Wall Street wonders if legacy carriers may outdo discounters after all
11/01/06 03:15:00
After roughly five years of ruling the airline industry's roost, the nation's low-cost carriers (LCCs) could be in for a rough landing. That's according to a Wall Street Journal article in which the paper writes: "Not only are discount carriers increasingly competing against each other, but they are up against some reinvigorated adversaries: big, older airlines. These so-called legacy carriers now have the best of both worlds -- some of the lower costs that discounters enjoy and the premium overseas traffic that they don't." That, the Journal adds, is raising questions about how much is left to be squeezed out of a low-cost business model that calls for cheap fares on mostly domestic routes. "Discounters are realizing an inconvenient truth: Slower growth may in fact improve profitability," says JP Morgan analyst Jamie Baker.
The Journal notes that American saw profits return after cutting non-regional routes by 2.4% and flying planes at higher capacity levels. JetBlue, on the other hand, swung to a third-quarter loss after growing by 19% and filling fewer seats. "A few years back, many industry watchers assumed discounters would dominate simply because of lower costs. And though their costs remain lower, many discounters underestimated the power of the legacy carriers' size and reach, which allow them to serve more major markets that draw higher fares," the Journal writes, citing JP Morgan's Baker. Some low-cost carriers –- notably JetBlue and AirTran –- have restrained (but not stopped) their expansion plans. At some point, however, slowing growth could prove to be problematic for the LCCs. They "need to grow rapidly to keep costs down, spreading overhead over more capacity," the Journal writes, adding that the LCCs "are constantly looking for new places to fly." Stay tuned ...
11/01/06 03:15:00
After roughly five years of ruling the airline industry's roost, the nation's low-cost carriers (LCCs) could be in for a rough landing. That's according to a Wall Street Journal article in which the paper writes: "Not only are discount carriers increasingly competing against each other, but they are up against some reinvigorated adversaries: big, older airlines. These so-called legacy carriers now have the best of both worlds -- some of the lower costs that discounters enjoy and the premium overseas traffic that they don't." That, the Journal adds, is raising questions about how much is left to be squeezed out of a low-cost business model that calls for cheap fares on mostly domestic routes. "Discounters are realizing an inconvenient truth: Slower growth may in fact improve profitability," says JP Morgan analyst Jamie Baker.
The Journal notes that American saw profits return after cutting non-regional routes by 2.4% and flying planes at higher capacity levels. JetBlue, on the other hand, swung to a third-quarter loss after growing by 19% and filling fewer seats. "A few years back, many industry watchers assumed discounters would dominate simply because of lower costs. And though their costs remain lower, many discounters underestimated the power of the legacy carriers' size and reach, which allow them to serve more major markets that draw higher fares," the Journal writes, citing JP Morgan's Baker. Some low-cost carriers –- notably JetBlue and AirTran –- have restrained (but not stopped) their expansion plans. At some point, however, slowing growth could prove to be problematic for the LCCs. They "need to grow rapidly to keep costs down, spreading overhead over more capacity," the Journal writes, adding that the LCCs "are constantly looking for new places to fly." Stay tuned ...
