mci----stl

[LambertMan]

mturpiz,
TWA was MAKING money if not for as stated before the KARABU ticketing deal w/ Icahn, and horrific credit ratings.
Now, if Carty really did say that STL was the most profitable, I find it hard to believe. And coming from me, an extremely biased STL fan, it's gotta take alot of doubt in my mind for me to put something down about my hometown airport. I think it is profitable however, but with LUV destroying the yields, I have a hard time believing it's most profitable.

 

[mturpiz]

[blockquote]
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On 1/23/2003 7:35:19 PM AA763 wrote:

mturpiz,
TWA was MAKING money if not for as stated before the KARABU ticketing deal w/ Icahn, and horrific credit ratings. [/blockquote]

The only credible assertions I ever heard that TW minus KARABU would have been consistantly profitable assumed that without it yield would improve a great deal (undoubtedly true) and traffic would hold constant (very questionable).

I think TW's ability to be consistantly profitable if KARABU disappeared is hardly a given:

(1) One of the key elements in making a hub profitable is the support and fare premium from the local market. While there are some smaller markets than STL which support huge hubs (like CVG), St Louis is a comparably small market to be the *one* local market TWA would be able to garner loyalty and gain a fare premium.

(2) TW, which was reduced to almost nothing but the STL hub, faced Southwest in market after market where they *should* have been able to earn a hub premium.

(3) Outside of the loyalty of a *portion* of the local STL market (because undoubtedly WN has plenty of local STL loyalty too), TW had very, very little loyalty or brand preference out there. TW had to price for traffic, with our without KARABU.

If there's evidence TW would have been *consistantly* profitable without KARABU, please post it. Even Vanguard had some quarters in the black in last couple of years, so I'm not sure coming close in a quarter or two really meant a whole lot.

I don't doubt for a minute that lots of people at TW really worked hard and made sacrifices to dig the company out of a terrible hole. Service and performance levels increased, layoffs, closures and pay cuts were endured, and much of the negative legacy that pulled TW down in the 80's and 90's was cut free. But in spite of all that hard, admirable work, I have doubts that they really overcame the challenges mentioned here.

 

[Connected1]

[blockquote]
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On 1/23/2003 7:35:19 PM AA763 wrote:

I think {STL} is profitable however, but with LUV destroying the yields, I have a hard time believing it's most profitable.
----------------
[/blockquote]
None of our hubs are profitable, much less STL. You don't get $529B losses by having any profitable hubs.

 

[Connected1]

I think everyone is kind of missing the point here. STL was a strategic acquisition so that we could divert connecting traffic away from ORD, and attempt to improve our local share in ORD. Think of it as the same thing as expanding our gate space and service out of ORD. That's why we also started depeaking in ORD first - we wanted to present a schedule that was optimized for the local passenger, not the connecting passenger. We weren't worried about losing the connecting passenger, because we could pass them over STL instead.

If you're going to evaluate this deal, you need to look at how the STL and ORD hubs have done in tandem. Needless to say, they have been horrible, but I don't think that's as much a result of the deal as it has been the result of the economic environment.

Throw this onto the long list of initiatives that AA has tried that we haven't had enough of an opportunity to truly evaluate, like More Room.

 

[mturpiz]

[blockquote]
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On 1/24/2003 547 PM Connected1 wrote:

I think everyone is kind of missing the point here. STL was a strategic acquisition so that we could divert connecting traffic away from ORD, and attempt to improve our local share in ORD. Think of it as the same thing as expanding our gate space and service out of ORD. That's why we also started depeaking in ORD first - we wanted to present a schedule that was optimized for the local passenger, not the connecting passenger. We weren't worried about losing the connecting passenger, because we could pass them over STL instead.
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[/blockquote]

I don't mean to come off as just automatically contrary, but I've never thought that was a good arguement for buying TWA. For years, the emphasis at AA/ORD has been about increasing frequency and decreasing aircraft size. Given that...

(1) AA is perhaps the most sophisticated user of yield management based pricing
(2) Higher frequencies mean a de-peaked ORD could still serve most key connecting traffic well
(3) Most any potential capacity shortfalls could be resolved by upgrading aircraft sizes

...it seems AA could have well-served the local ORD market without needing to find someplace else to divert connections through. Perhaps doing it this way would not have been perfectly ideal, but the costs of going the other direction (TWA) were huge.

Maytbe things would be very, very different if the economy hadn't tanked. But I tend to think that the TW purchase would be "not so bad" rather than "good" even under better economic conditions. Perhaps part of AA's plan was to remove a thorn from the national air travel pricing market that continually pressed fares low. Maybe it was a combination of all these things. But buying and integrating TWA seems like a big undertaking just to help out ORD.

 

[Winglet]

STL is one of the worst performing hubs. TWA was a good acquisition only if the economy had continued to grow, we needed the capacity, and we needed it immediately rather than expand from within.

It didn't, we don't, and we didn't. Hopefully in the long run, it'll turn out to at least be a wash. Right now, it looks as if there may not be much "long run."

 

[Connected1]

[blockquote]
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On 1/25/2003 8:29:26 AM mturpiz wrote:

I don't mean to come off as just automatically contrary, but I've never thought that was a good arguement for buying TWA. For years, the emphasis at AA/ORD has been about increasing frequency and decreasing aircraft size. Given that...

(1) AA is perhaps the most sophisticated user of yield management based pricing
(2) Higher frequencies mean a de-peaked ORD could still serve most key connecting traffic well
(3) Most any potential capacity shortfalls could be resolved by upgrading aircraft sizes

...it seems AA could have well-served the local ORD market without needing to find someplace else to divert connections through. Perhaps doing it this way would not have been perfectly ideal, but the costs of going the other direction (TWA) were huge.

Maytbe things would be very, very different if the economy hadn't tanked. But I tend to think that the TW purchase would be "not so bad" rather than "good" even under better economic conditions. Perhaps part of AA's plan was to remove a thorn from the national air travel pricing market that continually pressed fares low. Maybe it was a combination of all these things. But buying and integrating TWA seems like a big undertaking just to help out ORD.
----------------
[/blockquote]
Nice post. We could use a few more mturpiz and eolesen posts around here.

Remember that at the time the TWA deal was being put together (December 2000), we were just wrapping up a solidly profitable year, and had no reason to believe that things would be significantly worse. In those days, paying $600-$700 million for a major airline was seen as a tremendous deal (see also the original price of the UA-US merger and the $100 per share that NW wanted from us). We were expecting some consolidation, and we needed something to compare to UA's network initiatives. What better way than to attack them at their home base?

You may just have to take my word for it, but depeaking never would have happened if it weren't for the TWA purchase. Depeaking was never meant to be a cost-savings initiative. It was a direct attack upon UA's local share in ORD, with the interesting added benefit of some aircraft efficiency. That's why you saw depeaking going into effect in ORD first prior to 9/11. The aircraft efficiency is why you saw it expanded to DFW immediately after 9/11. The fact that we're moving ORD's connecting traffic over STL is why you haven't seen it expanded there.

(1) AA is perhaps the most sophisticated user of yield management based pricing

"Most sophisticated" and "best" are two different things. I think we do a good job of understanding historical revenue trends, but we don't do as good of a job at predicting future revenue environments. We still have not learned how to manage More Room. Our expectations were that we would gain a greater share of business traffic, and therefore an increased yield premium over the industry. The opposite has been true. Even more disturbing, our load factor gap versus the industry on an adjusted basis has widened. Nobody seems to have any answers, so you're seeing more experimentation in pricing schemes.

(2) Higher frequencies mean a de-peaked ORD could still serve most key connecting traffic well

Besides price, connecting traffic is concerned about their total length of trip. After depeaking, many of the possible connection combinations for east-west traffic in the northern U.S. could be served more quickly through STL.

(3) Most any potential capacity shortfalls could be resolved by upgrading aircraft sizes

Also known as the DL method. There are three drawbacks to this: (1) ORD is gate-constrained - there are only a few widebody gates, (2) you would be taking larger aircraft away from markets that probably make sense for larger aircraft already, and (3) when you add capacity to a market, it is often better to add it at a different time of the day rather than diluting a current flight with lower-quality revenue.

Perhaps your plan makes more sense in hindsight, but at the time it would have been scoffed at.