Monthly Archives: July 2009

A Few Thoughts about Southwest’s Bid for Frontier

Much of the news about Southwest’s $113 million bid for Frontier has focused on Frontier’s all-Airbus fleet (while Southwest has famously stuck with the 737), and how these two airlines could merge together.  To put in my two cents, here’s why I think think this is a great move:

– Southwest has more than $2 billion in cash and short-term investments.  The purchase price for Frontier is nothing.

– Southwest more than doubles their presence in Denver (they have 113 departures a day and Frontier has 168).  Yes, there is significant overlap in route maps.  But for that price alone it’s probably worth buying out the competition.  (The quick math on that:  113 daily departures * 100 seats each * extra $7 in revenue from eliminating competition allowing them to drive up fares * 365 days = $28 million.  Not too shabby).

– They smell blood in Denver.  Although Southwest acts like the nice guys, they are brutal competitors.  They saw a weak US Airways in Philadelphia, so they pumped up service there and basically drove US Airways out.  Same in Pittsburgh.  And eliminated ATA at Midway.  And they entered Denver when Frontier & United weren’t looking so hot.  They see a weakening United and they know there’s an opportunity to take over Denver from them, while eliminating a competitor in the process.  Genius.

– They get some slots in Washington DC and LaGuardia.

– The Airbus issue doesn’t matter.  They’ll keep those planes flying out of Denver and treat Frontier as a separate operation until they can replace the aircraft.  I don’t think anyone’s concerned about that.

So, they get to build a stronghold in Denver, eliminate the competition, pound on a weakened United, and gain a few slots out East.  All-in-all a great way to spend $113 million.

Airline Cancellation Fees Are a $2 Billion Industry

(Via WSJ):  According to Department of Transportation filings, US airlines earned $2 billion from change fees last year.  American Airlines reportedly earned more from change fees last quarter ($116 million) than from much-whined-about baggage fees ($108 million).  (The linked article has a nice rundown of what each airline received).

This is interesting to me not only because the numbers are sky high, but also because it illustrates an interesting fact about fees:  once they’ve been in place for a while, you come to accept them.  Change fees, which are now generally (though not always) about $150 on domestic tickets, seem to have become an acceptable part of doing business with airlines.  That’s because, at least in large part, we’ve had these fees for a while.  Baggage fees are new, and people complain about them constantly, despite that you can avoid them by not packing so much crap or having status.

The reality is this:  Travelers don’t way to pay much to fly.  That’s fine, but that comes at a cost, and the cost is $2 billion a year in fees.  Ask anyone who has flown Allegiant or Spirit, where the fees are absolutely brutal:  You’re incredibly happy when you’ve paid next-to-nothing for the ticket.  You don’t really even think about the $20 pick-your-seat fee (or at least you don’t think of it as part of the airfare — it’s in some other spending compartment.)  I wouldn’t be shocked to see even more movement in that direction (US Airways?), where fares stay at the lower end, and even more fees are tacked on.  This movement has been afoot for a year or so, and, as Ryanair has suggested, its logical conclusion is $0 fares with a ton of fees tacked on.  You’ll hate it at first, but you’ll love it later.

What Are Bloggers Saying about the New Delta 4th Tier?

Rather than jump on the bandwagon about Delta’s announced 4th tier in SkyMiles (called Diamond, earned when you hit 125,000 Elite miles.  You get lounge access, waved fees, upgrades on expensive coach fares, and unlimited upgrades on domestic frequent flyer tickets, and a handful of other things) and yammer about what I think (oh wait, yes I will:  except for the new “rollover” benefit where your elite miles over and above your current level roll over to the next year, there’s nothing particularly special)…I thought I’d give a quick roundup of what everyone else is saying (ranging from Happiest to Saddest):

Forrester:  This is the greatest move in history: “Keep ringing that bell, we have another winner here.”  Yes, Forrester is very happy with what Delta has rolled out and thinks it will help increase loyalty (As if someone with 100,000 miles wasn’t loyal already).  No mention of how Platinums used to get many of these perks.  Or that AA and United actually have better programs.

Cranky: Cranky is also pretty happy with what he sees: “it’s another day of good news for frequent flier mileage junkies…nice work,” which is both true (better than not offering a 4th tier) and not true (when has taking things away and re-instating them become the new benefit?).  Gary Leff from View from the Wing does a number on him in the comments section.  In a nice way, of course.

One Mile at a Time: Lucky is pretty ho-hum, noting that UA and AA flyers get many of these benefits already and some additional, including systemwide upgrades:  “This is a non-event…Diamond is probably better than US Airways Chairman, although that has more to do with the product as such instead of the actual benefits…”

View from the Wing: Not happy at all and thinks the whole thing is overblown, like Charles Barkley on a Phoenix street corner (OK, I wrote that, not him).  “Delta miles are also worth less than those of most competing carriers…Delta just isn’t that rewarding, of course, and likely never will be.”

Flyertalk Delta Forum: If you want bitching, this is your place.  Most disappointment around lack of systemwide upgrades.  People do like rollover, though.  “Diamond tier is just not as competitive with the current marketplace as the other tiers…”

There you have it…Rollover is good; lack of systemwide upgrades on all fares is bad; and everything else doesn’t matter much.

Quick Note Before the Weekend: OpenSkies Drops Amsterdam

On the heels of the news that they are looking for a buyer, OpenSkies has dropped its Amsterdam routes to focus on Paris, where it has built a nice (though likely not profitable) customer base.  Very sad to see the $1,000 roundtrip business class fares disappear.  Last flights are August 16th.

Not Even a Slight Glimmer of Hope from Network Airlines

“We’re all suffering from a significant decline in business travel demand,” said Southwest chairman and chief executive Gary Kelly. “We’ve detected a slight improvement in July, but post-summer we are prepared for significant continued weakness on the revenue front.

“It’s clear right now that we’re living on the back of strong leisure demand facilitated by low fares.” [The Continental CEO] added that the drop in business passengers appears to have “stabilized,” but “at a very low level.”

Delta executives said they did not expect any meaningful recovery for the remainder of the year, adding that they did not project a profit for 2009.“We may face some tough choices,” Richard H. Anderson, Delta’s chief executive, said.

Ouch.  Yes yes, you knew it was bad out there.  But when airlines actually start announcing the numbers, it’s ugly.  Historically ugly.  Continental’s Q2 trans-Atlantic revenue was down 28% over last year.  When you adjust for the capacity drops, it’s only a 23% drop.  Overall, their revenues were down 24% over the previous year.

And pretty much every network airline looks like that.

You may be saying to me and/or yourself:

1) But the airlines reduced capacity, so of course revenues will shrink;
and/or
2) But AirTran and Allegiant had real profits.

Yes, the airlines have been dropping capacity like I dropped European History in 9th grade, but that’s not enough.  Oil is getting more expensive.  Business travelers have disappeared or traded down to the low fare buckets in unprecedented numbers.  That last part is important – we’ve never seen this before.  Never.  Although the airline industry is 70+ years old, the deregulated industry in the US is only about 30, and it’s never been this bad.

Network (hub & spoke) airlines are suffering the most, which is how AirTran is able to avoid some of the problems facing the others (Allegiant is a juggernaut that manages their costs better than anyone).  But let’s put AirTran, Allegiant and JetBlue aside for a moment.  They are pretty much a different type of company than the network airlines.  Hub-and-spoke airlines, as I’m pretty sure I’ve said here before, are basically manufacturing companies — they manufacture connections.  They use a just-in-time manufacturing technique to ensure that raw materials (people and planes arriving in Minneapolis from the West) do not sit on the ground too long idle before heading off as finished goods (the connecting flights) to cities in the East.  They need to minimize the cost of getting the raw materials to the Minneapolis factory, and they need to maximize the revenues they generate from selling the manufactured good (the connected flight).

That system actually works pretty well when there is predictability in the market.  Regulation provides predictability, for example.  If you know roughly what you’re going to earn from the connection you’re making next week in Minneapolis, then it’s easier to run a profitable company, since you just need to make sure that your costs are below that set level.

When times are good there’s predictability in the market, since you are fairly sure people will be buying your seats at whatever price you sell them for (remember $2400 transcon coach fares?).  That also makes it easier to plan.

That manufacturing strategy pumps through the whole airline system when you think about it.  Airlines can talk all they want about customer service, but in reality they do 2 things pretty well:  they make connections at a pretty reasonable price, and they have fare sales to generate demand.  In other words, their basic job – getting flights from here to there on-time and safely – is a home run.  And when they cut fares, people do buy more tickets.

But that’s pretty much the only lever they’ve ever had.  Until 2 years ago, airlines were loathe to shrink themselves which, for a business with high fixed costs, means that you’re not willing to take costs out of the system except by asking unions for lower wages.  Which is what had happened up until 2007.  How many airlines in the 1980s and 90s disappeared because of labor-related strife.  Continental?  Eastern?  Continental again?

That fare sales were the only lever is what has driven the business case for nearly every new entrant since deregulation.  Each has thought the same thing:  We will come in without the legacy costs and legacy mentality and simply undercut the competition, driving consumers into our open arms.  And that works…until network airlines have a war of attrition and match prices until competitors are driven out of business.  Or until competitors grow large enough that they find out they are a low fare-driven airline and not an operations-driven airline (People Express figured this out quickly).  If you grow too fast, without understanding how to manufacture the connections (or worse – even run a point-to-point operation), it’s over.

The successful new entrants – JetBlue and Southwest being the two most successful — had completely different approaches.  Southwest started during regulation by flying intra-state, where they did not face fare regulations.  They grew up under unique circumstances.  That they’ve been able to continue to grow to this day is a testament to how well they’ve been run for 35 years.  But they were one of a small handful of airlines to run like a deregulated carrier during a regulated time.  That makes them unique.

JetBlue was the first to use the Target cheap chic model, which meant truly focusing on experience rather than simply low fares.  That they were able to do this and have a well-run operation speaks volumes about their founding management team.  That is, until the February storms a few years back in JFK that nearly destroyed every bit of goodwill they ever had and probably allowed Virgin America to come in and compete with them.  Striking the balance between operations and marketing is unbelievably difficult.

So where does this leave the network airlines?  Incredibly, only American Airlines has not gone through a bankruptcy in the past 30 years.  If every other company in an industry has been driven to bankruptcy (at least once), it suggests that there is a fundamental problem with having that many airlines, and such low barriers to entry.  Yes, business travel will come back at some point.  Oil prices will likely drop at some point.  Carriers will re-gain pricing power on some level.   But that doesn’t mean things will be good.  It will mean that it’s time for a new entrant to come in an knock the incumbents around.

I see only 2 options:

1) Re-regulation.  This will never happen.  It’s bad for consumers, and no administration wants to be seen as Communist.  It is, however, good for airlines.

2) Allow foreign ownership and eliminate the incredibly ridiculous cabotage rules.  This may, and should, happen.  What if I told you in 1977 that your only car options were a Ford Pinto and a Chevy Nova… and that while we knew that Toyotas and Hondas were superior in both quality and price, since they were made in Japan you couldn’t have them.  Because of border security.  You would think I’m insane.  That’s what’s happening now.  Let Singapore and Ryanair and Air Asia come here and show us how it’s done.  Closing off international competition has accomplished exactly nothing.  No wait, it’s accomplished exactly what you’d think:  allowed airlines to offer a middling product at the highest price they can possibly charge.  Nowadays that means they can’t charge much.  But when times get better, look out.

The current state of the industry is untenable.  A turnaround will not lead to anything, other than 12-18 good months, allowing airlines to grow like weeds before things go bad and a couple of them go bankrupt again.  That cycle needs to stop, and it will stop when we let the foreigners in.

Inside Eos Airlines: What The Hell Were They Talking About?

I recently found a few old emails from the Eos Airlines days, and if you had any question about why they didn’t succeed, I think this one will pretty much sum it up.  Written by a marketing team member, It is an unparalleled jumble of quasi-marketingspeak coupled with a complete lack of understanding of how to differentiate the product from competitors.  Brilliant and timeless.  And sad – really sad.  But brilliant.  Just thought you would all enjoy…

Team:

The uncompromising tagline will have minimal content effect to what we’re currently doing.

Similarly to how we were identifying some of our product attributes and service offerings as unordinary and that our Guests wouldn’t have to adjust their way of living to ours…uncompromising will still deliver on that message.

We will have a new brand essence document reflecting the above; I will send that round ASAP should be by tomorrow.

The Final Post about JetAmerica: They’re Not Going to Launch

A few weeks ago I predicted that nonsensical airline JetAmerica would close up shop in September.  I was wrong – JetAmerica shut down on Friday, citing the inability to get slots at Newark (obviously something they should have considered prior to selling tickets to Newark).  In their defense (sort of), they claim that they were operating as a public charter, which would not have required slots at Newark.  However, authorities with Newark Airport said that if it looked like a scheduled carrier, and smelled like a scheduled carrier, then it will be treated as a scheduled carrier (ie, if you fly a set schedule between cities, then you are not a charter).

None of that matters now, of course.  And while they claim to be looking for new cities to serve, this will be the end.

Nonsense like this gives the industry an even worse name than it already has.  I bid them a fond adieu.

British Airways Looking to Sell OpenSkies

…And now, the end is near/and so I face/my final curtain…

British Airways has hired an investment bank to help it sell most of its stake in OpenSkies, the all-premium carrier flying between New York, Paris and Amsterdam.  Most airline-watchers wondered how OpenSkies could work after Eos, MAXJet and SilverJet all failed.  Then they wondered how it could possibly survive the downturn in the economy.  And why BA would operate a separate all-premium brand when it was rolling out its own all-premium 318s between New Yorkand London.  Well, it looks like everyone was correct and BA is trying to find someone to buy most of it (BA says they want to retain a stake, but we’ll see about that…)

Of course they’re saying they have interested parties (which is what Eos, MAXJet, and SilverJet all said), and that future prospects look good (ditto).  Sadly, they have a great product and a fantastic pricepoint.  Just like the 3 airlines mentioned above.  But the economics simply have not worked, and that isn’t going to change.  OpenSkies likely only has a few months left.  Splurge $1200 and fly them over to Europe – you’ll be happy you did.

United Pilot Diverts to Miami to Kick Flight Attendant Off Plane

A United Airlines pilot flying from Sao Paulo to Chicago diverted his plane to Miami so he could kick a senior flight attendant off the aircraft after an argument on Tuesday.  Unfortunately, the details of the argument aren’t known, but I bet they are realllllllly good.  This may be the first time this has ever happened.  Nicely done.  United is investigating.

(Thanks Flight Global)

Is United Facing a Return to Bankruptcy?

The Chicago Tribune has joined the chorus of articles examining United Airlines’ financial situation and not liking what it sees.  I’m fairly certain that most of these pieces stem from a June deal United made to pay 17% on $175 million in debt it issued (that’s a high rate of interest, for those of you keeping track at home).  The other major concern is that American Express will begin to require cash payments from the carrier if United’s cash reserves fall below $2.4 billion (Chase has a penalty that kicks in at $2.5 billion beginning in 2010) – the airline actually fell below that level in May.

In addition, United doesn’t own much that it can sell off to generate cash quickly, should demand not recover in the next 6-12 months.  If you can’t sell your assets, how do you quickly generate cash?  By slashing prices.  Which is exactly what we saw last week with Southwest’s $30/60/90 sale, and what we’re seeing going into the fall and winter ($450 round trips to Moscow, anyone?).  As FareCompare’s Rick Seaney recently wrote (Tweeted?) “Reality Check! Nov to May airfare prices in a free fall, airlines have popped their chutes, just don’t know if their is a hole in the canopy.”  I’m not sure anyone knows more about airfare than him – if he’s saying airfares continue to reach new lows, we’re in historic territory.

But how low can you drop fares – at some point you’re not even covering the high fixed costs of running the airline.  And the old days of using business class to make up for low coach fares are over for now.  Sure, airlines have cut back significantly on capacity and that could help if business turns around.  But it may not – at least not for the next 9-12 months.  And if that happens, it’s desperation time, especially for United.

I can’t believe I’m saying this, but I think the only way out is a merger with Continental.  It makes me sick just thinking about that.  But the reality is that most industries have 2 major competitors, with a 3rd much smaller competitor, then extremely high fragmentation from there (Coke/Pepsi/Dr Pepper; McDonald’s/Burger King/Wendy’s).  Sure, there are exceptions.  But we don’t need AA, UA, Continental, Delta, US Airways, and Southwest (and JetBlue and Alaska?) as national carriers.   A UA/CO matchup would help consolidate some of the competition.  It’s not crazy that Delta could suck up US Airways once their NW merger is completed (assuming they’re able to ride out the next year’s downturn), and a JetBlue/Alaska matchup isn’t insane either.  Which, in this pretend scenario, would leave AA, CO, Delta and Southwest as major national carriers, with Alaska Blue as Dr. Pepper in this scenario.  It’s not crazy, and it would help to drive fares up (no one likes that – but no one likes airlines closing down either.  And driving from New York to LA is a loooooong trip).

Like many others, I had pooh-poohed consolidation as a way out of trouble, and on some level I still do.  It’s not a cure-all.  But these are times like we’ve never seen, and airlines need to use this opportunity to right-size the market.  4 major carriers sounds about right to me.  Sorry, United.