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Airlines rethink strategy
Quest for market share has taken a back seat to pure profit
12:00 AM CST on Sunday, February 12, 2006
By ERIC TORBENSON / The Dallas Morning News
In the dog-eat-dog airline world, the desire to keep every point of market share has driven some carriers into the ground. Now many carriers say profits – not presence – determine how they fly.
"We never talk market share – we have no interest in it," said Joe Leonard, chief executive of AirTran Airways Inc. The discounter, based in Orlando, Fla., is expected to be one of the few profitable players this year.
If AirTran executives know the carrier's market share in any particular city, "it's by accident," he said in a conference call with analysts. "We try to fly airplanes in places they make money."
For Dallas-based Southwest Airlines Co., profits top airport presence every time.
"We've always been about profitability," said spokeswoman Beth Harbin. Southwest has leading market share in nearly all its 62 cities, but that has more to do with creating demand than a fight to be No. 1, she said.
For the new generation of low-cost carriers, focusing on profits above all else comes naturally. But battling for every flier at any cost is a hard habit to break for traditional carriers. Most have never hesitated to throw extra flights with cheap seats at competitors who try to pinch passengers.
When JetBlue Airways Inc. launched service between New York and Long Beach, Calif. in August 2001, American Airlines Inc. fought back, securing landing rights at the small Southern California airport.
For the Fort Worth-based carrier, keeping its share of top New York passengers was worth the cost.
But having lost $8 billion since 2001, American has a new outlook on scheduling, including its Long Beach routes.
American dropped its New York nonstops to Long Beach in 2004, and will pull out of Long Beach entirely on April 1, citing low demand and the need for planes elsewhere.
"We don't purposefully lose money anyplace," said Scott Nason, vice president of revenue management for American. But it can be hard to explain why American does put flights into situations where it's not likely to make money.
"Sometimes we end up with two lousy choices: We can keep charging what we charge and lose money, or we can charge what the competitor charges and lose money," Mr. Nason said. "And typically we conclude that charging what the competitor charges will end up losing us less money."
American's tactics to keep customers ran afoul of the U.S. Department of Justice in 1999. Upstart Vanguard Airlines had added service to Dallas/Fort Worth International Airport, American's largest hub. American responded by adding thousands of cheap seats, all in the name of keeping its share of passengers from D/FW.
Vanguard eventually folded. The government accused American of "predatory pricing" – intentionally lowering its prices and losing money just to drive out a competitor – but couldn't prove it.
New 'predators'
Seven years later, the "predators" are low-cost carriers such as AirTran and Southwest, which are flooding top markets with cheap seats at the expense of American and other traditional carriers.
With strong balance sheets and new planes on order, the strength of the low-cost carriers makes the fight to keep market share an expensive venture for traditional carriers, especially the ones in bankruptcy protection.
"These airlines can't defend every part of their network," said Jon Ash, president of Intervistas-ga2 Consulting Inc., an aviation consulting firm. "They don't have the financial resources to do it."
And they don't have the spare planes to throw into a market where they want to keep their market share.
"They've collectively pulled 15 to 20 percent of their domestic capacity out of the system," Mr. Ash said. Some of those planes have been retired; others are flying internationally, where traditional carriers face little or no low-cost competition.
Lean times have prodded carriers to get creative in fighting new entrants to their top markets.
When AirTran added service from D/FW to Los Angeles International Airport in 2004, American lowered fares on all 39 of its daily flights from North Texas to Southern California airports.
AirTran withdrew from the Los Angeles route in December, though it hopes to resume the flights when fuel prices drop.
But the fight at Dallas Love Field is different for American, Mr. Ash notes. "It's not about chasing market share – it's about keeping their best customers," he said.
American plans to launch service at Love on March 2, in response to Southwest's success in loosening Wright amendment flight restrictions last year at its home airport. In November, Missouri became the eighth state that can be served with commercial interstate flights from Love.
According to American, 60 percent of its frequent fliers in North Texas live closer to Love than to D/FW. So American is starting service from Love even though it opposes long-haul service from the airport.
American won't make money on the new flights, analysts say, though Mr. Nason said he believes the airline "will be fine."
Recipe for success
Having a big market presence can translate into success for traditional carriers, said former American chairman Donald J. Carty, now chairman of low-cost startup Virgin America.
"I do think market share tends to weigh heavily into profitability," Mr. Carty said. Having substantial presence in any key market helps keep customer loyalty and feeds hubs with passengers, he said.
That said, smaller carriers such as AirTran or Virgin America have much more flexibility to ignore their own market share because they have far less capacity to work with and don't need to make a huge splash to be profitable, Mr. Carty said. "The bottom line for all these carriers is that they have to offer a customer proposition that people find attractive."
Quest for market share has taken a back seat to pure profit
12:00 AM CST on Sunday, February 12, 2006
By ERIC TORBENSON / The Dallas Morning News
In the dog-eat-dog airline world, the desire to keep every point of market share has driven some carriers into the ground. Now many carriers say profits – not presence – determine how they fly.
"We never talk market share – we have no interest in it," said Joe Leonard, chief executive of AirTran Airways Inc. The discounter, based in Orlando, Fla., is expected to be one of the few profitable players this year.
If AirTran executives know the carrier's market share in any particular city, "it's by accident," he said in a conference call with analysts. "We try to fly airplanes in places they make money."
For Dallas-based Southwest Airlines Co., profits top airport presence every time.
"We've always been about profitability," said spokeswoman Beth Harbin. Southwest has leading market share in nearly all its 62 cities, but that has more to do with creating demand than a fight to be No. 1, she said.
For the new generation of low-cost carriers, focusing on profits above all else comes naturally. But battling for every flier at any cost is a hard habit to break for traditional carriers. Most have never hesitated to throw extra flights with cheap seats at competitors who try to pinch passengers.
When JetBlue Airways Inc. launched service between New York and Long Beach, Calif. in August 2001, American Airlines Inc. fought back, securing landing rights at the small Southern California airport.
For the Fort Worth-based carrier, keeping its share of top New York passengers was worth the cost.
But having lost $8 billion since 2001, American has a new outlook on scheduling, including its Long Beach routes.
American dropped its New York nonstops to Long Beach in 2004, and will pull out of Long Beach entirely on April 1, citing low demand and the need for planes elsewhere.
"We don't purposefully lose money anyplace," said Scott Nason, vice president of revenue management for American. But it can be hard to explain why American does put flights into situations where it's not likely to make money.
"Sometimes we end up with two lousy choices: We can keep charging what we charge and lose money, or we can charge what the competitor charges and lose money," Mr. Nason said. "And typically we conclude that charging what the competitor charges will end up losing us less money."
American's tactics to keep customers ran afoul of the U.S. Department of Justice in 1999. Upstart Vanguard Airlines had added service to Dallas/Fort Worth International Airport, American's largest hub. American responded by adding thousands of cheap seats, all in the name of keeping its share of passengers from D/FW.
Vanguard eventually folded. The government accused American of "predatory pricing" – intentionally lowering its prices and losing money just to drive out a competitor – but couldn't prove it.
New 'predators'
Seven years later, the "predators" are low-cost carriers such as AirTran and Southwest, which are flooding top markets with cheap seats at the expense of American and other traditional carriers.
With strong balance sheets and new planes on order, the strength of the low-cost carriers makes the fight to keep market share an expensive venture for traditional carriers, especially the ones in bankruptcy protection.
"These airlines can't defend every part of their network," said Jon Ash, president of Intervistas-ga2 Consulting Inc., an aviation consulting firm. "They don't have the financial resources to do it."
And they don't have the spare planes to throw into a market where they want to keep their market share.
"They've collectively pulled 15 to 20 percent of their domestic capacity out of the system," Mr. Ash said. Some of those planes have been retired; others are flying internationally, where traditional carriers face little or no low-cost competition.
Lean times have prodded carriers to get creative in fighting new entrants to their top markets.
When AirTran added service from D/FW to Los Angeles International Airport in 2004, American lowered fares on all 39 of its daily flights from North Texas to Southern California airports.
AirTran withdrew from the Los Angeles route in December, though it hopes to resume the flights when fuel prices drop.
But the fight at Dallas Love Field is different for American, Mr. Ash notes. "It's not about chasing market share – it's about keeping their best customers," he said.
American plans to launch service at Love on March 2, in response to Southwest's success in loosening Wright amendment flight restrictions last year at its home airport. In November, Missouri became the eighth state that can be served with commercial interstate flights from Love.
According to American, 60 percent of its frequent fliers in North Texas live closer to Love than to D/FW. So American is starting service from Love even though it opposes long-haul service from the airport.
American won't make money on the new flights, analysts say, though Mr. Nason said he believes the airline "will be fine."
Recipe for success
Having a big market presence can translate into success for traditional carriers, said former American chairman Donald J. Carty, now chairman of low-cost startup Virgin America.
"I do think market share tends to weigh heavily into profitability," Mr. Carty said. Having substantial presence in any key market helps keep customer loyalty and feeds hubs with passengers, he said.
That said, smaller carriers such as AirTran or Virgin America have much more flexibility to ignore their own market share because they have far less capacity to work with and don't need to make a huge splash to be profitable, Mr. Carty said. "The bottom line for all these carriers is that they have to offer a customer proposition that people find attractive."
