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What do you guy think about this?
How many airlines will be their in the future?
How many airlines will be their in the future?
Impact of Airline Consolidation
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BoeingBoy
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- Nov 9, 2003
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Personally, consolidation done right can help but it's not the magic bullet that some seem to believe - especially those that really push consolidation like Parket, Tilton, and some analysts. The theory is that consolidation results in less capacity (so higher average fares) and less competition for market share (so higher average fares). The reality is that the capacity the legacies take out of the system is replaced by capacity that the low cost carriers add to the system - not on a route by route basis certainly, but overall. I read a piece not long ago that said that the legacies had reduced capacity by 85 billion available seat miles in the last decade, while the low cost carriers had added over 84 billion available seat miles - basically just a shift from legacy capacity to low cost capacity. So what you end up with is the legacy carriers fighting over frequent flyer market share as always (except now for who has a bigger piece of a smaller pie) while the low cost carriers capture an ever increasing portion of the large part of the market that is price sensitive.
Jim
Jim
BoeingBoy's absolutely spot on there.
Here's a different angle to look at. For any market, increased supply results in decreased price (all else being equal). When the price drops low enough, suppliers can no longer support the market and exit. Provided barriers to enter are relatively low, new suppliers with lower costs show up to fill the gap left by the exiting suppliers. In this case, we're looking at lower-cost point-to-point carriers filling those gaps.
Taken to its logical conclusion, this doesn't bode well for UA, US, AA, DL, or even CO. Consolidation's main benefit, of the type demonstrated by a UA/US merger, is prolonging the agony.
Here's a different angle to look at. For any market, increased supply results in decreased price (all else being equal). When the price drops low enough, suppliers can no longer support the market and exit. Provided barriers to enter are relatively low, new suppliers with lower costs show up to fill the gap left by the exiting suppliers. In this case, we're looking at lower-cost point-to-point carriers filling those gaps.
Taken to its logical conclusion, this doesn't bode well for UA, US, AA, DL, or even CO. Consolidation's main benefit, of the type demonstrated by a UA/US merger, is prolonging the agony.
Nice to see you back here. While I agree with you and BoeingBoy, consolidation could help the remaining legacies (prolonging the agony, as you say) by combining the few remaining premium fare-paying passengers (high-yield pax) onto fewer planes. Instead of UA and AA flying more than two dozen overlapping narrowbody flights ORD-LAX each day, a merger of the two could allow the merged entity to fly a dozen larger planes, saving signficant money. Same on ORD-LGA, where some of the frequencies could be reduced, spilling the cheap-fare passengers to the always-present LCCs. These efficiencies won't make the survivor viable forever, but it would help in the short-term. Plus, in some congested east coast markets, the survivor could run fewer large RJs instead of more smaller RJs, or substitute 737s and cut large RJ frequencies (while maintaining the same effective frequencies).
About the replacement by LCCs of legacy capacity reductions, there's a frequent view, especially among airline employees, that the LCCs are only able to expand because of contraction by their legacy employers. There's a single-issue poster over at Flyertalk who laments the growth of B6 at BOS and has repeatedly blamed AA for "running from the competition." I'm not tarring BoeingBoy with this brush, as I've never seen him make this claim. But of course as customers demand more low-cost seats and fewer high-cost seats, and as legacy execs realize that they must reduce the amount of flying they do at a loss, the capacity reductions by legacies will probably be replaced by the LCCs. GM and Ford sell fewer cars than they did several decades ago, and Toyota, Honda and Nissan sell millions more than in the past. Passengers have come to realize that a seat on WN isn't all that bad and that B6 and VX offer relatively nice coach products. People have forgotten/forgiven Airtran for their Valujet mistakes and that airline has grown substantially. No doubt other upstarts will emerge to attack legacies. Eventually, they'll even do it on the so-far lucrative overseas flights.
jimntx
Veteran
Ditto. WN (being run by airline people rather than by accountants like the rest of us) is particularly astute at seeing opportunities for expansion. Because of AA's capacity reduction attempts (excuse me, our latest buzz phrase is "concentrating on our cornerpost cities"), WN now pretty much owns STL as well as MCI.
AA cut STL-BOS from 3xdaily to 1xdaily. WN started STL-BOS 2xdaily.
AA exited the STL-MCI market. WN now provides only service on this route.
AA exited STL-MSP market (was 5xdaily on AX) last November. WN started STL-MSP in January.
AA cut STL-SEA from 2xdaily to 1xdaily. Guess who now flies nonstop STL-SEA? I'll wait while you think about it.
Consolidations/mergers/buyouts between the "majors" has never reduced capacity over the long run, and won't this time. It simply moves that capacity to more efficient, cost-effective carriers.
We are simply seeing the beginning of the end for domestic "majors". Those that have substantial International service like AA, UA, DL, and CO will survive in that arena (it will be in the government's interest to support this for "national pride and prestige" reasons), but domestic service will go to the true low-cost carriers--such as, WN.
We saw a similar progression with train service that is happening in the airline industry now. Even in my lifetime, train travel was nice to luxurious, and "regular" people rarely traveled by air. It was too expensive. As air travel cost came down, people saw the advantage of getting from NYC to LA in 5 hours instead of 3-4 days. Railroads started merging to "reduce capacity and support price levels." They also started charging for things that traditionally had been free (see also, airline baggage fees). They reduced the amenities drastically--full-service dining cars became a club car with vending machines (see also Food for Sale in coach). Travel by train became an experience to endure rather than enjoy. Eventually, the railroads dumped the passenger service on the government. (This is an oversimplification, but the underlying story lines are the same.) Let's hope the airlines don't decide that cargo is more profitable than passengers and force the government to create an AMTRAK of the skies. :blink:
AA cut STL-BOS from 3xdaily to 1xdaily. WN started STL-BOS 2xdaily.
AA exited the STL-MCI market. WN now provides only service on this route.
AA exited STL-MSP market (was 5xdaily on AX) last November. WN started STL-MSP in January.
AA cut STL-SEA from 2xdaily to 1xdaily. Guess who now flies nonstop STL-SEA? I'll wait while you think about it.
Consolidations/mergers/buyouts between the "majors" has never reduced capacity over the long run, and won't this time. It simply moves that capacity to more efficient, cost-effective carriers.
We are simply seeing the beginning of the end for domestic "majors". Those that have substantial International service like AA, UA, DL, and CO will survive in that arena (it will be in the government's interest to support this for "national pride and prestige" reasons), but domestic service will go to the true low-cost carriers--such as, WN.
We saw a similar progression with train service that is happening in the airline industry now. Even in my lifetime, train travel was nice to luxurious, and "regular" people rarely traveled by air. It was too expensive. As air travel cost came down, people saw the advantage of getting from NYC to LA in 5 hours instead of 3-4 days. Railroads started merging to "reduce capacity and support price levels." They also started charging for things that traditionally had been free (see also, airline baggage fees). They reduced the amenities drastically--full-service dining cars became a club car with vending machines (see also Food for Sale in coach). Travel by train became an experience to endure rather than enjoy. Eventually, the railroads dumped the passenger service on the government. (This is an oversimplification, but the underlying story lines are the same.) Let's hope the airlines don't decide that cargo is more profitable than passengers and force the government to create an AMTRAK of the skies. :blink:
BoeingBoy
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One thing I failed to mention is the small markets - the AVP's, TRI's, etc. Too small to attract low cost carriers to provide the amount of service they currently enjoy, they'll see higher fares from the legacy carriers that remain to serve them. For some, that would mean a drive to a larger airport with lcc service and for others it would mean paying more.
There is also the "I wouldn't fly on XYZ because they don't have ______ (fill in with F/C, assigned seats, international flights, whatever)". That will help sustain the legacies, but not all legacies forever.
And FWAAA is right, history has demonstrated that well-run lcc's can expand without legacies contracting to provide the opportunities. However, legacy consolidation and the presumed reduction in capacity is just further opportunity for lcc's to expand.
Jim
There is also the "I wouldn't fly on XYZ because they don't have ______ (fill in with F/C, assigned seats, international flights, whatever)". That will help sustain the legacies, but not all legacies forever.
And FWAAA is right, history has demonstrated that well-run lcc's can expand without legacies contracting to provide the opportunities. However, legacy consolidation and the presumed reduction in capacity is just further opportunity for lcc's to expand.
Jim
Thanks.
We are in violent agreement. I just would like to see a sustainable model for them, rather than cannibalism until there's nobody left to eat.
In a sense that's true. Margins drop too low for the legacy carrier, but remain high enough for the LCC. The predictable result is the legacy leaves and the LCC expands. That's basically what you said, too.
And that's the biggest innovation of upstarts since 1990. You don't have to have peeling paint (metaphorically speaking) to have low costs.
I wonder what percentage of Airtran customers know that it's Valujet 2.0. I bet it's low.
I suspect the only reason it hasn't happened yet is the prolonged agony of airline consolidation. Going across the oceans will require a much bigger investment. Once the lower-hanging fruit of domestic traffic has been fully consumed, Canada and Mexico will follow, then overseas...barring some major shift that isn't yet apparent.
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