New Casm?

[SVQLBA]

[snip]
In any case, I'm not going to dispute insp89's comment that the remaining issues are operational. It's obviously true. In fact, it was true before this round of concessions. Nonetheless, it appears that the current management philosophy is to remake the airline in the image of HP. It's not necessarily a bad idea; HP is the only airline to survive a serious head-to-head against WN. It's just not especially innovative. Then again, when one's back is against the wall, perhaps "innovative" isn't the thing to be.

[post="244760"][/post]​

I'd respectfully disagree regarding HP. Considering the mess they were in back around 2000, they have been doing a lot of cutting edge things. First, they recognized they had both operational issues (e.g., Mx, OTP) as well as business model issues and decided to fix both (only DL is publicly talking the same talk). They fixed the blocking and tackling ops (don't have the details), they restructured the network (closed CMH), innovated with the product (buy on board -- first to do that in the US I believe), simplified the pricing structure long before GoFares or Simplifares. Plus (unliked U), they actually have respected leadership in Parker. They're not out of the woods, but they've made a good fist of things, especially as both their hubs are major WN markets (LAS and PHX).

All in all, HP isn't a bad example for US to follow. But, have they learnt all the lessons (marketing, leadership, etc.)

 

[BoeingBoy]

insp89,

Trying to predict what mweiss will say here....

I think it'll be a long time before fuel hedges are WN's only advantage. While there are offsetting advantages the legacies are reaching (pay, primarily), WN will still have the advantage of a single fleet type, rapid turn, high utilization business model. That'll be awfully hard for a legacy to duplicate.

Examples...

Pitot training - WN pilots generally go to A/C initial training twice in their career, when hired and when upgrading to captain. We have more than a few pilots going to initial twice a year. Each time is a month (or more) of pay with zero productivity (ASM's produced).

Utilization - even with the extensive long haul high utilization international operations of the big legacy carriers, they get less utilization out of the airplanes per day than WN does flying mostly short haul domestic.

Turn times (which contribute to utilization) - DL's new ATL schedules call for 50 minute turns (according to media reports). Mostly the same for our transformation plan (possible exception is the 737 at spoke cities where 35 is the minimum, but not necessarily the scheduled). WN turns their planes in about 35 minutes max.

One final advantage WN has is RASM, which seems odd because theirs is low compared to the legacies. But consider why it's low when their yield is pretty comparible to the legacies (4Q04 it was higher than U) - load factor. WN seems content to achieve a roughly 60-75% average LF depending on time of year. That means it's fairly easy for them to raise RASM if they need to by cutting back capacity on specific routes, primarily by reducing frequencies).

Jim

 

[mweiss]

Weiss, The" point "is that SW's fuel hedging will shortly be the only advantage over the other carriers. and when the fuel hedge advantage starts to erode, Southwest will find itself on a much more level playing field.

[post="244800"][/post]​

What's your evidence? funguy2, BoeingBoy, and I have been unable to see how US's non-fuel CASM will get within striking distance of WN's.

And, yes, Jim, you pretty much said what I was thinking.

 

[mweiss]

I'd respectfully disagree regarding HP. Considering the mess they were in back around 2000, they have been doing a lot of cutting edge things.

We're not disagreeing. HP was certainly doing a lot of innovative stuff, and it paid off. But they had no choice but to blaze a new trail; nobody had successfully fended off WN by that point. US doesn't have to be innovative, and perhaps shouldn't be.

 

[SVQLBA]

Ah! Too many "its" in your prior post -- thought you were referring to HP being innovative. I agree with your point that US could do a lot worse than just copy what HP did in the eastern US.

Two glaring gaps that I see: 1) management leadership qualities, or lack thereof (Crellin, Glass, can't comment on Lakefield) and 2) lack of understanding of the market and customer price-value perception. The "dragged kicking and screaming" approach to GoFares comes to mind as well as BBB circa 2003/2004.

[Edited to fix typos]

 

[Groucho]

The seat mile cost debate among the various carriers is an important one and not always made clear to the public.

"Airline Management for the 21st Century" a text used in many managment courses states the problem this way.
"The hub and spoke mode is advantageous for a number of reasons. It allows enhanced marketing opportunities via the geometric proliferation of the number of possible city-pair markets which can be served." Both O&D and many connecting passengers pay a yield priemium for the frequent service hubbing allows.

Critics say that hubbing is inefficient for short haul traffic and that Souhtwest's ground time translates into a 22% increase in utilization above the industry norm. "Hubbing sacrifices equipment and labor utilization and consumes more fuel than a linear route sytem" Think of an aircraft as a $30million factory that produces air miles. A factory that operates more hours a day produces more seats.

The profitability of hub and spoke airlines is only attainable if they can achieve a yeild premium sufficient to cover the costs of the hub and spoke operation vs a linear operation. That yield premium is gone and we are left with all the inflated costs of the hub system.

No airline has yet made this transformation although most are trying to de-peak and realing hub operations.

Until this occurs no amount of give backs by employees will alter the situaition until the airline is operated differently.

I admit I have no idea what that means, I just work here. Someone in the revolving head shed needs to figure that one out, I am not holding my breath on this one though.


And now for something completely different.

A major research organization has recently announced the discorvery of the heaviest chemical element yet known to science. The new element named "US Airwaysmanagemnentium". US Airwaysmanagementium has 1 neutron, 12 assistant neutrons, 75 deputy netrons, and 111 assistant deputy neutrons, giving it an atomic mass of 312.

These 312 particles are held together by forces called morons, which are surrrounded by vast quantities of lepton-like particles called peons. Since US Airwaysmanagementium has no electrons, it is inert. However it can be detected as it impedes every reaction with which it comes into contact. A minute amount of USAirwyasmanagmentium cause one reaction to take over 4 days to complete when it would normally take les than a second.

USAirwyasmanagementium has a normal half-life of 2 to 6 years; it does not decay, but instead undergoes a reorganization in which a portion of the assistnat neutrons and deputy neutrons exchange palces. In fact, US Aiwaysmanagementiums's mass will actually increase over time, since each reorganization causes some morons to become neutrons forming "isodopes."

This characteristic of moron promotion lesds some scientists to speculate that US
Airwaysmanagementium is formed whenever morons reach a certain quantity concentration. This hypothetical quantity is referred to as "Critical Morass."

 

[Groucho]

The seat mile cost debate among the various carriers is an important one and not always made clear to the public.

"Airline Management for the 21st Century" a text used in many managment courses states the problem this way.
"The hub and spoke mode is advantageous for a number of reasons. It allows enhanced marketing opportunities via the geometric proliferation of the number of possible city-pair markets which can be served." Both O&D and many connecting passengers pay a yield priemium for the frequent service hubbing allows.

Critics say that hubbing is inefficient for short haul traffic and that Souhtwest's ground time translates into a 22% increase in utilization above the industry norm. "Hubbing sacrifices equipment and labor utilization and consumes more fuel than a linear route sytem" Think of an aircraft as a $30million factory that produces air miles. A factory that operates more hours a day produces more seats.

The profitability of hub and spoke airlines is only attainable if they can achieve a yeild premium sufficient to cover the costs of the hub and spoke operation vs a linear operation. That yield premium is gone and we are left with all the inflated costs of the hub system.

No airline has yet made this transformation although most are trying to de-peak and realing hub operations.

Until this occurs no amount of give backs by employees will alter the situaition until the airline is operated differently.

I admit I have no idea what that means, I just work here. Someone in the revolving head shed needs to figure that one out, I am not holding my breath on this one though.


And now for something completely different.

A major research organization has recently announced the discorvery of the heaviest chemical element yet known to science. The new element named "US Airwaysmanagemnentium". US Airwaysmanagementium has 1 neutron, 12 assistant neutrons, 75 deputy netrons, and 111 assistant deputy neutrons, giving it an atomic mass of 312.

These 312 particles are held together by forces called morons, which are surrrounded by vast quantities of lepton-like particles called peons. Since US Airwaysmanagementium has no electrons, it is inert. However it can be detected as it impedes every reaction with which it comes into contact. A minute amount of USAirwyasmanagmentium cause one reaction to take over 4 days to complete when it would normally take les than a second.

USAirwyasmanagementium has a normal half-life of 2 to 6 years; it does not decay, but instead undergoes a reorganization in which a portion of the assistnat neutrons and deputy neutrons exchange palces. In fact, US Aiwaysmanagementiums's mass will actually increase over time, since each reorganization causes some morons to become neutrons forming "isodopes."

This characteristic of moron promotion lesds some scientists to speculate that US
Airwaysmanagementium is formed whenever morons reach a certain quantity concentration. This hypothetical quantity is referred to as "Critical Morass."

 

[FWAAA]

You're looking at the first order conditions. Keep in mind that WN is setting the bar for prices. If fuel were costing them more, they'd be charging more. If they were charging more, so would everyone else. If everyone were charging more, there would be some dropoff in demand, but not sufficient to push WN back into the red.

[post="244538"][/post]​

You may be right, but I'm not certain that WN is setting the pricing bar right now. If it were, wouldn't WN load factors be higher than they are? WN's January load factor was 58.8%. Q4 LF was only 65%. Full year 2004 LF was only 69.5%.

Nearly every other airline's load factors for all three periods were higher. Load factors at UAL and USAir were much higher for all three periods. Many observers think that UAL and USAir are selling seats at distress-level pricing. That would make sense, since both are in severe distress right now.

I agree that WN is in the drivers seat and could undercut everyone else based on their superior cost structure and their successful fuel hedging program. I'm just not convinced that WN has chosen that path. Instead, it looks to me like WN is still just as choosy about its price structure as it ever is. If it were setting the price, wouldn't it be selling more seats?

 

[jack mama]

I think WN sets the price only to the point were they can still make a profit. Based on the recent quarters, WN is in jeopardy of lossing money. It doesn't seem they will price themselves into losses to attempt to bleed the other carriers....

 

[funguy2]

Thats a good question FWAAA.

I'll add my two cents here.

First, you would think that LUV would have a higher LF than it does if it was setting the price AND nobody matched. It would make sense that customers would sell out the lowest price option before buying at the next higher price point. Of course, this is not the case, as all pricing moves in this industry are either universally matched or abandoned.

Second, I firmly believe that Southwest (and jetBlue in certain markets) may set the price points, but the rest is up to yield management. It has been demonstrated that it is much harder to buy the sale-priced fares on Southwest than on legacies. How many threads have we read with topics like "Is LUV really the lowest fare?" And what about the statistics that came out a few years ago showing that from JFK to FLL, jetBlue, on average, sold its tickets at $20 more than Delta?

While the LCC's often match the lowest available fares, they seem to sell less of them (i.e. Yield Management) because they are confident that they can sell more of their more expensive fares. Perhaps a logical conclusion to make when your top roundtrip fare is $600 (1/4 of what the legacies used to charge for some transcon segments). The legacies, on the other hand, sell more sale fares because they need less sales of their high end in order to even out. Thus they can afford to sell more lower fare seats than Southwest can.

Of course, that was the story two years ago. In the meantime, the demand for price points more than $1000 roundtrip had significantly diminished, and the $2000 roundtrip is virtually unheard of these days. Blame it on the proliferation of LCC's. Blame it on pricing transparency due to the internet. The problem is, that the legacies have not found a new balance between the sale fare and the high end fare... So they seem to sell a lot of sale fares and pray for some last minute travellers to gouge.

So, my conclusion from all of this is, that Southwest's system still works. The other carriers are trying to profit from volume rather than yield, hence their willingness to sell more lower and sale fare tickets and their higher load factors than Southwest.

 

[BoeingBoy]

[Gosh, in the time it took me to right this, two other people said pretty much the same...]

FWAAA,

For whatever it's worth, I think WN is setting the bar on prices (and don't forget B6, etc) because of their cost structure allowing them to make money at their fares, not because they are intentially keeping their fares artifically low.

I've said before that WN seems content to have a roughly 60-75% load factor and sets fares that'll give them a nice little profit at that LF.

Look at the yield on their lowest normal fares (excluding sales/introductory) - it appears to be roughly break even, running from approx 6.5-7 cents to 10.5-11 cents with the short haul having higher yields and long haul having lower yields (just like stage adjusting CASM). The higher fares more than make up for the LF's, resulting in their profits.

Jim

 

[jack mama]

Funguy,
I can agree that it appears Southwest has a slight advantage in yield management. I would say this is mainly due to Marketing...they have the preception of the lowest fares, due to word of mouth, tv ads, etc, so when customers checks their fare, if it is reasonable, they won't comparison shop because they already feel Southwest offers the lowest fare.

 

[funguy2]

I agree. But they also have extremely low, relative to the majors on non-competitive routes, walk-up fares. Do you think a walk-up one way fare from MSP to LAX is $300? I'm certain is something much higher. But since we know demand is a function of price, there is much more demand for Southwest's highest fare of $300 each way than whatever the legacies highest fare is (even DAL's $500 each way...). So it makes sense for LUV to bet on its "high" fare traffic.

 

[SVQLBA]

Funguy,
I can agree that it appears Southwest has a slight advantage in yield management. I would say this is mainly due to Marketing...they have the preception of the lowest fares, due to word of mouth, tv ads, etc, so when customers checks their fare, if it is reasonable, they won't comparison shop because they already feel Southwest offers the lowest fare.

[post="244881"][/post]​

Herb Kelleher made a nice point in a recent interview (Strategy & Business I think) -- when WN load factors exceed 75% they don't jack up fares, they add more flights.

Compare that attitude and the benfits it brings customers (more flights, more room on each flight) to the downsizing "de-averaging" approach taken by all the legacies, trying to up yield and load factor by downgauging.

 

[whlinder]

What % of passengers does WN fly nonstop vs. connecting, and how does that compare to the legacies? IIRC it was something like 70-30 for WN, with 70% flying nonstop on the O&D. They also seem to set their connecting fares higher. I think this could be a reason why they can fly at a lower load factor than the legacies. They aren't connecting as many folks which keeps their costs down while also maintaining their revenue.