Major Carriers May Fail In 05

[sfb]

Read this if you want to know why Southwest is successful even with some of the most generous pay rates in the industry:

Can Airlines Pin Their Woes On Labor Costs Alone?

The summary: Southwest has one of the lowest non-labor unit costs, and their high-utilization business model leads to productivity at or near the top of the industry, giving them lower labor unit costs than virtually all of the "legacy" carriers.

Probably the best one-sentence summary of the network carriers' problems is in this report:

A basic point that seems to be lost is that many airlines’ business models — and not merely wage rates — drive losses.

Changing where the company flies in hope of achieving better yields is NOT changing the business model. Adding GoFares almost solely in markets that compete with WN and DH and FL is NOT changing the business model. Downgauging mainline service to RJ's so you can charge higher fares is NOT changing the business model.

 

[Winglet]

Read this if you want to know why Southwest is successful even with some of the most generous pay rates in the industry:

Can Airlines Pin Their Woes On Labor Costs Alone?

The summary: Southwest has one of the lowest non-labor unit costs, and their high-utilization business model leads to productivity at or near the top of the industry, giving them lower labor unit costs than virtually all of the "legacy" carriers.

Probably the best one-sentence summary of the network carriers' problems is in this report:

A basic point that seems to be lost is that many airlines’ business models — and not merely wage rates — drive losses.

Changing where the company flies in hope of achieving better yields is NOT changing the business model. Adding GoFares almost solely in markets that compete with WN and DH and FL is NOT changing the business model. Downgauging mainline service to RJ's so you can charge higher fares is NOT changing the business model.

[post="228954"][/post]​

The salient point is that small cities should not have air service. Cities should not have air service unless they can support a minimum of several 150 seat aircraft a day or they're willing to subsidize the airline to a profit on the routes. If the small cities want service, it won't be cheap using very high CASM RJs . . . sometimes up to 40 cents per seat mile. The problem is these hick towns want high-frequency and cheap. Well, no more, jerkoffs. The free ride is over. Your service providers are going broke pandering to you. What this country needs is the SW model. ONLY BIG CITES, POINT TO POINT, AND CRAMMED IN LIKE SARDINES. NO HUB OPERATIONS. NO SEEMLESS CONNECTIONS. SO PICK UP YOUR BAG AND DRAG IT TO THE NEXT AIRLINE, CHECK-IN AND RUN TO THE NEXT GATE. YOU VOTED WITH YOUR WALLETS. YOU WANT SOUTHWEST. OK. YOU GOT IT. Now reap the harvest.

 

[WorldTraveler]

Forgive me for being very direct, but you are so wrong in your conclusions, Winglet. Perhaps there is some sarcasm in your response but we need to make sure that it is understood that air service can be profitably provided aside from the Southwest model.

It is preposterous to think that small cities cannot have air service or be profitably served with regional jets. Plenty of well meaning people have tried to convince the world that only large routes and big cities deserve or can afford air service. That is like saying that Wal-Mart Super Centers are the only retail option available to a community and if they can't support one, they don't get retail service. There are alot of people in the world, like me, that won't wince if we never set foot in a Wal-Mart store again.

There are many cities that are served exclusively by regional jet service to a major carrier hub and it is provided profitably. I'll not go into the math, but if you have access to DOT data, look up service to a couple cities like Montgomery or Tri-Cities or Bangor or.... Using standard airline proration models, those cities generate enough revenue to cover the costs of providing service to those cities.

It is also invalid to think that all WN passengers fly on $49 fares. In fact, WN does some of the best revenue management in the industry and often has higher average fares on routes that they serve alongside other major carriers. They know how to take enough discount passengers to be perceived as a value leader but make sure there are enough higher paying passengers to make money. The same principle applies in cities served by regional jets. Yes, on a per seat basis, RJs are more expensive to operate but not everyone in Charleston, WV needs to be given a fare of $118 roundtrip to go to Florida.

There are airlines that understand how to use regional jets and serve small cities profitably. Just in the past week, Delta has announced service to four new cities to be served by Delta connection. I don't even know how many cities they've announced this year but it's got be a dozen or more. Either they are insanely moronic or they recognize there is money to be made by serving small cities through a hub and spoke system. Given DL has no choice but to turn themselves around and has used regional jets longer than most airlines and has more of them at its disposal than anyone, it's pretty obvious they know what they are doing.

Yes, it's about the business plan. No aircraft, city, or labor group will make or break an airline in and of itself. Prudent use of all resources, including regional jets and traditional hubs, can ensure a company's future just as much as a single fleet type flying point to point markets.

 

[Walmartgreeter]

.

Yes, it's about the business plan. No aircraft, city, or labor group will make or break an airline in and of itself. Prudent use of all resources, including regional jets and traditional hubs, can ensure a company's future just as much as a single fleet type flying point to point markets.

[post="229030"][/post]​

Nice to see you back on the U board. And to see you pretty much NAILING this issue. Best to you and yours. Greeter (nice, also to see DAL doing it RIGHT) Anybody listening....320, Jones, Lance?????

 

[luvn737s]

There are many cities that are served exclusively by regional jet service to a major carrier hub and it is provided profitably. I'll not go into the math, but if you have access to DOT data, look up service to a couple cities like Montgomery or Tri-Cities or Bangor or.... Using standard airline proration models, those cities generate enough revenue to cover the costs of providing service to those cities.

[post="229030"][/post]​

Wait a second. Rj's are profitable to mainlines, so an exclusively RJ airline should be a moneymaker. Wanna explain that to Flyi? RJ's appear to make money because so many of the true costs of operation are not prorated to the Rj operator, such as advertising, insurance, deicing, ATSB fees and interest (in the case of HP and F9), etc.

If RJ's are so vital to an airline, why are their expenses and revenues not detailed in annual reports?

 

[Bear96]

There are airlines that understand how to use regional jets and serve small cities profitably. Just in the past week, Delta has announced service to four new cities to be served by Delta connection. I don't even know how many cities they've announced this year but it's got be a dozen or more. Either they are insanely moronic or they recognize there is money to be made by serving small cities through a hub and spoke system. Given DL has no choice but to turn themselves around and has used regional jets longer than most airlines and has more of them at its disposal than anyone, it's pretty obvious they know what they are doing.

[post="229030"][/post]​

Delta's doing it? Then it must be a sure-fire winner!

Of course, your post would be particularly persuasive if DL hadn't been losing billions of dollars over the past couple of years. That little annoying fact would lead some to believe maybe DL isn't all that. (Not you though.)

I know; I know; you'll be responding momentarily about how brilliant DL is despite the numbers. Here comes the spin...

 

[javaboy]

Southwest serves 60 cities in the USA

USAIRWAYS serves 203 destinations in USA and Abroad.


if the SWA model is to be followed to the letter, then in one sense yes air service would only take place at the most profitable citiies. SWA does not serve a city for citizen's convenience but only if they figure they can make a profit, part of those factors are indeed size of the city.

Independence Air seems to target the 2nd tier cities with a SWA like model, they lack brand recongition that SWA enjoys and you can see the difference.

So in a short and dirty conculsion every time one of the so called experts (al khan) says looks SWA can make money (of course they must give credit where credit is due for massive fuel hedging). i would say ok only 60 cities in the USA deserve air service. and watch the responses then. to their retorts i would say well southwest doesnt go there because its not profitable why should brand X then serve that city..

again i point out, ok lets say UAIR gets every labor concession it asks for (just humor me for a moment) i ask NOW WHAT? what is the plan? is it to deploy the E170s and park 737s? is it to raise ticket prices? will people pay more to ride on the 170 than the 737 or will the 170s go to profit centers that 737s simply can not serve? Credit again for "flying more" out of FLL. great whats next? what is the plan to increase TOP LINE GROWTH? how are you going to get 1. the same amount of people to travel but pay more? or 2. people to play the same but more of them to ride on your airline. I continue to ask who is willing to RUN THE AIRLINE?

B)

 

[local 12 proud]

Southwest serves 60 cities in the USA

USAIRWAYS serves 203 destinations in USA and Abroad.
if the SWA model is to be followed to the letter, then in one sense yes air service would only take place at the most profitable citiies. SWA does not serve a city for citizen's convenience but only if they figure they can make a profit, part of those factors are indeed size of the city.

Independence Air seems to target the 2nd tier cities with a SWA like model, they lack brand recongition that SWA enjoys and you can see the difference.

So in a short and dirty conculsion every time one of the so called experts (al khan) says looks SWA can make money (of course they must give credit where credit is due for massive fuel hedging). i would say ok only 60 cities in the USA deserve air service. and watch the responses then. to their retorts i would say well southwest doesnt go there because its not profitable why should brand X then serve that city..

again i point out, ok lets say UAIR gets every labor concession it asks for (just humor me for a moment) i ask NOW WHAT? what is the plan? is it to deploy the E170s and park 737s? is it to raise ticket prices? will people pay more to ride on the 170 than the 737 or will the 170s go to profit centers that 737s simply can not serve? Credit again for "flying more" out of FLL. great whats next? what is the plan to increase TOP LINE GROWTH? how are you going to get 1. the same amount of people to travel but pay more? or 2. people to play the same but more of them to ride on your airline. I continue to ask who is willing to RUN THE AIRLINE?

B)

[post="229071"][/post]​

i think USAIR's plan is the same as DELTAS, AMERICANS, UNITED, ETC.... throw as much SH!T against the wall and hope some of it sticks. THEY HAVE NO FRIGGIN CLUE HOW TO MAKE A PROFIT folks its obvious by now!

 

[JS]

Delta's doing it? Then it must be a sure-fire winner!

Of course, your post would be particularly persuasive if DL hadn't been losing billions of dollars over the past couple of years. That little annoying fact would lead some to believe maybe DL isn't all that. (Not you though.)

I know; I know; you'll be responding momentarily about how brilliant DL is despite the numbers. Here comes the spin...

[post="229069"][/post]​

Try to think two-dimensionally for a moment. Opening new cities has nothing to do with a bloated pilot labor contract, high fuel prices, or increasing LCC presence at its ATL hub and at many destinations such as LAX or FLL.

 

[Bear96]

Try to think two-dimensionally for a moment. Opening new cities has nothing to do with a bloated pilot labor contract, high fuel prices, or increasing LCC presence at its ATL hub and at many destinations such as LAX or FLL.

[post="229109"][/post]​

I prefer to think three-dimensionally. You should try it some time.

Anyways, why was the pilot contract allowed to get so bloated? Why did DL find itself in a position not to hedge? Why did they allow the fare structure to get so screwy that the LCCs saw a fat juicy target sitting in ATL? Perhaps as a reult of some not-so-wise decisions made in the past?

My point is that it struck me as silly to point to DL, only a heartbeat away from filing Ch.11 last month (and with a shaky future), as the successful model in how to do things.

 

[sfb]

Southwest serves 60 cities in the USA

USAIRWAYS serves 203 destinations in USA and Abroad.

Correction: According to the company's latest fact sheet, US Airways serves 179 airports in the U.S. and abroad (which probably works out to about 175 "cities"). As for actual mainline service in the continental U.S., US Airways itself only serves 56 airports (you can get to 59 if you include SJU, STT, and STX).

if the SWA model is to be followed to the letter, then in one sense yes air service would only take place at the most profitable citiies. SWA does not serve a city for citizen's convenience but only if they figure they can make a profit, part of those factors are indeed size of the city.

Size of the city is a factor, but it's certainly not the most important one, given that WN does not directly serve (or serve at all) several of the top 30 metro areas. But you are absolutely correct that they choose their cities based in large part on where they feel they can make the most profit. Isn't that the way airlines should be running their businesses? And in general, if enough people find that air service to a given city is convenient and offers value, that service will be profitable. I'd be willing to bet that that plenty of people are willing to pay a modest premium to use a closer airport with reliable service; they're simply not willing to pay hundreds of dollars more.

Independence Air seems to target the 2nd tier cities with a SWA like model, they lack brand recongition that SWA enjoys and you can see the difference.

Independence doesn't just lack brand recognition; there's also the problem that they largely lack a point-to-point network. Almost everything goes through IAD, and I suspect that close to half of their markets simply cannot support much more than a couple hundred seats daily to IAD. Basically, too many high-cost RJ's flying too empty. If they had about half the aircraft, they might be profitable right now.

So in a short and dirty conculsion every time one of the so called experts (al khan) says looks SWA can make money (of course they must give credit where credit is due for massive fuel hedging). i would say ok only 60 cities in the USA deserve air service. and watch the responses then. to their retorts i would say well southwest doesnt go there because its not profitable why should brand X then serve that city..

Southwest would have made money last quarter even without hedging -- just not as much. And they serve at least two dozen cities which US doesn't serve at all outside the UA codeshare (OAK, SJC, SMF, PDX, GEG, BOI, SNA, BUR, ONT, TUS, RNO, SLC, ABQ, ELP, LBB, AMA, MAF, AUS, SAT, CRP, HRL, OKC, TUL, OMA). Let's compare ABQ and GSP. The metro population of Greenville-Spartanburg is nearly 1/3 larger than that of Albuquerque, and yet US doesn't even have a single mainline flight at GSP. Contrast that to over 60 daily 737 departures on Southwest from ABQ. Of course, it doesn't hurt that rational fares mean that ABQ has over 7 times the number of passengers of GSP. If Southwest can manage to fill more seats out of Boise than US Airways can out of L.A., they can probably manage to serve a lot more than 60 cities long term.

again i point out, ok lets say UAIR gets every labor concession it asks for (just humor me for a moment) i ask NOW WHAT? what is the plan? is it to deploy the E170s and park 737s? is it to raise ticket prices? will people pay more to ride on the 170 than the 737 or will the 170s go to profit centers that 737s simply can not serve? Credit again for "flying more" out of FLL. great whats next? what is the plan to increase TOP LINE GROWTH? how are you going to get 1. the same amount of people to travel but pay more? or 2. people to play the same but more of them to ride on your airline. I continue to ask who is willing to RUN THE AIRLINE?

Now you're asking the tough question! If the strategy is to continue to shrink mainline capacity and replace some of it with E170's and CR7's, they will fail long-term. Sure, the block hour cost is lower, and you don't have to sell as many cheap seats. But the CASM is considerably higher, and your product no longer offers anything more than the LCC aside from an assigned seat. And if you have to match WN fares while flying a high-cost RJ, that's just a recipe for disaster.

Shifting flying to the Caribbean and Europe makes sense to a point. But what happens when the LCC's turn more of their attention to the Caribbean? Where does US run to next?

 

[insp89]

sfb, " Southwest would have made money last quarter even without hedging-- ".............. When you get the chance, would you please post what Southwest paid for fuel last quarter along with their last quarter profit ? Thank You

 

[WestCoastGuy]

Shifting flying to the Caribbean and Europe makes sense to a point. But what happens when the LCC's turn more of their attention to the Caribbean? Where does US run to next?

[post="229158"][/post]​

This is where USair is best....turning and running. Probably have more experience at this than anyone.

 

[javaboy]

Let's compare ABQ and GSP. The metro population of Greenville-Spartanburg is nearly 1/3 larger than that of Albuquerque, and yet US doesn't even have a single mainline flight at GSP. Contrast that to over 60 daily 737 departures on Southwest from ABQ. Of course, it doesn't hurt that rational fares mean that ABQ has over 7 times the number of passengers of GSP. If Southwest can manage to fill more seats out of Boise than US Airways can out of L.A., they can probably manage to serve a lot more than 60 cities long term.


agreed with most of your stuff, with ABQ/GSP i would like to point out
1. how many carriers serve ABQ vs GSP
2. what are the alternatives (ie GSP you can ride other carriers to other hubs)
3. you can Drive from GSP to CLT or other major airports in a resonable amount of time this is not true of ABQ its out in the middle of no place. well new mexico anyways.

that is not to say that at a certain point lower prices attract more business to the point it creates other business (ie those that would not have flown now find it possible to fly to begin with as opposed to a person traveling that simply chooses a cheaper fare to a different connecting city to get to his/her final destination)

B)

 

[sfb]

When you get the chance, would you please post what Southwest paid for fuel last quarter along with their last quarter profit ? Thank You

OK, in the 3rd quarter of 2004, Southwest posted an operating profit (i.e. before interest, income taxes and a $4 million in "other") of $191 million. Their net profit (after interest, taxes, and "other") was $119 million. They reported that their fuel hedging program resulted in a net reduction in operating expenses of $131 million, with an effect on net income of $73 million -- which means that net income would have been $46 million.

It gets kind of complicated in that if they had not hedged fuel at all, fuel costs would have been about 50% higher, but labor costs would have been lower, since higher profits equal higher profit sharing resulting in a higher labor expense item. With lower net income before taxes, the company's tax burden would have been substantially lower as well.

In actuality, they paid what everyone else pays at the airport for jet fuel, though they do tanker fuel to some extent. Their hedging program is actually tied to heating oil futures as far as I'm aware; profits (or losses) from the hedges are used to offset aviation fuel costs. They reported, however, that net of hedging, their fuel cost per gallon before taxes was 80.3 cents.

javaboy-

It is true that Albuquerque isn't close to much aside from El Paso, Amarillo, and Lubbock. But you also have to figure that there's SOME reason that over 1300 people per day fly between ABQ and PHX while only 64 travel between GSP and DCA/IAD (as of 1Q04, Independence has probably changed this number). The driving times are pretty similar. But if people from the GSP area are driving to other airports to save money, they're certainly not driving to Charlotte (maybe Atlanta).

Delta's CEO said today that SimpliFares at CVG have increased traffic there by about a third. I suppose the bigger question is what sort of effect there has been on revenue.