability to capture that stimulation at the lowest CASM will win. E170 CASM (assuming all else equal) will be higher than A319 CASM.

 

[Stick-n-Rudder]

Arrivals
What Happens When Regionals' Growth Stops?
Aviation Week & Space Technology
01/10/2005, page 46


Steve Lott







What Happens To Regionals' Costs When Growth Stops?

U.S. regional airlines' unparalleled ability to slash unit costs, which, along with stepped-up use of the regional jet, propelled the segment's meteoric growth, may no longer be the ticket to success when growth slows down.

While common wisdom usually credits low-cost carriers (LCCs) with taking Herculean steps to whittle down expenses and boost efficiency, a new analysis from Aviation Daily and partner Eclat Consulting shows regionals have achieved the greatest cost cuts in the industry.

Adjusting for stage length, current regional carrier unit costs are 13% lower than in 1997. The drop is impressive, considering that the cost per ASM (CASM) of U.S. network carriers jumped 20% and LCC carrier unit costs rose 12% during the same period.

Part of the regionals' rocket-like growth is due to the widespread use of regional jets, which, since their introduction increased regional/commuter capacity 422%. RJ growth nearly doubled average stage length for regional carriers, to more than 400 mi. in 2004 from 205 in 1997, up 97%. Accompanying this is a 29% decrease in the RJ CASM to 13.3 cents in 2004 from 19 cents in 1997.

As the graphs show, most of the change occurred in a short time, starting in 2002 with the relaxation of labor scope restrictions that let the big six network carriers fly more RJs. The analysis also found that overall costs were down in virtually all categories, especially the three main ones that account for more than 60% of regional carrier expenses.




Labor costs--28% of total CASM for regionals--declined 8% adjusted for stage length, while maintenance costs--17% of total CASM--fell 30.4%. Aircraft ownership costs--17% of total CASM--sank 13.4%. Regional carriers also managed a 14% drop in aircraft utilization, which dramatically lowers the unit production expense of all fixed costs, such as assets and overhead. At the same time, the collective fleet size expanded rapidly, jumping 177% since 1997 and 111% since 2000.




Rapid growth over a sustained period benefits an airline in many ways, such as saving on labor costs. Unless regionals hire furloughed employees of their network parent, they draw new hires from those with least seniority and lowest salaries. Rapid growth boosts the percentage of low-salaried employees, effectively cutting average wages overall.

Regional carriers have been very successful at cutting costs while expanding networks and fleets, but the honeymoon can't last forever. Both labor and maintenance expenses--45% of total costs--will start to rise as growth slows in the next few years.

Steve Lott is assistant managing editor of the Aviation Week Group's Aviation Daily. Eclat analyst Aaron Taylor contributed to this report.

Editor's note: Arrivals is a collaborative effort between Aviation Daily, a sister publication of Aviation Week & Space Technology, and partner Eclat Consulting. It is dedicated to analyzing critical airline industry issues, and appears monthly. Comments and suggestions for future topics should be sent to Aviation Daily Editor Jim Mathews at [email protected]. Readers seeking more information on Aviation Daily can contact Denise Almond at [email protected].

 

[mweiss]

Adjusting for stage length, current regional carrier unit costs are 13% lower than in 1997.

So he uses this statistic to support the following:

While common wisdom usually credits low-cost carriers (LCCs) with taking Herculean steps to whittle down expenses and boost efficiency, a new analysis from Aviation Daily and partner Eclat Consulting shows regionals have achieved the greatest cost cuts in the industry.

If you're not reading carefully, you might conclude that the regionals represent a threat to either
a: the legacies, or
b: the LCCs.

Of course, they are a threat to neither. Sure, they've reduced their CASM a lot, for plenty of reasons that have been hashed to death around here. But they're rapidly approaching the end of that road. Meanwhile, the operating CASM of their RJs is higher than the overall CASM of the LCCs. Their overall CASM remains higher than the overall CASM of the legacies (with the possible exception of US...but even that is unlikely now).

 

[Rico]

rico: You continue to ignore the fact that the aicraft is reducing its "mainline" fleet by 15 airframes, and adding 12 70-seat RJ's, thus increasing the percentage of RJs in the fleet, and increasing CASM (assuming all else is equal). Furthermore, if you beleive USA320Pilot, there are plans to re-institute ERJ-170 and CRJ700 acuisitions post BK, while Airbus deliveries have been placed on long term hold. Thus increasing the proportionate amount of RJs to big jets, and increasing CASM in the long term.

Put down your CASM numbers for a second and think. We are an airline, meaning we are in the business of operating for a profit, not just obtaining low costs. When the company finds profitable opportunities, especially those in which we have a competitive advvantage over other carriers, then we must try to exploit those opportunities fully...

Would available financing be better spent on additional mainline aircraft (or keeping the one's we have) or on additional RJ's?

Hmmm, well, say we were going to add additional mainline aircraft right now, I am curious:

1. Can a B737 or A319 use commuter slots in DCA or LGA...?

2. Can you replace the feeder flights that use the commuter slots with a B737 flight, to a more lucrative point to point O+D market (like ORD)...?

Well, can you...?



Oh, I see, you still want to talk about CASM instead...

Well, the EMB-170 has the lowest CASM of any aircraft, mission capable (and competitive), able to fly routes like DCA-ORD, yet still utilize the commuter slots that were used previously by 30 and 50 seat express aircraft...

Period.


Yeah, I know, you are starting to get clever, and are about to type some sort of comeback stating that "one airport does not justify a new fleet type..." Well, it is the same situation in LGA too you know...

The E-170 lowers our airline's overall CASM, by replacing smaller express aircraft (not mainline aircraft), flying short haul routes... With as many seats as we can legally add inot those slots, to fly long haul routes instead.

And it does not stop there.



Let me ask you this Jim...

1. When was the last time you landed on PHL's Rwy 35/17 to avoid airborne or ground delays...? If you wanted to, could you land on that runway everyday?

2. How about Rwy 25/8...? Have you ever made a takeoff or landing on that PHL runway in your 737 Jim...?

3. Do you think a A319 could use the gates at Philly's F Terminal..? How about your 737, would your plane fit into the space between each gate...?

The E-170 is able to skirt traffic congestion in PHL by using the "commuter" runways, and maximize our gate assets by using the commuter gates. Can additonal mainline aircraft do the same...?

Once again...

The EMB-170 has the lowest CASM of any aircraft that can still utilize the "commuter" runways at PHL on a continual basis. And the EMB-170 also has the same wingspan as the DHC-8, meaning IT FITS into the F terminal gates designed for use by 30 and 50 seat express aircraft ...

Period.


So, to answer your question Jim, it makes more sense to obtain additional aircraft that we can use to substantially increase our market strength right now in DCA and PHL.

Unless you can pull mainline DCA slots out of thin air..., Or produce both gate space and a means to get around PHL traffic congestion... Then your hypothetical "CASM" argument withers in the light of day. Theory is nice, but execution is what matters.

The EMB-170 provides a competitive and profitable advantage that our competition cannot counter easily. It allows US Airways to grow in markets that, and in ways in which, we were limited beforehand. It allows us to exploit profitable opportunities and make BETTER USE of the few advantages we have right now.


Could you imagine the smile on my face, as I took off from Rwy 35 today, while the SWA and AirTran aircraft ahead of us had instead travel over in the looooooong line at the end of 27L...?

I have my fingers crossed that we will reach the day in which we have the strength to go after future opportunites with additional mainline aircraft. That day will come, but right now we must instead make better use of the remaining mainline aircraft we DO have, and try to solidify our position in our current markets.

Do we need a flood of E-170's...? No. But we do need enough to make the the most of the opportunites they do provide. And that is why we are getting more of them for now, rather than additional mainline aircraft.

Get it...?

 

[Rico]

the RJ's could help the company if it really were going to more of a point-to-point focus. Adding point-to-point routes from cities east of the Mississippi to LGA, DCA, and BOS, focused primarily on O&D traffic at moderate yields, makes a lot of sense. But if they're being used to downsize flying to and through the hubs, simply to push yields up by restricting capacity, the long-term effect is that LCC's will continue to invade your stronger spoke markets and eventually the bigger hub markets as well.

And that is why they are being moved from PIT into PHL and now DCA. IMO the company is figuring out how to best utilize this new asset as time goes by, and it is my hope that they have found that niche.

They are best used to increase our operations in PHL and DCA, rather that try to salvage what is left of a downsized PIT. It is my hope that post BK that additional E-170's can be used in the same manner in LGA and BOS as well.

Take the situation in the PHL F terminal as an example. F terminal is far more busy today with E-170 passengers added, than it was in the past. This has been done without sacrificing any mainline gate space of frequency in the remaining PHL terminals. The E-170's high use of the alternate runways has also minimized the additional congestion that those added flights would have otherwise caused.

In fact, I have noticed that the example of the E-170's using the alternate runways has increased their use by CRJ and ERJ aircraft as well, while before it was rare to see anything other than a turboprop aircraft on those runways...

I understand you reluctance to consider anything smaller than a narrowbody, capable of operating on a route like PHL-IAH, but you have to keep a few things in mind. At the end of the day, it is not the comparison of two aircrafts CASM's that matter, rather if each flight was profitable or not.

I ask you this, why not make a profit on all flights by flying a full E-170, rather than making a profit only some of the time on partially filled mainline flights...?

You are right, it does cost more per seat to operate a E-170 than say, a A320. But it costs less per flight to operate a E-170 between PHL-IAH also... Why fly only 70 passengers in the larger plane, if the E-170 can transport them for less...?

I know, a full A320 generates a lot more profit than a full E-170 will, but remember your load factor averages around 75%, so you do not always fill the larger aircraft. It is far easier to count upon a profitalble passenger load for the E170 throughout the day, rather than hope to fill an Airbus everytime on the same route.

Sure, we might leave behind some revenue we "could" have made once and awhile because we are full, but making a profit on each flight (instead of some of them) is worth it. We have a fleet of different sized aircraft, that operate on the very same routes, because some flights need the capacity and others do not. It is important to have that flexibility to place the right sized aircraft on each flight segment.

As for your other question, business people seem like the E-170. It does not have a First Class, but it has the nicest Coach Class in the fleet. I hear nothing but compliments about the cabin, even on 3 hour-plus flights... I would rather sit in any of the seats of a E-170 than the middle seat of a 737 any day of the week, who wouldn't...?

So yes, I think in the right situation, the E-170 is a valuable tool. I hope that the company has experimented enough with this new kind of aircraft (not quite a narrowbody, not quite an RJ) to know where the E-170 works best, and will use these aircraft accordingly...

 

[RowUnderDCA]

Ok, but the success of the 170 is clearer in its use at DCA than it is in its use at PHL. I agree, that I've been assuming that U has a plan to integrate these craft on routes to grow them and on routes like PHL-IAH eventually put bigger aircraft. But the strategy at PHL is less clearly a success strategy. Granted PHL is a difficult airport to operate out of, but I was assuming that rolling the hub would allow for smoother, more efficient large jet operations. Obviously, I'm not privy to the math, but is there a point of rolling PHL that provides opportunities for some connectivity, but drastically improves the utilization of the gates and airfield assets?

Seriously, what is the value of PHL if you cant operate the right sized aircraft from there for the demand on the routes, because of the infrastructure? With rolling the hub, does the demand and capacity STILL not intersect?!? If that's true, then they did pick the wrong airport. Of course, there is the thought that U does not want to improve the operability of PHL SO much because of WN. .

 

[funguy2]

Rico... You make some valid points... But I'll counter with a couple of my own...

First of all, you should NEVER build the airline around terminal constraints. Congestion constraints, maybe. But to say that Terminal F could not be reconfigured to handle bigger jets is foolish. I'll ask a question here... Does Wal-Mart downsize their store because the building is not big enough, or do they build a bigger building?

Second, downsizing to profitability is a fine strategy if that IS your strategy. However, US Airways has said it wants to be an LCC. By offering low fares, the PHL market will be stimulated... I.e. MORE traffic. Why would you stimulate the market with lower fares, and then reduce your capacity and reduce your ability to capture the stimulated traffic?

There are two paths to profitability from here:
1) Lower capacity (i.e. supply) to move the equalibrium point between supply and demand to a higher price, thus (hopefully) moving from a loss to a profit.

2) Lower costs and fares in order to stimulate the market. Lower costs more than fares, such that a smaller profit can be made on each unit. Sell more units at a lower profit to acheive a desirable total profit, which should be possible due to the increased demand.

US Airways has stated it wants to do #2. Smaller aircraft do not make sense, to me at least, in that situation.

I agree, that making more efficient use of commuter slots at DCA/LGA is a good thing... But if memory serves me, US Airways was also looking to downsize the shuttle, thus indicating that it was also seeking to make some slots less efficient. I don't think that has happened, but it has been proposed.

 

[Rico]

Row under...

The E-170's were moved into PHL as part of the competitive repsonse to SWA's arrival.

Head to head cage match on each route...?

No.

But what US Airways did was to ramp up the PHL operation overall, to increase their presense in this market in whatever manner possible. Like I talked abotu before, it was possbile to add E-170 flights where additional mainline flights had to be squeezed in.

Put it this way, stop thinking about the E-170 "replacing" mainline flights, rather that it replacing Exress flights (previously done by smaller jets or turboprops), or was added onto established mainline routes, providing better frequency to places that used to just have a 737 or Airbus a few times a day (or allowing that mainline plane to be used on a different route to add frequency there).

 

[mweiss]

By offering low fares, the PHL market will be stimulated... I.e. MORE traffic. Why would you stimulate the market with lower fares, and then reduce your capacity and reduce your ability to capture the stimulated traffic?

[post="242818"][/post]​

Rico brought up an interesting point. PHL seems to be more runway constrained than gate constrained. If the large RJs can use the small runway and the 737s and narrow Airbuses can't, then adding the large RJs to PHL actually does increase capacity, at a lower cost. After all, sitting in line for a runway earns the company $0, so the CASM could be closer at PHL than the systemwide numbers would suggest.

I don't have enough information to determine if he's right. Does anyone else?

 

[RowUnderDCA]

I had thought that the 50-seat CRJ and ERJ's were NOT good short field aircraft for lack of forward slats. Do the larger/newer CRJs and EMBs have better short field performance?