Business History Books » Business Management Consultant » Southwest Sets Standard on Costs for Airlines
Southwest Sets Standard on Costs for Airlines
Question:
(snipped. absolute hogwash) Three factors amaze me… 1. That anyone could have read the diuscussion of WN’s business plan and the problems facing the majors and have drawn from it the conclusion you did. 2. That anyone had as dismally deficient comprehension of the US economy as you’ve dispalyed. 3. That matching your pre-schooler’s economic comprehension, there’s a political disconnect which reveals you to the world as… "Dumber than a post and unaware of it" As we write, the majors are for better or worse and at varying rates of speed and effectiveness, attempting to alter their traditional business plans, aware that the old days as we knew them (and functioned ineffectively within) will never return. No, they’re wisely not copying WN which has created not only its own niche, but birthed, nurtured and weaned big chunks of its own market, fostering the same sort of need-related brand loyalty that some auto manufacturers once could claim (and a couple still my). Right or wrong, they’ll arrive at and succeed or fail with their own (or copycat) plans. TMO
Response:
>>>The majors have the advantage that they SHOULD be able to handle a wider >>variety of routes profitably because they have a more versatile fleet. >But also at an inherently higher cost per passenger mile. > Why should that be ?
First, because smaller planes are inherently more expensive. Second, because on some routes, it may be harder to fill the planes as well as low cost operations which limit themselves to routes where they know they’ll consistently maintain a good load factor. >>It seems that in the past, the airlines put a premium on the non-stop service. >And people will pay for that. So, what’s the point? > But it costs the airline less to provide the non-stop instead of the > connecting flight. By charging a premium for the non-stop, you push people to > choose the cheaper ticket option with connecting flights which end up costing > the airline much much more and reducing the load factor on the non-stop flight.
Again, depends. Nonstop flights may entail using smaller planes and/or living with lower load factors. Both leading to higher costs. > I once flew CP from montreal to New York to get points. They matched AC’s > fares. But it was through Toronto. (YUL-YYZ, then YYZ-LGA). Do you seriously > think that CP made a profit with me for that ticket ? I essentially got 4 > flights for the price of 2.
They may have made a profit to the extent that they would not otherwise have sold that seat. This said, that sort of business gets tricky. You can’t make a profit by filling your plane with cheap fare folks. Which brings us to the core of the current problem: when the airlines lose the high yield passengers, they get in trouble. Situation being basically that the majors (1) are primarily in the business of catering to these folks but (2) because their planes have been too big for the market, they have been in a situation whereby they also needed to discount the rest of the plane to meet the costs. You lose the first, and on the second you can’t compete with WN. Trouble. > Airlines must switch from what they think "the market will bear" and "we must > match our competitors" to a philosphy of charging for what it costs.
No argument there. But the other side of that equation is: what will customers be willing to psy? At which point do I decide to endure Air Transat rather than paying for Mapleflot when taking the family to Europe? >Sure. I think that’s again exactly what I was trying to say: as long as >they are set up in such a way that they need to discount to death to >sell the last of their seats, they are shooting themselves in the foot. >Which is why they need smaller (but efficient) planes. Nowadays these >are available. > But the US airlines (except of UA and Northwest) don’t have large planes. What > they do is to fly small planes very often, but because they have long layovers > at hubs to allow for transfers etc, the airlines need far more planes than necessary.
If they lose money, presumably it is because they don’t have enough customers willing to pay enough to cover costs, isn’t it? So, their planes must be too large for a good chunk of their network. In contrast, low costs limit themselves to routes which they can run profitably at the price they are paying. I wouln’t be surprised if, when limiting the comparison to these routes alone, the majors would be doing OK too on these. Which is by and large what you limit your argument to. – Hide quoted text — Show quoted text ->The low costs are inherently limited to only some specific markets. > I am not sure about that. Look at City Express in Canada. They were able to > operate Dash-8s at low cost betwen Montreal and Toronto while Air Canada was > charging an arm and a leg. had it not been for AC’s predatory pricing and FF > plan, City Express would have survived. > Now, if City Express was able to operate low cost flights, how come AC > Regional couldn’t ? There is no reason why AC regional (or whatever name they > have this week) wouldn’t be able to provide low cost service/fares between > Montreal and Toronto. > AC Regional should be much better capable of offering low fares than Tango > (which is essentially AC mainline operation with a different sticker on the > plane). Yet AC regional charges the same fares as AC mainline.
You are talking about the quintessential limited market here. Shuttle between two large cities. But talk about flying from YYZ to Saskatatoon. (Ever watch Rumpole 
.) You can’t expect low fare to serve more than perhaps a dozen Canadian cities, and you can’t expect them to offer seamless overseas service. > Another example is AA’s puddle jumper service between New York and Montreal. > AA’s fancy yield management computer decides it can match AC’s exhorbitant > fares and make a profit with only 2-3 pax on the plane. But it fails to see > the opportunity of offering low fares and fill the plane while still being > profitable. It would create a market and compete against bus/train as well as > serving business travellers.
Again, it is conceivable that there is room for a low cost in that market. This said, in a sensible competitive market, what we should end up with is the majors offering a typical economy fare that’s not outrageously different than the low cost fare, plus a J/F fare that is 30-40% higher. This is not happening because the market is not competitive, hence what you call "AC’s outrageous fare." This is not really an issue of low cost vs. major.
Response:
> Sorry if I’m being dense here, but _why_ does having feeder planes > increase the costs of mainline? Are you assuming that each leg of a
No, doesn’t increase cost of mainline but increase overall cost to his airline (relative to revenue). > ticket won’t be priced independently? If JF-Airlines says ‘oh, you > want to fly from Los Angeles to Podunk, OH? That’s a free add-on to > your flight to Cincinnati’ (or, worse, ‘that’ll cost you less than > flying to Cincy’), _then_ the feeders will put your mainline costs up > (or rather your mainline revenues down). But that’s precisely one of > the fallacies that the majors are falling into — a large ‘non-stop
I’d wager that’s precisely what will still happen if the hypothetical CVG is a fortress hub. > premium’ that suddenly goes away when you connect. (Although I can > certainly see that the market will happily accept a small non-stop > premium — up to about 25% or so. Nevertheless, the mere existence of > hidden city and throwaway ticketing proves how stupid the airline > pricing systems are.)
Not if you have a fortress hub.
Response:
> They have reseach & experience that suggests that the majority of their > passengers prefer the choice in flight time vs a single larger flight. > And it is that very research which has driven the airlines to near bankrupcy > because their insistance to run high frequencies which prevents them from > gaining the efficiencies needed to compete against low cost carriers. > Business travellers are no longer willing to pay 3 times the normal fare just > for the convenience of a few more flights per day.
Then why does WN offer about 30 flights a day (every half hour) between DAL and HOU? Rich — Visit America’s Aviation Headquarters: www.usaviation.com
Response:
– Hide quoted text — Show quoted text -> Lets say Jetblue has a fleet of 10 A320s and JF-Airlines has a fleet of 30 > flying skidoos and 30 A320s. > Are you saying that because JF-Airlines has more than one fleet type that the > use of its A320s would cost more per pax-mile than JetBlue ? If I have as > many > or more A320s than JetBlue, then there is no reason why I shouldn’t have > equal > or lower seat mile costs operaying the 320, notwidthstanding whatever other > plane type I might have. > Perhaps you’ve asnwered your own question. By having a mixed fleet, > you’re implying that you will use them to feed regional/small jet > flights to/from the large mainline jets. More flights will cost you > more money for the same fare. > The only way you can avoid your own hypothesis is to make sure the > regional jet routing is independent of the mainline jets, that you;re o > hubbing.
Sorry if I’m being dense here, but _why_ does having feeder planes increase the costs of mainline? Are you assuming that each leg of a ticket won’t be priced independently? If JF-Airlines says ‘oh, you want to fly from Los Angeles to Podunk, OH? That’s a free add-on to your flight to Cincinnati’ (or, worse, ‘that’ll cost you less than flying to Cincy’), _then_ the feeders will put your mainline costs up (or rather your mainline revenues down). But that’s precisely one of the fallacies that the majors are falling into — a large ‘non-stop premium’ that suddenly goes away when you connect. (Although I can certainly see that the market will happily accept a small non-stop premium — up to about 25% or so. Nevertheless, the mere existence of hidden city and throwaway ticketing proves how stupid the airline pricing systems are.) The other issue, and I’ve harped on about it before, is that if you have stupid union contracts that require bidding based on seniority, and mandate widespread retraining at company expense any time you change the fleet mix, then fleet changes become that much more expensive and the company becomes less nimble — and that makes a mixed fleet more expensive than a single-type fleet.
Response:
– Hide quoted text — Show quoted text -> Perhaps you’ve asnwered your own question. By having a mixed fleet, > you’re implying that you will use them to feed regional/small jet > flights to/from the large mainline jets. More flights will cost you > more money for the same fare. > The idea is to size jets to match demand. What shouldn’t be done is to > artificially increase frequencies by reducing jet size. > One shouldn’t put a 747 when the market is only big enough to support a 737. > But one shouldn’t put 4 737s on a market that is big enough to support a 747. > If you only have one route that supports a 747, you can make an exception and > be less efficient by using 4 737s on that route since a single route isn’t big > enough to warrant a 747. But if you have many routes that could make use of a > 747, then you would start to save money by being more efficient.
No, you only need a 747 when the market can support several 747s a day. I wouldn;t want a once daily 747 service if I cna have 4x daily 737 service. And if service is seasonal (weekly, monthly, quarterly yearly, etc), what happens wheny ou are running empty 747s? Can’t redeploy 1/4, 1/3 or 1/2 a 747 to another route, can you?
Response:
> > They have reseach & experience that suggests that the majority of their > passengers prefer the choice in flight time vs a single larger flight. > And it is that very research which has driven the airlines to near bankrupcy > because their insistance to run high frequencies which prevents them from > gaining the efficiencies needed to compete against low cost carriers. > Business travellers are no longer willing to pay 3 times the normal fare just > for the convenience of a few more flights per day.
"No longer" is a tad unfair. "currently" would be a better choice. The majors are far more exposed to the business cycle than Southwest and other carriers. They pursued a very profitable market for years, decades to some extent. It isn’t clear that it won’t return. The market segment the majors pursued may have become saturated with products, it certianly appeared that way even pre 9-11. That doesn’t mean the market isn’t there, nor profitable. It just means that a contraction in the market is required, and to some extent we are seeing that. There is a tendency to view airline economics on a national basis, but the world market issues will come to bear soon. As it becomes less clear exactly what a "domestic airline" is, foreign competition will rearrange the US market to a great extent. WN may get caught competing with strong airlines which aren’t "domestic only" service. Their current strength could end up being their weakness. Larger, better capitalized, and more diverse airlines less sensitive to the market cycles in any particular region could be a tough competitor to WN.
Response:
> > They have reseach & experience that suggests that the majority of their > passengers prefer the choice in flight time vs a single larger flight. > And it is that very research which has driven the airlines to near bankrupcy > because their insistance to run high frequencies which prevents them from > gaining the efficiencies needed to compete against low cost carriers.
who offer high service frequency > Business travellers are no longer willing to pay 3 times the normal fare just > for the convenience of a few more flights per day.
but they still want service frequency
Response:
> They have reseach & experience that suggests that the majority of their > passengers prefer the choice in flight time vs a single larger flight.
And it is that very research which has driven the airlines to near bankrupcy because their insistance to run high frequencies which prevents them from gaining the efficiencies needed to compete against low cost carriers. Business travellers are no longer willing to pay 3 times the normal fare just for the convenience of a few more flights per day.
Response:
>But one shouldn’t put 4 737s on a market that is big enough to support a 747.
The airlines would disagree with you, if you are talking about demand at a point in time vs. spread out over 6 or 8 hours. They have reseach & experience that suggests that the majority of their passengers prefer the choice in flight time vs a single larger flight.
Response:
> Times of affluence will return, and the business model of the majors will no > longer seem so stupidly out of date.
When you look at the majors, over time, they have not been profitable. And this time, the "bottom" may kill off one or more majors. Even during the boom of the 1990s, the majors were concerned about the low cost airlines, be it Southwest or Valuejet. The current slum is both forcing and enabling the majors to make major changes. I say enabling because now is the time that unions are more likely to chanmge contracts. After 9/11, Air Canada was able to quickly revise its contract with its pilots which not only broke all the fancy blue sky" commitments to increase fleet size, but allowed AC to dump a whole wad of planes *AND* put in CRJs at the regional, something which would have caused big time striokes in the past. The DC-9s and Pesky F-28s aren’t coming back. > Southwest will return somewhat to its > niche market serving a limited number of patrons on a limited number of > routes with limited service levels.
No. Southwest and Jetblue will continue to grow and will probably grow faster than the majors, unless the majors can match their performance and price. It isn’t just the low price that attracts customers, it is also their reliability and efficiency. > Why fly at the level of the > lowest-common-denominator when one can well afford a more pleasant journey?
Sorry, but the US airlines have not been known as "comfortable" airlines in a long long time. AA may have increased seat pitch (good move), but it has decreased food service from their already dismal levels as have most other US carriers for domestic service. It is unlikely that those will be increased back when good times return because the majors will still be less efficient than Southwest. I think it is more likely to see JetBlue add meal service to their long haul flights for a $10 increase in price and provide service levels that the majors could never hope to achieve. > 4 lanes closed on NJ turnpike after traffic slump level
No, that should read: NJ turnpike turned into a bicycle path with one lane reserved to buses. > Bike sales triple during last quarter
Yeah ! > Former President Bush convicted for crimes against humanity committed during > prolonged Iraqi invasion
You forgot illegal detention of folks in one of its military bases in Cuba.
Response:
> Perhaps you’ve asnwered your own question. By having a mixed fleet, > you’re implying that you will use them to feed regional/small jet > flights to/from the large mainline jets. More flights will cost you > more money for the same fare.
The idea is to size jets to match demand. What shouldn’t be done is to artificially increase frequencies by reducing jet size. One shouldn’t put a 747 when the market is only big enough to support a 737. But one shouldn’t put 4 737s on a market that is big enough to support a 747. If you only have one route that supports a 747, you can make an exception and be less efficient by using 4 737s on that route since a single route isn’t big enough to warrant a 747. But if you have many routes that could make use of a 747, then you would start to save money by being more efficient.
Response:
MYOPIC: Pertaining to, or affected with, or characterized by, myopia; nearsighted. With the Dow at its lowest level in 5 years, combined with the effects of a recession, all you fools can do is persist and persist and persist that Southwest is the way of the future, forever more Times of affluence will return, and the business model of the majors will no longer seem so stupidly out of date. Southwest will return somewhat to its niche market serving a limited number of patrons on a limited number of routes with limited service levels. Why fly at the level of the lowest-common-denominator when one can well afford a more pleasant journey? Sure, in hard times it makes sense to save every time, but hard times let up and there are many prepared to spend that extra dollar for more comfortable, privileged travel. There are many rich old men around who are prepared to flaunt their wealth for extra leg room, airport lounges and other "non-necessities" … just not so much when times are thin. Plus, after GW’s version of VietNam draws to a hopefully ego-molesting conclusion, Americans might have to pay the real price of gasoline, not a price based upon the indirect misery and degradation of millions of people far away who aren’t worth worrying about. Man, I cannot wait for those days. Just think of all the wonderful things for the earth that will change when your country has to pay the price of its greed. Headlines of that time: Wal*Mart stock lowest level ever: 8c, and carparks still empty Bank of America closes 1500 vehicular bank tellers in latest round of customer service overhauls Ford Field to be renamed following recent chapter 11 auto-industry proceedings 4 lanes closed on NJ turnpike after traffic slump level Area public transportation company profit jumps 650% Bike sales triple during last quarter Gasoline tops $6.00/litre at area gas station Elderly conservatives still unable to fathom metric system 3 year old Cadillac recently sold for $2400; car values plummeting and the best of all Former President Bush convicted for crimes against humanity committed during prolonged Iraqi invasion Great days ahead. Ian
Response:
> We had a heavily regulated system prior to 1978. The chances of it > coming back to anything resembling that period are nonexistent. If you > gave carriers antitrust immunity, they could legally engage in all > kinds of anticompetitive tactics that would end up costing passenges > more money.
But what if you gave the majors antitrust immunity for say 6 months in order for them to restructure their schedules together so that one airline wouldn’t be at a disadvantage for reducing convebnience for the sake of lowering costs ?
Response:
– Hide quoted text — Show quoted text -> > The majors have the advantage that they SHOULD be able to handle a wider > > variety of routes profitably because they have a more versatile fleet. > But also at an inherently higher cost per passenger mile. > Why should that be ? > Lets say Jetblue has a fleet of 10 A320s and JF-Airlines has a fleet of 30 > flying skidoos and 30 A320s. > Are you saying that because JF-Airlines has more than one fleet type that the > use of its A320s would cost more per pax-mile than JetBlue ? If I have as > many > or more A320s than JetBlue, then there is no reason why I shouldn’t have > equal > or lower seat mile costs operaying the 320, notwidthstanding whatever other > plane type I might have.
Perhaps you’ve asnwered your own question. By having a mixed fleet, you’re implying that you will use them to feed regional/small jet flights to/from the large mainline jets. More flights will cost you more money for the same fare. The only way you can avoid your own hypothesis is to make sure the regional jet routing is independent of the mainline jets, that you;re o hubbing. B6 prefers to fly pax non-stop NYC-somewhere, w/o any interconnections. They can afford this luxury as NYC is a very large origination/terminating market.
Response:
> > The majors have the advantage that they SHOULD be able to handle a wider > variety of routes profitably because they have a more versatile fleet. > But also at an inherently higher cost per passenger mile.
Why should that be ? Lets say Jetblue has a fleet of 10 A320s and JF-Airlines has a fleet of 30 flying skidoos and 30 A320s. Are you saying that because JF-Airlines has more than one fleet type that the use of its A320s would cost more per pax-mile than JetBlue ? If I have as many or more A320s than JetBlue, then there is no reason why I shouldn’t have equal or lower seat mile costs operaying the 320, notwidthstanding whatever other plane type I might have. In that sense, United should be able to operate its A320s with lower seat mile costs than JetBlue even if United has other plane types. And United should be able to beat an airline whose sole plane type forces it to operate 2 flights where United can use its larger planes to operate a more efficient single flight. And United can be more efficient in markets where it can operate a regional jet to get a high load factor whereas the single-fleet airline may have to operate that route less efficiently because of load factors that aren’t as high. (Case in point, Westjet’s service to Thompson which was operate with 737s because that is all Westjet has, even though the 737 is too big a plane for that market). > It seems that in the past, the airlines put a premium on the non-stop service. > And people will pay for that. So, what’s the point?
But it costs the airline less to provide the non-stop instead of the connecting flight. By charging a premium for the non-stop, you push people to choose the cheaper ticket option with connecting flights which end up costing the airline much much more and reducing the load factor on the non-stop flight. I once flew CP from montreal to New York to get points. They matched AC’s fares. But it was through Toronto. (YUL-YYZ, then YYZ-LGA). Do you seriously think that CP made a profit with me for that ticket ? I essentially got 4 flights for the price of 2. Airlines must switch from what they think "the market will bear" and "we must match our competitors" to a philosphy of charging for what it costs. > Sure. I think that’s again exactly what I was trying to say: as long as > they are set up in such a way that they need to discount to death to > sell the last of their seats, they are shooting themselves in the foot. > Which is why they need smaller (but efficient) planes. Nowadays these > are available.
But the US airlines (except of UA and Northwest) don’t have large planes. What they do is to fly small planes very often, but because they have long layovers at hubs to allow for transfers etc, the airlines need far more planes than necessary. Consider having 50 planes that spend half an hour more than necessary at a gate 5 times a day. That is 125 hours of service lost every day. Assuming those 50 planes operate 18 hours a day, reducing the gate time by half an hour would allow you to keep the same capacity and number of flights with 7 fewer planes. In other words, carry as many people as before, but with 7 fewer lease payments and much lower maintenance costs (granted, the 43 remaining planes, getting used more, would have increased maintenant costs, but you would still have to maintain fewer planes). How many planes does United and American have ? Imagine how much they could save if they managed to switched their schedules to reduce plane turn around time. Boeing woulnd’t be happy, but the airlines would be. > The low costs are inherently limited to only some specific markets.
I am not sure about that. Look at City Express in Canada. They were able to operate Dash-8s at low cost betwen Montreal and Toronto while Air Canada was charging an arm and a leg. had it not been for AC’s predatory pricing and FF plan, City Express would have survived. Now, if City Express was able to operate low cost flights, how come AC Regional couldn’t ? There is no reason why AC regional (or whatever name they have this week) wouldn’t be able to provide low cost service/fares between Montreal and Toronto. AC Regional should be much better capable of offering low fares than Tango (which is essentially AC mainline operation with a different sticker on the plane). Yet AC regional charges the same fares as AC mainline. Translate this to the USA: Couldn’t delta simply make Comair a low cost carrier ? The problem with the regional airlines is that they are often called upon to take over the thinner routes formerly operated by mainline, and the mainline continues to offer the same fares as were offered before. They see the opportunity to milk customers. But they miss the opportunity to provide much lower fares and beat the competition. Another example is AA’s puddle jumper service between New York and Montreal. AA’s fancy yield management computer decides it can match AC’s exhorbitant fares and make a profit with only 2-3 pax on the plane. But it fails to see the opportunity of offering low fares and fill the plane while still being profitable. It would create a market and compete against bus/train as well as serving business travellers.
Response:
>>Start with routes. They do offer destinations that Southwest would >never consider. > But such routes should still be profitable. If it is a small thin route, give > it to a regional carrier. If it is a heavy route, then use 767s or 777s > instead of multiple 737s to make the route more efficient.
I think that’s exactly what I was saying… > The majors have the advantage that they SHOULD be able to handle a wider > variety of routes profitably because they have a more versatile fleet.
But also at an inherently higher cost per passenger mile. > Which do you think is more efficient: JFK-LAX non-stop, or JFK-ORD-LAX ? > Should the ticket that goes through ORD cost the same as the one that is > non-stop ? > It seems that in the past, the airlines put a premium on the non-stop service.
And people will pay for that. So, what’s the point? >Presumably also charging higher fares; which is not >inherently a money losing proposition presumably. > It is amoney losing proporsition when you structure the ailrine to survive on > 10% of your customers because you think that they can be milked with extremely > expensive fares, but then you find out that itis that very 10% that is leaving > to Southwest and Jetblue or not flying at all and you are left with passengers > which do not generetae any profit.
Sure. I think that’s again exactly what I was trying to say: as long as they are set up in such a way that they need to discount to death to sell the last of their seats, they are shooting themselves in the foot. Which is why they need smaller (but efficient) planes. Nowadays these are available. >They do offer F/J/C service which does increase unit costs. And >presumably should be paying for itself. > "presumably". What happens when you have a plane that needed F/J seats on only > 2 hops per day between A-B, but the remained of the hops are to cities that do > not generate any F/J revenus ?
That’s typically not how things work. But again, presumably that can be dealt with with some fare flexibility. And, as it goes now, by bumping people up. > Look at Canada where "first class" is long gone, and business class is being > downsized out of existence for domestic flights. Air Canada can do this > because it has no competition so it doesn’t need to offer all those free > upgrades to J class anymore.
Canada is such a poor country, you know. :-). So poor that no one can afford traveling in First. Oh well. > I suspect that the US airlines will be forced to reduce their J/F class > product and make upgrades not as common.
Perhaps just the opposite? They need to extract more cash from their customers, don’t they? The thing is, it’s not by pricing first outrageously expensive that they are going to fill it up. >They do offer interline ticketing. They do offer a much more flexible >sales/ticketing set of choices, presumably. > Does interline ticketing really cost the airline much more ? I can see that > going through a CRS does. And CRS systems such as Sabre, Amadeux, Gallileo etc > will have to rethink their business model to compete against bookings made > direct with the airline on its web site.
Of course these things cost. How significant they are, I don’t know, but add on. > Another possibility is that each alliance (Star, Skyteam and the smaller > Oneworld) will get each of its members the ability to book directly into each > other without the use of a CRS in the middle. That would allow interlining to > be "free".
That still doesn’t work if you are flying into Oolan-Baatar (sp?). > Then, airlines can start to charge an additional fee to those who still make > interlined tickets (for instance, a BA issued ticket to canada with an > additional leg on Air Canada, such a booking would have to be done through a > CRS since BA wouldn’t have a direct connect to AC). > As far as interlining of luggage. Does it really cost that much ? It is just a > matter of the originating airline properly tagging the luggage, and then > sending an electronic message to the other airline to advise of the luggage > tag information.
Add things up. Each individually may not cost much, but adding… > Airlines could continue to charge $1000 when Southwest was seen as just a > niche player with limited routes. But as Southwest expanded, and JetBlue > entered, they became real competitors. And I think the killer in this is that > those low cost airlines are seen as more reliable than the majors and this > makes a big step towards stealing business customers from the majors.
The low costs are inherently limited to only some specific markets. This said, if full-service airlines are perceived as less reliable (and less service-oriented), of course they should be in trouble. > And with the majors cutting back on on-board service, the flight themselves > aren’t that different anymore. So you have a huge price difference for a major > airline whose service is not see as reliable and whose on-board service isn’t > seen to be much different from the low cost carriers.
Sure. That’s not a strategy.
Response:
> Start with routes. They do offer destinations that Southwest would > never consider.
But such routes should still be profitable. If it is a small thin route, give it to a regional carrier. If it is a heavy route, then use 767s or 777s instead of multiple 737s to make the route more efficient. The majors have the advantage that they SHOULD be able to handle a wider variety of routes profitably because they have a more versatile fleet. The problem is that they create schedules that are often very inefficient not only for fleet utilisation but also on a fare/connections issue. Consider the people who would choose A-C-D-E-F-G-B route over the A-B route because it was same price or cheaper and gave more FF points. Which do you think is more efficient: JFK-LAX non-stop, or JFK-ORD-LAX ? Should the ticket that goes through ORD cost the same as the one that is non-stop ? It seems that in the past, the airlines put a premium on the non-stop service. > Presumably also charging higher fares; which is not > inherently a money losing proposition presumably.
It is amoney losing proporsition when you structure the ailrine to survive on 10% of your customers because you think that they can be milked with extremely expensive fares, but then you find out that itis that very 10% that is leaving to Southwest and Jetblue or not flying at all and you are left with passengers which do not generetae any profit. > They do offer F/J/C service which does increase unit costs. And > presumably should be paying for itself.
"presumably". What happens when you have a plane that needed F/J seats on only 2 hops per day between A-B, but the remained of the hops are to cities that do not generate any F/J revenus ? Look at Canada where "first class" is long gone, and business class is being downsized out of existence for domestic flights. Air Canada can do this because it has no competition so it doesn’t need to offer all those free upgrades to J class anymore. I suspect that the US airlines will be forced to reduce their J/F class product and make upgrades not as common. > They do offer interline ticketing. They do offer a much more flexible > sales/ticketing set of choices, presumably.
Does interline ticketing really cost the airline much more ? I can see that going through a CRS does. And CRS systems such as Sabre, Amadeux, Gallileo etc will have to rethink their business model to compete against bookings made direct with the airline on its web site. Another possibility is that each alliance (Star, Skyteam and the smaller Oneworld) will get each of its members the ability to book directly into each other without the use of a CRS in the middle. That would allow interlining to be "free". Then, airlines can start to charge an additional fee to those who still make interlined tickets (for instance, a BA issued ticket to canada with an additional leg on Air Canada, such a booking would have to be done through a CRS since BA wouldn’t have a direct connect to AC). As far as interlining of luggage. Does it really cost that much ? It is just a matter of the originating airline properly tagging the luggage, and then sending an electronic message to the other airline to advise of the luggage tag information. > misleading. One key issue in the current Major predicament is that they > operate in a market segment much more susceptible to business downturns > than Southwest.
Airlines could continue to charge $1000 when Southwest was seen as just a niche player with limited routes. But as Southwest expanded, and JetBlue entered, they became real competitors. And I think the killer in this is that those low cost airlines are seen as more reliable than the majors and this makes a big step towards stealing business customers from the majors. And with the majors cutting back on on-board service, the flight themselves aren’t that different anymore. So you have a huge price difference for a major airline whose service is not see as reliable and whose on-board service isn’t seen to be much different from the low cost carriers.
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- Hide quoted text — Show quoted text ->>United, AMR Corp.’s American Airlines, Northwest Airlines >>and Continental Airlines all have costs at least 40% higher >>than Southwest’s, according to the report. America West >>Airlines comes closest to Southwest, with costs 15% higher. >>Delta Air Lines and Alaska Air Group Inc.’s Alaska Airlines >>fly domestically with unit costs 30% higher than >>Southwest’s. >This could be somewhat misleading however. We would need to >separate into the costs differences associated with the >different business model and the real operating cost >differences. > The problem with laying the cost per pax differences at the feet > of "different business models" sort of begs the question as to > whether the other airlines’ "business models" themselves > provide part if not parcel of the problem.
Fair enough. Although that is not synonymous with suggesting they all should adopt the Southwest model. > In attempting to be all things for everybody, the majors have > ended up over extending themselves is search of segments of a > dynamic pie, one that shrinks or swells due to circumstances, > economic and psychological, and in which the "filling", > (demographics, customer profiles and attitudes) is extremely > diverse in composition and large portions of which have changed > faster than have the airlines capacity to address change.
Poor judgement and wishful thinking is not just a prerogative of the airlines though. Just look at telecoms and the whole internet business pipedream. And one would think sooner or later fundamentals end up winning the day. The fare system based upon (1) grabbing as much as they can where they can while (2) filling any left seat at any cost resulted from years of operating planes larger than was needed from an economic perspective. These days are now by and large gone and one would think fares will end up more in line with costs eventually. – Hide quoted text — Show quoted text -> I suspect that the next decade will bring a revolution (and not > necessarily a welcome one for many poster/reader/travelers here) > in domestic and foreign service by US airlines. A number of > smaller markets are certain to lose chunks of service and as > with amenities such as meals, a number of the sort of > traditional conveniences will disappear. "Point to point" > service (other than those routes capable of filling one or more > regular flights) will increasingly be replaced by hub and spoke > operations (with dimished service down spokes unable to fill > a/c) or the WN business model which seems based on maximum > utilization of available assets, a/c, crews, ground staff, > gates, counters and coffee pots, the "optimization" approach, > Spartan, but easier to alter and adjust to circumstances. WN’s > biggest advantage after 9/11 – its customers – less likely to be > discretionary or even flexible travelers – "needed to go" with > higher priority than did the average/median/mean customer of > other lines. For Southwest to institute or drop a direct flight > from San Diego to Providence would cost (in money and customer > good will) far less than it would for Delta to start or drop a > flight from Atlanta to Tokyo, yet WN’s potential real profits > from the such routes, real or potential, may be as great as > Delta’s and WN’s potential losses much lower.
But all of that does not mean that one cannot run a profitable business based upon better service, such as more direct routes etc. Of course, trying to have both ways is a different story. > These days, the flexibility of the US majors is limited to > gamesmanship in the area of fares, and the phenom of the > "weekend web specials" in which they attempt to induce > non or discretionary travelers to travel. The doewnside of > flexible fares has emerged, as countless businesses, traditional > customers for premium seats or late purchase tickets, have > become "players" for cheap tickets. "Real" first class > travelers have diminished to a laughable few on US domestic > routes, and the front of the bus is mostly a haven for > "upgradees".
Again, real issue is you can’t have it both ways. You can’t claim you are full service if your service is no better than WN. But surely there remains a sizeable market. Provided that you put "service" back into "full service airlines." For instance, if no one pay for first anymore, it’s not really because there is no market. It’s more like because the airlines are prisoners of their fare system. No one pays full economy; first has to be more expensive than full Y. Result: no one pays for F anymore. OTOH, if F would cost 30-40% more than coach (as it did before deregulation) surely enough people to fill a reasonable F cabin would pay for it? I regularly pay 30% more than the cheapest available fare to get upgradeable tickets. (That’s in Canada, but with AC, which is not terribly different than the majors.) > The same sort of changes are inevitable abroad (with the current > Canadian experience as a foretaste of things to come). > Governments (with exception of petty despoteries maintaining a > crewed, fueled jet at the airport to get out of town quickly) > are less and less likely to want to or to be fiscally able to > subsidize national flag carriers (or regional "brandnames" > carrying semi-flag status) or to be concerned about the > importance thereof to the national image.
Agreed on national image, although as long as they are monopolistic, some of these dinosaurs seem to be profitable: LH and AF are apparently. I wouldn’t be surprised if our beloved Mapleflot does more or less OK this year too. Although the jury is still very much out on the AC brands follies. My guess is that the main reason they are doing fine do not stem from these but from the benefits of near-monopoly, which has allowed them to raise fares to be more in line with costs, together with very tight cost control. If found that this summer, flying overseas from Canada was nowhere near as cheap as it used to be. Ultimately, this is the only true remedy for the airlines. Fares got to pay for the costs.
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> costs’ BOTH contribute to that. If they are to survive and be > profitable again, they need to change both their business model and > their operating costs.
Perhaps what the US majors need is some sort of antitrust immunity so that all carriers can stop competing on frequencies to allow them to restructure their operations. The focus should be moved from making "convenient and frequent connections/service" to "making the best possible use of aircraft/schedule". Yes, the airline need to rethink their yield management system that results in a $1000 fare for last minute purchase and a $98 fare for seat sale. But that could be done tomororow if the airlines wanted to. The recent changes to prevent stand-by, ticket-value reuse etc seems to indicate that the majors still expect to be milking the business travellers with higher fares by making the lower fares less attractive for business travel. And that is wrong. The airlines should be doing as Horizon just announced: make the last minute fares more affordable and just as flexible.
Response:
- Hide quoted text — Show quoted text ->>United, AMR Corp.’s American Airlines, Northwest Airlines and Continental >>Airlines all have costs at least 40% higher than Southwest’s, according to the >>report. America West Airlines comes closest to Southwest, with costs 15% >>higher. Delta Air Lines and Alaska Air Group Inc.’s Alaska Airlines fly >>domestically with unit costs 30% higher than Southwest’s. >This could be somewhat misleading however. We would need to separate >into the costs differences associated with the different business model >and the real operating cost differences. > Sorry if this is a stupid question, but why? The whole point is that > the majors spend more to fly one seat one mile than Southwest does, > and that the differing business model and higher ‘real operating > costs’ BOTH contribute to that. If they are to survive and be > profitable again, they need to change both their business model and > their operating costs.
Why? They do offer a different type of service, or at least they claim to. Start with routes. They do offer destinations that Southwest would never consider. Presumably also charging higher fares; which is not inherently a money losing proposition presumably. They do offer F/J/C service which does increase unit costs. And presumably should be paying for itself. They do offer interline ticketing. They do offer a much more flexible sales/ticketing set of choices, presumably. Bottom line: comparing costs only without looking at income is at best misleading. One key issue in the current Major predicament is that they operate in a market segment much more susceptible to business downturns than Southwest.
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> > United, AMR Corp.’s American Airlines, Northwest Airlines and Continental > Airlines all have costs at least 40% higher than Southwest’s, according to the > report. America West Airlines comes closest to Southwest, with costs 15% > higher. Delta Air Lines and Alaska Air Group Inc.’s Alaska Airlines fly > domestically with unit costs 30% higher than Southwest’s. > This could be somewhat misleading however. We would need to separate > into the costs differences associated with the different business model > and the real operating cost differences.
Sorry if this is a stupid question, but why? The whole point is that the majors spend more to fly one seat one mile than Southwest does, and that the differing business model and higher ‘real operating costs’ BOTH contribute to that. If they are to survive and be profitable again, they need to change both their business model and their operating costs.
Response:
– Hide quoted text — Show quoted text -> United, AMR Corp.’s American Airlines, Northwest Airlines > and Continental Airlines all have costs at least 40% higher > than Southwest’s, according to the report. America West > Airlines comes closest to Southwest, with costs 15% higher. > Delta Air Lines and Alaska Air Group Inc.’s Alaska Airlines > fly domestically with unit costs 30% higher than > Southwest’s. > This could be somewhat misleading however. We would need to > separate into the costs differences associated with the > different business model and the real operating cost > differences.
The problem with laying the cost per pax differences at the feet of "different business models" sort of begs the question as to whether the other airlines’ "business models" themselves provide part if not parcel of the problem. I already see AA beginning to alter (but not rapidly or iconoclasticly enough I suspect) its business model, but it appears likely that USAir, even in bankruptcy, may be in an irrecoverable tail spin, and that the traditionalist "icon- centered" perspective of UA is equally frightening. In attempting to be all things for everybody, the majors have ended up over extending themselves is search of segments of a dynamic pie, one that shrinks or swells due to circumstances, economic and psychological, and in which the "filling", (demographics, customer profiles and attitudes) is extremely diverse in composition and large portions of which have changed faster than have the airlines capacity to address change. I suspect that the next decade will bring a revolution (and not necessarily a welcome one for many poster/reader/travelers here) in domestic and foreign service by US airlines. A number of smaller markets are certain to lose chunks of service and as with amenities such as meals, a number of the sort of traditional conveniences will disappear. "Point to point" service (other than those routes capable of filling one or more regular flights) will increasingly be replaced by hub and spoke operations (with dimished service down spokes unable to fill a/c) or the WN business model which seems based on maximum utilization of available assets, a/c, crews, ground staff, gates, counters and coffee pots, the "optimization" approach, Spartan, but easier to alter and adjust to circumstances. WN’s biggest advantage after 9/11 – its customers – less likely to be discretionary or even flexible travelers – "needed to go" with higher priority than did the average/median/mean customer of other lines. For Southwest to institute or drop a direct flight from San Diego to Providence would cost (in money and customer good will) far less than it would for Delta to start or drop a flight from Atlanta to Tokyo, yet WN’s potential real profits from the such routes, real or potential, may be as great as Delta’s and WN’s potential losses much lower. These days, the flexibility of the US majors is limited to gamesmanship in the area of fares, and the phenom of the "weekend web specials" in which they attempt to induce non or discretionary travelers to travel. The doewnside of flexible fares has emerged, as countless businesses, traditional customers for premium seats or late purchase tickets, have become "players" for cheap tickets. "Real" first class travelers have diminished to a laughable few on US domestic routes, and the front of the bus is mostly a haven for "upgradees". The same sort of changes are inevitable abroad (with the current Canadian experience as a foretaste of things to come). Governments (with exception of petty despoteries maintaining a crewed, fueled jet at the airport to get out of town quickly) are less and less likely to want to or to be fiscally able to subsidize national flag carriers (or regional "brandnames" carrying semi-flag status) or to be concerned about the importance thereof to the national image. Along with the water in the crapper rotating in reverse than in Canada and the US, Ozmandians have always considered themselves as separate from and above the fray and long secure from the terrors of the night which beset folks who live in the real world. Now, they will be forced to swallow e-tickets and surcharges for paper ones, and that Oz’s location, population and economy may actually serve to further isolate the country as international air service stagnates (or as likely, actually declines) and Ozmandian cities become simply the tips of spokes emanating from Asian or better located Pacific hubs. After all, the facility with which Ozians rise to the bait and thrash out at the rest of the world (especially the US), seems an inheritance of a combination of environmental and genetic paranoia, unrelieved by substantial efforts by US military forces during WWII to introduce fresh root stock providing a healthier perspective…. TMO
Response:
> United, AMR Corp.’s American Airlines, Northwest Airlines and Continental > Airlines all have costs at least 40% higher than Southwest’s, according to the > report. America West Airlines comes closest to Southwest, with costs 15% > higher. Delta Air Lines and Alaska Air Group Inc.’s Alaska Airlines fly > domestically with unit costs 30% higher than Southwest’s.
This could be somewhat misleading however. We would need to separate into the costs differences associated with the different business model and the real operating cost differences.
Response:
Dow Jones Business News Southwest Sets Standard on Costs for Airlines Wednesday October 9, 1:49 am ET Major U.S. airlines would have to collectively slash $18.6 billion in costs, or 29% of their total expenses, to operate at the same level as Southwest Airlines , the only major carrier that has been profitable the past 18 months, Wednesday’s Wall Street Journal reported, citing a study to be published today. Unisys Corp.’s R2A Transportation Management Consultants tallied up the magnitude of the problem facing major airlines. By looking at Southwest’s per- mile costs, the study concluded that the eight other big carriers would have to slash billions from their cost structures if they wanted to compete on an equal basis with Southwest and other low-fare carriers. U.S. airlines are expected to post losses of as much as $8 billion this year, possibly eclipsing last year’s record $7.7 billion. Even before the Sept. 11 terrorist attacks and the ensuing travel hassles and security costs, U.S. airlines were suffering from a steep drop in demand for high-fare busines-travel tickets. The high-cost airlines face enormous pressure from low-fare carriers, which total more than 20% of U.S. domestic air capacity, as well as from powerful Internet tools that allow flyers to hunt bargains. US Airways Group Inc. , which sought bankruptcy-court protection in August, is at the biggest disadvantage, the study said; its cost to fly one seat one mile is 69% higher than Southwest’s. The data, which cover the year ended June 30, 2001, show UAL Corp.’s United Airlines, which is teetering on the edge of a bankruptcy filing, to be at the second-biggest disadvantage. United, AMR Corp.’s American Airlines, Northwest Airlines and Continental Airlines all have costs at least 40% higher than Southwest’s, according to the report. America West Airlines comes closest to Southwest, with costs 15% higher. Delta Air Lines and Alaska Air Group Inc.’s Alaska Airlines fly domestically with unit costs 30% higher than Southwest’s. Southwest, now the nation’s sixth-largest airline, has been profitable for 29 consecutive years, relying on low costs, reasonable fares and high efficiency. Wall Street Journal Staff Reporter Scott McCartney contributed to this report.