Us Airways Strategic Analysis

[mweiss]

adopting rational fares before a LCC competitor decides to enter a market could increase revenue and might keep the LCC out, thus retaining most/all of the increased revenue at little increased cost.

[post="253187"][/post]​

Unfortunately for US, nobody has yet to have rational fares produce RASM at over 10 cents.

An interesting element of WN's pricing is evidenced by their (relatively) low load factors. Submarket bleedover is hard to combat, particularly with the rational pricing structure. WN sells more tickets at the higher end, even if that means leaving seats empty, in order to preven bleedover to the lower fares.

 

[BoeingBoy]

Unfortunately for US, nobody has yet to have rational fares produce RASM at over 10 cents.

[post="253198"][/post]​

Ah, but has anyone rationalized fares without basically adopting WN's model - $299 max one way for coach? Before DL, that is.

Anyone adopting WN's fare structure is going to end up approximating WN's RASM, since the only remaining variables are yield management (it seems WN does a pretty good job) and load factor (which is hard to increase enough to have more than a 10% effect).

It'll be interesting to see what DL gets once they have a full quarter with the new fare structure.

Jim

 

[mweiss]

Ah, but has anyone rationalized fares without basically adopting WN's model - $299 max one way for coach? Before DL, that is.

Yes.

 

[usairways_vote_NO]

Yes.

[post="253276"][/post]​

Didn't AA fail at some type of fare restructure years ago?

 

[BoeingBoy]

Yes.

[post="253276"][/post]​

Ok, they added some to the WN fares....

But a quick check shows them closer to WN than DL's new fare structure - about $360 SEA-EWR walkup (that's one way, R/T is slightly lower) vs $299 tops on WN and $499 tops on DL. And they're close to crossing your 10 cent RASM threshold. Their RASM was about 9.75 cents for all of 2004 - that's about 3/4 cent less than our mainline RASM. Pretty close considering their size & lack of international service to speak of (Mexico vacation spots & Canadian Rockies)

Jim

 

[mweiss]

And they're close to crossing your 10 cent RASM threshold.

It's not my threshold. In fact, I picked that number precisely because it's just above AS's 2004 RASM.

Their RASM was about 9.75 cents for all of 2004 - that's about 3/4 cent less than our mainline RASM.

So it would seem that DL's structure would make it very close to US's CASM. Now, I'll be the first to say that being operationally break-even would be a tremendous improvement for US, but it's not all the way there.

I'm sure your next comment would be to note that beating 10 cents RASM by a hair, coupled with increased utilization of aircraft and better utilization of hourly employees, would be operationally profitable. It would.

For of all sad words of tongue or pen,
The saddest are these: "It might have been!"

 

[BoeingBoy]

"It's not my threshold."

But if you picked it, doesn't that make it yours?

"So it would seem that DL's structure would make it very close to US's CASM."

Looks like they'll be the test case. Can a large network carrier increase RASM (or even maintain it) with a rational fare structure.

Actually, as far as I'm concerned, there's nothing magical about 10 cent RASM - except that U's CASM is higher than that. If AMR or CAL had AS's RASM, they'd have broken even (give or take a few million) in 2004. Heck, give almost any other carrier U's RASM and they'd be printing money. Conversely, give U almost any other carriers CASM and U would be printing money.

Actually, I think "your" 10 cent RASM dividing line is a little skewed. Few carriers break that barrier whether they have a rational fare structure or not. And the ones that do aren't any better off than many of those that don't, and worse off than some.

U's problem is not low revenue as measured by RASM (since we have high RASM by industry standards), it's high costs. Especially now, that high cost is driven by inefficiency. Fix that and you fix a lot of U's problems.

I tend to like a loose parallel to the old retirement income analogy - the one that says retirement income is a 3-legged stool. One leg is social security, another is the employer's retirement plan, and the third is personal savings. Along those lines, I think of U as sitting (teetering?) on a 1-legged stool. The one leg supporting high costs all these years is high revenue. That single leg is being eaten up by termites (the LCC's) and the stool is about to collapse.

Jim

 

[mweiss]

But if you picked it, doesn't that make it yours?

Yeah, I guess it does.

Actually, I think "your" 10 cent RASM dividing line is a little skewed. Few carriers break that barrier whether they have a rational fare structure or not.

Au contraire. Airlines that had more than 10 cents RASM in 2003 include AA, CO, DL, NW, US, UA, and AS. That's hardly "few" carriers. It just so happened that all of those carriers had CASM that was even higher that year.

U's problem is not low revenue as measured by RASM (since we have high RASM by industry standards), it's high costs.

Absolutely. My contention is that it'd be hard to rationalize fares and still keep the RASM above US's CASM. Since there seems to be a reluctance in CCY to cut costs through any other method than wage and bennie concessions, what other choices are available?

 

[BoeingBoy]

Au contraire. Airlines that had more than 10 cents RASM in 2003 include AA, CO, DL, NW, US, UA, and AS. That's hardly "few" carriers. It just so happened that all of those carriers had CASM that was even higher that year.

I looked at AMR's & AS's 2004 number (though I admit I mistakenly took AS's 4th qtr instead of annual number) and used AMR's as a guide to what the rest of the legacies will most likely do. 8.63 cents RASM for AMR's mainline (which is what U reports) & 10.02 for AS (the inadvertently used 4Q was 9.75). Odd that of the two reporting so far, the rational fare airline has higher RASM. Of course, the problem is that no two airlines are alike so using one number to make sweeping conclusions is vastly oversimplified.

Since there seems to be a reluctance in CCY to cut costs through any other method than wage and bennie concessions, what other choices are available?

[post="253323"][/post]​

Well, there's always chapter 7....

Jim

 

[RowUnderDCA]

I still don't think that U cares much about operational stuff, cuz the point is to put together a potentially succesful airline in order to get somebody to buy U. Potential is often more appealling than reality, usually just wishful thinking. Also, U doesn't have the management to actually run the airline. I suspect that the managers have just left.

But it does seem that U continually chooses to cut it awfully close. And it might be that the financial community finally wakes up to how bad the airline industry really is just when U needs the music to keep playing.

 

[mweiss]

Somewhere along the way, though, you have to actually run the business.

It's sort of like putting a house on the market. If you don't do any of the necessary maintenance on the house while it's on the market, and it's not selling immediately, the value drops rapidly due to reduced perceived value. If anything, you have to be more diligent in maintaining the house while it's on the market.

 

[usairways_vote_NO]

Since there seems to be a reluctance in CCY to cut costs through any other method than wage and bennie concessions, what other choices are available?

[post="253323"][/post]​

That is absolutely false. They told employees and the court that the employee concessions were only part of "The Plan" of cutting costs B)

It's sort of like putting a house on the market. If you don't do any of the necessary maintenance on the house while it's on the market, and it's not selling immediately, the value drops rapidly due to reduced perceived value. If anything, you have to be more diligent in maintaining the house while it's on the market.

[post="253376"][/post]​

Not necessarily true in a hot market or even a stale/stagnant market.

 

[mweiss]

Not necessarily true in a hot market or even a stale/stagnant market.

[post="253380"][/post]​

Not as much in a hot market, true, but this sure doesn't look like a hot market. How many bidding wars have we seen over airlines lately?

It is true in a stagnant market. Let the roof start leaking, and you're looking at a huge drop in the value. US would be doing well if leaks were the only problem with the company. <_<

 

[RowUnderDCA]

I'm not saying it's a correct strategy, or even a deliberate one, but it seems to be a high priority that gets served at the expense of the secondary priority: run an airline. But isn't that to be expected in Ch. 11?

There may even be a perverse logic here. And U's first bankruptcy could be seen as a similar strategy. Reorg quickly during a time when neither U nor its peers would be expected to do well, fly extremely close to failure financially, cuz the changes required are SO risky anyway, might as well realize it. Look two years or three years out, cuz there's no survuival under any restructuring if the future is as bleak as the present or near future anyway.

Maybe get some bites by the visionaries and ego maniacs that have propelled the aviation industry during its first 60 years. Aren't there one or two left?

 

[usairways_vote_NO]

Not as much in a hot market, true, but this sure doesn't look like a hot market. How many bidding wars have we seen over airlines lately?

It is true in a stagnant market. Let the roof start leaking, and you're looking at a huge drop in the value. US would be doing well if leaks were the only problem with the company. <_<

[post="253385"][/post]​

Your post I commented you were using housing markets as an example I was only commenting on that example sorry to confuse you. You used "not selling immediately" But I would think a roof leaking would not be a common necessary maintenance item for a house that just didn't happen to sell immediately. But anyway it can be true in a stagnant market as I had the experience myself (as seller). Exception or not it can happen. Even if it takes some Bozo buying it.


Back to airlines USAirways doesn't have a roof let alone wall's just a foundation thats crumbling as we speak. So I don't think a roof leaking is a good example.