Lakefield's Piece In Avdaily

[RowUnderDCA]

Doesn't everyone think that Lakefield's piece in AvDaily was pretty reasonable? I believe it. Perhaps, I have one caveat. I agree that U management has believed that changing the pricing structure would reduce overall revenue: that they could NOT accomplish a better 'mix' of higher fare solutions with a new pricing scheme. I believe this, in part, because of the historically larger revenue premium of U (of course, I'm not smart or energetic enough to do a segment adjusted analysis of RASM). Where I think he's missing the boat is that at some point the LCC pricing control is going to cause the lines on the graph to cross and there will no longer be an advantage to old-fashion revenue management. Predicting when that will happen has been the main mistake of past U management. But less revenue is less revenue, no matter how it is shaped and will result in losses, unless cost structures are adjusted.

I understand that not everyone has access to AvDaily and I think you can't post their stuff, so sorry.

 

[Pragmatic]

Here is the full text...

". Fundamental Changes Needed To Transform Legacy Carriers
By Bruce Lakefield, Aviation Daily Departures Op Ed (full text, subscription only)

The new competitive landscape facing the legacy carriers is forcing major structural shifts in the U.S. airline industry. Even in this hyper-competitive industry, where cutthroat competition has been a way of life, there is now a higher level of intensity and a lower tolerance for being uncompetitive. The result: legacy carriers must make deep, fundamental changes in their business models and cost structures, and do it quickly.

There is no longer a low-cost carrier “threat.†There is only the low-cost carrier “reality.†And faced with intense competitive pressure from low-cost carriers, record high fuel prices, the demise of premium fare-paying business travelers and unprecedented levels of government taxation and fees, airlines such as US Airways that have already gone through severe cost cutting and restructuring are finding that deeper and more lasting change is needed.

To that end, we couldn’t agree more with a recent “Arrivals†analysis (DAILY, May 19), which concludes that permanent changes to legacy carriers’ business models, including reductions in both labor and non-labor costs per available seat mile (CASM), must be made if the industry is to return to — and sustain — profitability.

With the core of its route network on the East Coast where low-cost carriers have experienced explosive growth, and a hub in Philadelphia — the epicenter of low-cost activity and a microcosm of airline change — US Airways recognizes the acute need to transform. And while we have exceeded the projected cost savings targets set when we emerged from Chapter 11 in 2003, the industry’s deteriorating revenue outlook requires further change.

The legacy industry was built on a revenue model that extracted premium fares from a minority of passengers. As a result, lowering fares, especially top-end fares, is highly dilutive. As commodity price structures proliferate, customers increasingly can avoid the legacy high fares and so the legacy carriers face a daunting choice: lower fares and lower revenue, or don’t lower fares and lose customers.

Consider this: revenue projections we used for our original 2002 restructuring efforts estimated total 2004 U.S. airline industry revenue of $73 billion. Some labor leaders viewed our estimates as conservative and unrealistic. Yet in reality, total U.S. domestic airline revenue is only expected to be $63 billion this year despite passenger volumes rising from 2003 as traffic rebounds from the Iraq war, recession and SARS.

Consequently, legacy carriers now must find ways to be profitable while playing a volume game through a combination of lower fares and higher aircraft utilization, smarter scheduling, better distribution and competitive costs.

As The DAILY’s analysis pointed out, an airline cannot pin its woes on labor costs alone. That is certainly not our strategy. As we work to lower our annual costs by another $1.5 billion, about half those costs must come from labor, while the other half comes from savings in categories like those listed above. As we have explained to our employees, reducing labor costs does not mean simply looking at wage rates. We must also factor in the advantages of growth and start-of-scale seniority that low-cost carriers hold over legacy airlines that have a senior work force, high pension costs, and other more expensive benefits that our employee groups have fought to secure.

So now the task is to engage our unions in a collaborative dialogue to implement an across-the-board cost reduction strategy that will ensure the airline’s future profitability. Labor costs must be part of the solution. But that must be coupled with a strategy that adjusts to the new world of low fares so that our employees see that their participation and sacrifice will result in success, career opportunities and growth.

We have started talks with our union leaders and are encouraged that there is recognition that change is needed. "

 

[funguy2]

I would agree that this seems pretty reasonable. The only problem is that thus far, US Airways ONLY major cost reductions have been Labor and shrinking the airline (saves on aircraft rent, etc, as well as a second blow to Labor).

I don't disagree with the argument or analysis. However, US Airways cost-savings strategy to date has been labor. If Lakefield wants me to believe otherwise, he needs to tell us where else he has realized cost-savings from.

 

[USFlyer]

I would agree that this seems pretty reasonable. The only problem is that thus far, US Airways ONLY major cost reductions have been Labor and shrinking the airline (saves on aircraft rent, etc, as well as a second blow to Labor).

You have got to be kidding me, right? US's creditors and lessors took a hairclipping in the Chapter 11 proceedings, not only with rejecting leases but also with reducing lease rates on still operating aircraft. Rents at airports and for office space were also renegotiated. What didn't happen was a complete revamp of how the airline fundamentally operates, which is what Lakefield is now attempting to do. PIT should have been downsized two years ago, for example.

 

[funguy2]

You have got to be kidding me, right? US's creditors and lessors took a hairclipping in the Chapter 11 proceedings, not only with rejecting leases but also with reducing lease rates on still operating aircraft. Rents at airports and for office space were also renegotiated. What didn't happen was a complete revamp of how the airline fundamentally operates, which is what Lakefield is now attempting to do. PIT should have been downsized two years ago, for example.

Fair enough USFlyer...

But let's face it. The restructured agreement with PIT/ACAA actually increased lease rates on 40 of 50 gates (as the month-to-month lease rate was more than the long-term lease rate).

Also, the reduced lease-rates on aircraft is a new competitive reality for the leasing companies, isn't it? The value of aircraft has declined as there are many more idle aircraft in the desert than prior to 9/11, right? I am not saying that they didn't lower lease rates, but it was only to keep their aircraft leases producing revenue (vs. parked).

I am still of the opinion that the structural cost problems at US Airways need to be addressed. They haven't been. I am hopeful that changes soon.

 

[mwereplanes]

"So now the task is to engage our unions in a collaborative dialogue to implement an across-the-board cost reduction strategy that will ensure the airline’s future profitability. Labor costs must be part of the solution. But that must be coupled with a strategy that adjusts to the new world of low fares so that our employees see that their participation and sacrifice will result in success, career opportunities and growth."

That is key. He truly needs to admit that management has really messed up to this point and he recognizes it and will address it. That, along with solid management, would go a long way to ensuring U's success.

mr

 

[700UW]

This company has broken any trust with the mechanic and related group, I seriously doubt that can be repaired and I truly believe US will end up back in bankruptcy and try to abrogate labor contracts.

 

[Tim Nelson]

US AIRWAYS already enjoys a significatn "Non-Pilot Labor cost advantage" when compared to Southwest. In fact some departments enjoy almost a 20% labor cost advantage to LCC like Southwest and by contract will enjoy further labor cost advantages over the next 3 years. Once again, it isn't Labor but rather non-labor cost structures that has this company walking on 'piss clams'.

regards,

 

[mwereplanes]

I don't necessarily disagree with you 700. However, if Lakefield truly wants to avoid the C11 route (which basically allows a court to manage the company) he has the ability to do so. He may not have the will or desire to do so and that is what I implied in my post.

The game plan may well be C11 once again but there are definite disadvantages in going there once again. Do the benefits of another filing outnumber staying out of court? That is the 800 million dollar question.

You can count on the pilots caving in without demanding accountablilty and returns. Our fear is ledendary. I also believe you will see the F/A's cave (except for PIT) in a similar scenario. I certainly hope the IAM demands more from management and I think they will. Good luck to us all.

mr

 

[700UW]

mwere,

Hang in there, one day your union will wake up and realize what they have destroyed.

I wonder how your union would feel if Mesa takes over the 767 and A330 flying, that would be the equivalent of the scope violation of our contract. The company just continues to be arrogant and lie, planes 11 and 12 are at BFM when they said only 10 would be done.

I am not optimistic at all about the future of this company.

 

[ITRADE]

I am not optimistic at all about the future of this company.

You're not optimistic about much, are you?

 

[700UW]

I am very optimistic about things in life, but reality has set in this company has no vision and no leadership, it is the same old plan time after time.

You should know being on the inside like you are.

 

[ITRADE]

You should know being on the inside like you are.

'scuse me?

 

[aerosmith]

Your right 700 the handwriting on the wall has never been clearer, it doesn't take a fortune teller to read this crystal ball. :down:

 

[cavalier]

You're not optimistic about much, are you?

Itrade thanks for the laugh. Sometimes your one-liners are funny.

700 seems that way because this outfit IS that way, you know that too, but still you hit my funny bone.