Today in the Sky, a USA Today Blog, has posted THIS story about United Airlines doubling their 2nd checked bag fee from $25 to $50.   Citing volatile oil prices and the fact that oil remains almost double what it was a year ago, United Airlines is raising this fee for a 2nd checked bag with the usual disclaimers (elite frequent flier members, business class passengers, etc don’t pay the fee.)

 

While the checked bag fees may be working for some airlines, it still strikes me as dishonest.  What United is saying essentially is that it costs them $50 to carry that second bag in addition to all the other fees you are now charged for flying their airline.  Not really true.  What they want is more revenue to fly profitably and I’ve no objection to them asking for that.  But to couch this as necessary for checking bags is just silly and fosters resentment from passengers. 

 

This fee affects a relatively small portion of travelers and will likely have the effect of simply reducing the number of 2nd bags checked.  Travelers will instead stuff more into a carry on and 1st bag. 

 

Please note that Southwest Airlines continues to charge no fees until the 3rd bag is checked.  All of these additional fees just leave a foul taste in one’s mouth over legacy airlines in general.  How long before they suggest tipping flight attendants in order to reduce their salaries?

 

 

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As an experiment today, I decided to go through the process of booking a flight and estimating the cost of the ticket and fees that might be associated with that trip.  To be fair and give a reasonable representation, I’m going to assume that I’ll enjoy a couple of beverages (but not liquor or beer since I don’t drink on flights as a general rule) and that I’ll be hungry.  To make it interesting, I chose to fly from DFW (where I live) to EWR (Newark Liberty International Airport and where my brother lives) and I’m going to choose 2 airlines for comparison.

 

To start, I visited American Airlines’ website because AA is, after all, the dominant carrier in my home town and most likely to offer a variety of flights that are non-stop.  A reasonable person seeks out non-stop first, right?

 

I found a flight leaving on a Friday morning and a flight returning on a Monday morning so that I could visit for the weekend.  After entering my preferred criteria, AA shows me a set of flights that, to my surprise, are labeled as being $164.00.  I’m feeling good suddenly.  I chose the outbound flight and it then asks me to select a return flight.  Hmm, there is that same fare so I choose an early morning return for the same price.  It felt like my roundtrip fare was $164 the way it was presented even though I actually know better from my own extensive experience.  The presentation gets one’s hopes up I suspect.

 

It wasn’t.  It was $164 each way for total of $328 and that, my friends, was as super saver fare.  The standard Economy saver fare (still not the full economy fare and therefore still subject to some restrictions) was $876 each way for a total of $1752. 

 

Now, my super saver economy fare was to also be taxed $21.00 for fees levied by various governments.  Now I’m up to $349.00.  Mind you, that’s what it has cost to simply book the flight and let me note that if I want a paper ticket (which would be unreasonable today but wasn’t just 8 years ago), I would pay an additional $25 and I would only have that option *if* I lived in a country where paper ticketing was required such as a Latin American nation.  Yes, they’ll let you pay $25 to receive a ticket if you live in a country where e-ticketing isn’t permitted. 

 

Now, since I’m flying to visit my brother, I plan to bring him a few things and since we tend to go out and enjoy ourselves, I’ll be taking my larger suitcase and need to check that bag.  The first checked bag fee is $15.  In some respects people have been seeing that as almost reasonable.  How reasonable does it look when you realize that you pay that fee EACH WAY?  Yup.  $30 for roundtrip baggage check of my bag.  If I were traveling with two bags to be checked (unreasonable), it would cost a total of $80 each way to transport two bags (and they still have to be under 50lbs each.)

 

So, just to plan, I’ll need to find out what my food and beverage costs will be for this trip.  I’ll be wanting a couple of soft drinks or cups of juice each way and it turns out that on AA, this will be complimentary for me.  GREAT! 

 

Both of my flights will be morning departures and it would be nice to eat a meal enroute so that I don’t empty my brother’s cupboard or force him to stop at a Nathan’s as soon as I get there.  It doesn’t have to be a big meal or a hot meal, just a good sandwich or something similar for a breakfast item.  Checking AA, I find that I have these options for my morning flights:

Snacks for $3.00

• 4oz of mixed nuts
• A 4oz MegaCookie (i’ll be choosing this.)

 

Snacks for $4.00

• Cheese and crackers (not for breakfast!)

 

Breakfast Sandwiches for $6.00 each.

• Breakfast Bagel Sandwich
  Enjoy a plain bagel topped with slices of roasted turkey breast and mild muenster cheese. This sandwich is served with a side of Hellman’s® mayonnaise and dijonnaise mustard.
• Club Croissant Sandwich
  Savor a freshly baked croissant topped with thinly sliced roasted turkey breast and aged cheddar cheese, garnished with crisp green leaf lettuce. Hellman’s® mayonnaise served on the side.

 

Neither of those sandwiches are very appealing but let’s assume I’m hungry enough to get one.  My meal costs each way will be $9.00 for a total of $18.00 roundtrip.  But, hey, I get a free Coca Cola right?

 

So, to take this trip on American Airlines, it will cost me $397 and that doesn’t seem too bad all in all.  However, let’s say my brother and I have just too good of a time and I want to return a day later.   That would cost me a whopping $150 change fee *and* the difference in fares.  Since it would be a morning flight, it’s safe to assume that I’ll be paying full economy fare and that would mean a one day change would cost me $1137. 

 

Now, let’s take a look at taking a different airline.  Since I have done this trip once before on Airtran, I’ve chosen them as my economy option.  It will require me to connect through Atlanta but my departure and arrival times are actually quite close to the non-stop AA flights so I’m happy enough with that.

 

First, I discover that my travel fare options include a super saver fare for $164 each way or a total of $370 roundtrip with taxes.  The taxes and fees for this choice were a stunning $43.00 higher.  Not a good start.  There is some good news though.  Airtran will let me check that first bag for free so I save $30 and find myself at this point with a total cost savings of $9.00 over AA right now.

 

But I will be hungry so let’s check out the options on Airtran.   Hmmm, no food except a complimentary snack of pretzels (which I only know from experience as it is not shown on their website.).  I’ll have to buy some food at an airport and I think that if we assume that I’ll purchase something resembling breakfast at McDonald’s, I’ll probably pay about $4.50 for a couple of sausage biscuits or breakfast burritos (and I’ll enjoy them more too just from my own experience.)  Let’s call my food charges an additional $10 just to be safe. 

 

My all in price on Airtran will be $380 vs AA’s price of $397 for a savings of $17.00 overall.  Now, which would I actually choose?  That’s tough to say.  Airtran offers XM satellite radio which I like a lot but I do own a MP3 player and I would very likely bring it along anyway so that doesn’t compel me towards Airtran.  I do prefer Airtran’s seating, particularly on their 737’s which use a Recaro seat that is a great deal more comfortable than AA’s economy seat.  That *might* compel me to choose Airtran. 

 

However, Airtran also offes a business class upgrade at the gate for pretty cheap prices per segment.  Assuming I could get it for 2 of the 4 segments, it would only cost me $69 each segment or a total of $138.  That is compelling.  In my experience, you need only arrive about 1.25 hours before your departure time and you can usually get these seats.  Flying Business Class gets me a nice seat and that is it though.  For a man like me at 6’1″ with long legs and weighing 275lbs, it’s nice to be a bit more comfortable and I would probably take that upgrade for two flight segments.  So, I would pay $518 total to fly travel an extra hour but be comfortable.  You might choose otherwise. 

 

My point here is that cheap economy fares are pretty much the same no matter what the airline.  At least on trunk routes.  It might be possible to save a dollar here and there but more often it isn’t.  Airtran’s approach strikes me as more honest in that while I do pay the same base fare, I don’t pay for the first bag checked (reasonable) and I do have some upgrade opportunities to a better seat.  I don’t get food but, then again, do I really want food from the airline?  In the real world I do not.  I’ll happily buy a burger or a breakfast at the airport because the food is not only cheaper but a bit more appetizing. 

 

Just for the record, I planned a similar trip from DFW to PDX (Portland, where my mother lives) for the same dates on both AA and Southwest Airlines.  Using the same criteria, here are the all in prices:

 

American Airlines:  $527 (including $21.00 in taxes and fees) for the ticket and a grand total of $575.00 (checked bag fees and meal prices included).

 

Southwest Airlines:  $469.00 (including $76.94 in taxes and fees) for the ticket and a grand total of . . . wait for it. . . $469.00.  Southwest has no baggage fees and they do not offer food.  Would I take SWA?  Nope.  Because it requires me to fly from DAL (Love Field) to ABQ (Albuquerque) and then to SLC (Salt Lake City) where I changes planes and fly on to Portland.  That’s a whipping and it’s just worth it to fly on AA’s decrepit MD-83 for only 3.5 hours to get there. 

In general, low cost carriers such as Southwest and Airtran are providing a slightly lower fare than the legacy carriers.  The difference in fares are mere dollars but that is because we examined economy super saver fares.  Want to know why those airlines soundly trounce legacy carriers?  Take a look at their business class fares.

 

DFW to EWR

AA:  $2902.00 all in.  Since it is business class, there will be no baggage fees and a decent meal will be provided. 

 

Airtran:  $1070.00 but since we’ll still have to buy a meal, let’s call it $1100.00 even. 

 

That is a savings of over $1800.  And it is the biggest reason why airlines such as American Airlines are doing everything possible to hold on to their valued frequent flier.  Sure, Airtran takes about 1.25 hours longer but if I’m running a business, my guys will be flying Airtran because with a savings of $1800, I don’t mind if they lose 2.5 hours of productivity. 

 

This is the real reason airlines such as American and United resent low cost carriers.   Low cost carriers set the price for the “fill” of the aircraft.  Which is the revenue they would not earn if they didn’t sell a seat at a discount price.  In addition, low cost carriers such as Airtran, Jet Blue and Frontier (and to a lesser extent, Southwest) are now competing for those business class passengers at prices legacy carriers can’t come close to. 

 

 

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American Airlines, in a rare move smacking of smart, began flying from Dallas Love Field to Chicago O’Hare (Midway would have been better) using their American Eagle subsidiary and the Embraer ERJ-145 aircraft.  The Wright Amendment allows this flight because it uses an aircraft with less than 56 seats. 

 

There are 6 daily flights each way and at very convenient times too.  This is smart because they can price the seats for these flights so they make money and, at the same time, build some customer loyalty for the flights while Southwest Airlines waits until 2014 to fly the same route.  The Dallas business traveler potentially saves an hour or more in total travel time for the same economy price he or she would pay flying from DFW. 

 

By using their 2 gates at Love Field (Dallas’s secondary airport) for these flights instead of competing directly with Southwest on flights to places like Austin and St. Louis, American Eagle Airlines will begin to get traction with the Love Field business commuter for once.  It would not surprise me at all if they introduced their CRJ-700 aircraft on this route with a few first class seats to reduce seating to the Wright Amendment limits.  The CRJ-700 or even the CRJ-900 could be uniquely well suited to this city pair in that could provide first class and/or economy plus seating for a price many would pay.

 

 

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In the late 1990’s, I worked in a general contractor partnership with two other men.  We reached a particularly bad period where despite all our efforts, our clients weren’t giving us business.  After almost 2 months of giving ourselves $200 paychecks every other week, it was clear that it was time to do something else. 

 

Our particular situation seemed to be based on our costs.  Things like sheetrock and doors had been rising in costs to the point where it became necessary to raise our prices to support the work we did.  There were other competitors, one man shops with a pickup for an office, who were undercutting our bids just enough to win the business.  We faced a choice of lowering our prices to win the business and not have any money or to stand firm and not win the business.  Or so we thought.

 

One of my partners and I were motorcyclists and decided to take a ride during this period that lasted 18 hours.  At one point, we were taking a breather alongside a very quiet road and began talking about our business troubles.  We realized a couple of things that changed our game.  First, the people that were undercutting our business were formerly from larger construction companies setting out on their own.  They were winning on price, not quality and dependability.  Second, we had an operation that had grown some and no longer fit well with some of our clients. 

 

The next business day, we renewed our effort to check in with clients on a regular basis and continued to bid every job available.  By doing this, we began to underline our ability to a project better and for a reasonable price.  We also began to go out and seek new clients who better fit into our business.  This meant asking for the business and delivering exactly what we promised on each job.  The result was that old customers that continued to fit our model came back and we gained new customers who were looking for a company that performed.

 

This should sound remarkably familiar to those who follow the airline industry.  There has been a cycle of attempts to enter the industry by people thought they had a game changing business plan and some were successful while others haven’t been.  Jet Blue brought a new LCC model based on the Southwest turnaround and fleet efficiency but that was also focused on a higher level of comfort and service.  They introduced two types of fleets to right size their routes but stuck with only two in order to benefit from economies of scale. 

 

Skybus came about based on the single fleet, pay for everything model that Ryanair of Ireland built.  They promised rock bottom fares and engineered a plan to accomodate that by flying to secondary cities and airports that offered lower operational costs.  Skybus failed partly because of rising fuel costs but also from a failure to recognize that distances in the US make it much more inconvenient to fly into those secondary cities. 

 

Airlines who identify their niche and develop a plan for it are more likely to survive.  You cannot be all things to all people in this business because that means you have to compete against every other airline at the lowest common denominator.    Why would American Airlines wish to compete against Allegiant Airlines when doing so puts them at a competitive disadvantage?  Allegiant is based on a business model that addresses low frequency, leisure travel combined with ancillary revenue derived from charging for every convenience.  Their labor costs are low and their fleet capital costs are low.   American Airlines isn’t built to compete for that business.

 

Continental Airlines is an excellent example of a company serving the people that fit their niche.  It doesn’t operate a low cost airline, it operates a high frequency, high service system that serves business travelers.  They understand that maintaining a modern fleet with modern conveniences is important to that customer.  They fly where their customers want to go and worry a lot less about being all things to all people when it comes to destinations. 

 

Southwest Airlines has found itself evolving over these past several years.  Often identified with the first time flier in the past, business travelers have realized that Southwest Airlines offers something that many don’t:  dependability.  When they fly Southwest, they know that there is a very high degree of probability that they’ll be able to get to their destination on time and, often, closer to their needs in a particular city.   While Southwest still offers a very low fare compared to its customers and still attracts those first time fliers, they’ve also begun to serve the needs of the business traveler by remodeling their gate areas to offers business conveniences such as laptop power ports.  They are in the process of testing in flight internet connections for the business traveler as well. 

 

In contrast, you have United Airlines who has pursued the “be all to everyone” philosophy and it shows.  With a huge network to leisure destinations, they get soundly beat by other airlines who compete on price.  Their national and international business traveler destinations are served by older, unrefurbished equipment and their service model denies the conveniences a business traveler expects such as meals, beverages and even charging for checking the first bag.  Notice that Continental hasn’t ignored the incremental revenue from such fees in general (they charge $25 for the 2nd bag checked) but they haven’t offended the business traveler with 1st bag checked fees either. 

 

American Airlines and United Airlines have pursued a strategy that offends or, at the least, disappoints their core customers.  Continental, on the other hand, recognizes that the opportunity cost of forgoing that 1st bag fee is paid back in customer loyalty when it comes to choosing Continental. 

 

The last thing the business or frequent flyer wants to hear is that the airline resents them and wants more.  Indeed, many have said publicly that if an airline wants more money, charge a higher fare but don’t insult them by charging for a bottle of Ozarka water on a flight.  It strikes such people as petty and money grubbing.   At the same time, these travelers don’t need to be singled out as the ones to carry the burden of paying for a flight.   Don’t charge exorbitant business fares simply because the company is paying for it rather than traveler.  These business travelers are smart people and generally the ones traveling are some of the smartest.  They will begin to recognize that the fare to travel somewhere on business becomes inefficient at a certain point.

 

I suspect that it is time for airlines to begin eliminating some perks in the business class cabin as well.  Often the business cabin is occupied by many travelers who purchased full fare economy class tickets and used their frequent flier status to upgrade into that seat.  Airlines will have to begin to find ways to differentiate their service and charge accordingly.  Perhaps a full fare economy ticket should be upgradeable to an Economy Plus seat rather than a business class seat. 

 

Service is important to the frequent flier but what is that “service” that is most important?  Is it a hot meal?  A business class seat?  A friendly flight attendant?  No doubt each of those things has some importantance but I’d argue that the primary measure of service is whether or not you can dependanbly transport your customer from point A to point B on time.   That is, after all, what the airline is contracting to do.  Deliver that and the customers bags as well, and you’ll likely win their hearts and minds.

 

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Virgin Atlantic reported a $50million (USD) increase in profits for their just completed financial year.  Given the financial circumstances for all airlines, it impresses me to no end that they have managed to not only make a profit but increase it against rising fuel costs.  To me, this points to service being the prime key to financial success.  Say what you want about Virgin Atlantic (and many people do), they do have a well deserved reputation for being a good, consistent service product.  Look at any airline that doesn’t have this key element and you’ll find them fighting for their lives.

 

Airlines such as VA, Southwest Airlines, Singapore Airlines (as well as many others) are concentrating on their service and meeting the expectations of customers and it shows.

 

 

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It would be easy to see my two previous posts as anti-union but, in fact, I’m really just anti-stupid and anti-selfish. The primary issue I have with most airline unions is that they have leadership that stands for election on the basis of “getting more” no matter what the present airline industry climate is. The best strategy, presently, for that leadership to remain in power is to promise and fight for short term gains.

 

I firmly believe that both airline management and airline unions would be far better served by contracts that span a far longer term (7 to 10 years). These contracts would fall into term periods that would most likely contain both up and down cycles in the business. Management is better served by having long term, predictable costs to plan for and union leadership would be able to make a better argument for the well being of their membership in that each party recognizes that the long term success of the business supports the long term financial security of the employees.

 

Airlines suffer such exaggerated cycles because it is so difficult to diversify an airline company with other counter-cyclical businesses. The business strengths of an airline do not necessarily carry over to other industries. However, it is possible for an airline to perform a kind of business diversification for itself by diversifying its route and customer structure. Several airlines such as Delta, Continental and Northwest have recognized that by increasing the percentage of their business (and revenue) that derives from international travel tends to balance against their domestic business. Accordingly, they’ve worked hard to adding new, fuel efficient aircraft and flying new long haul routes to mitigate against domestic conditions that rarely align with the rest of the world.

 

This means the business model is changing and that requires a certain cooperation from airline employees. It means that pilots may have to fly longer trips but that can be balanced by requiring fewer trips over a certain period. It means that airlines likely need to measure this “balance” for their employees over a 90 day period instead of a traditional 30 day period. But that can benefit an airline employee as well. Having a route schedule planned for 90 days means that employee can make better personal decisions about their lives and how to accommodate their work.

 

Many of the work rules in place at large legacy airlines derive from the 1950’s and airline travel in the 1950’s was vastly different. Airline travel in the 1990’s is vastly different now too. Wiping the slate clean and negotiating a contract that provides for flexibility (on both sides), economic security (for both sides) and which addresses both the existing business model as well as the evolving one would be of huge benefit to both parties.

 

Unions mistake the need for increased productivity per dollar spent as a call to eliminate jobs in this industry. It isn’t. Increased productivity means being able to use a mechanic to work a variety of aircraft or being able to use a pilot for a variety of routes. It means re-arranging the job functions and duty times to provide for financial growth, not to simply eliminate jobs.

 

Many legacy airlines have let their employees down in one area in particular. Leadership. An airline is best served by a CEO who is, first and foremost, a leader. That CEO should no doubt be served by an executive team who excels at management but a leader “leads” all the employee groups with some common goal and with some harmony. In fact, many legacy airline unions often call for more “leadership” on behalf of their employees and I believe it is no hollow wish.

 

Find a successful airline, today or 30 years ago, and you’ll most often find an airline being run by a leader. American Airlines employees used to refer to former AA CEO Bob Crandall as a Son of a Bitch but they also acknowledged that he was *their* Son of a Bitch. Former Continental CEO, Gordon Bethune, did not architect Continental’s rise from the ashes of bankruptcy through financial management alone, he did it by working very hard at re-aligning the goals and interests of his employees with the airline’s long term success. He worked to make things both flexibile and financially rewarding.

 

It comes as no surprise that many United employees are badly demoralized and disillusioned with their leadership. That executive team has found ways to reward itself during bankruptcy, after bankruptcy and in spite of poor financial performance while tirelessly grinding away at the financial security of their own front line employees. Shareholders would be wise to structure financial incentive packages that only reward and retain airline executives who deliver financial and service performance.

 

The Continental executive team has proven at least 3 times in the past 15 years that it can turn a profit while treating their employees humanely and their customers with great service. The same is true of Southwest Airlines (who I note does have some of the longest term union agreements in the industry.)

 

If an airline executive doesn’t wish to remain a CEO if he doesn’t get millions in financial incentives each year whether the airline performs good or bad, then he (or she) really isn’t the best choice to lead the airline. Airlines are a business whose success can only be measured over a fairly long duration of years. Indeed, if you look at the financial results of legacy airlines just this year, there is no argument for ever investing in the business.

 

The airline employee is the front line service delivery mechanism for an airline. It isn’t the plane, it’s the people staffing the airline that provide that discriminator for choosing one airline over another. No airline in the US can afford to discriminate on price alone anymore. Southwest, a low cost leader, recognized that a few years ago and now has begun offering a more differentiated service product that is more attractive to the business traveler. It is critically important for airline management to get over itself with this idea that airline employees are commodity. They aren’t. They are the prime service provider for customers and customers really do notice and differentiate on that experience more than anything other discriminator (aircraft choice, etc.)

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The latest on-time statistics are out on US airlines and the Dallas Morning News has them here.

 

I’m struck by  more than one item. First, how strange is it that 2 commuter airlines that fly for legacy airlines have better on-time numbers than any 48 state legacy airline? These airlines fly aircraft that is subject to more technical delays and cancellations. It boggles my mind that SkyWest and Pinnacle Airlines are at the top.

 

Skywest flies for United, Delta and Midwest as their feeder “connection” airline using CRJ200/700ER/900 aircraft (and a few Embraer EMB-120 turbo-props).  Ordinarily, the Bombardier aircraft is not universally known for its dispatch reliability but the new(er) CRJ700/900 must be doing much better than its older cousin the CRJ200. 

 

Pinnacle Airlines flies the CRJ200/440/900 aircraft, all similar or the same as Skywest, for Northwest Airlines and Delta.  Right now, you could drop me with a feather.  In addition to the aircraft, these airlines fly out of major hubs that are often disastrously affected by summertime weather. 

 

What is a bit more surprising (if you can believe it) is that US Airways is the top on-time non-LCC legacy carrier.  There are reports that they’ve made drastic improvements at their Philadelphia hub.  Right now, they are neck and neck with Southwest Airlines and, frankly, I’d say you are doing pretty good to be playing ball in Southwest’s neighborhood.

 

What I have to ask is this:  Is it an anomaly (unlikely as US Airways has been climbing steadily) or is because they’re able to depart on-time more often since instituting charges for checking bags?  If this climb in reliability is due to changes in customer baggage habits, look out. 

 

Three LCC carriers, Southwest, Frontier and Airtran, are virtually neck and neck in these ratings and, again, I wonder if this might be due to people traveling with more carry-on luggage than in the past. 

 

American Airlines is dead last (even beat by American Eagle) in the ratings and that, to me, indicates graver trouble at that airline.  There have been some reports of pilots becoming slightly inflexible with respect to work rules.  I believe it is more a symptom of an airline that has become sick in morale and flexibility.  Gerard Arpey won’t fix this with more mattressmakers.com analysis, better financing or capacity constraints.  It gets fixed with leadership.  Something that American Airlines really hasn’t been blessed with since Robert Crandall retired. 

 

Finally, if you offered me a bet that Mesa would have better on-time ratings than American Eagle, I’d have taken the bet with glee.  When you are worse than Mesa, you’ve got real problems.

 

 

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This story is on the Aviation Blog of the Dallas Morning News.  In short, Delta has decided to charge $50 for the 2nd checked bag on their flights starting shortly.  Many airlines are now charging fees for the first checked bag as well.

 

This is just bad, bad form.  While I certainly agree that an airline can, and perhaps should, charge fees for various services, those fees should be charged on amenities not basic services.  Carrying baggage on a flight is, in the US, a basic service.  This just makes them more vulnerable to LCC superstars such as Southwest Airlines.  Southwest has been using a great “No Fees” ad campaign in their strong markets with great success and I suspect that these fees for basic services will be the issues that drive fliers away from their chosen legacy carriers. 

 

Let’s see . . . my choice is to fly AA and pay fees for a checked bag and enjoy a high probability of a delayed flight or I can fly SWA and expect reasonable comfort (often on the same type of airplane), 2 bags checked for free, generally lower prices and friendly service.   Yeah, hard choice isn’t it?

 

Starting this year, I made a decision that I would no longer buy air travel using frequent flier miles as a decision point.  It’s too hard to redeem the points and now legacy airlines are charging ever increasing fees to redeem them.   Why bother?  I think you now get more value by shopping for the low price and schedule that fits.

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I got asked today what airline(s) I thought might be in real trouble.  Thinking about it for a few hours, I’ve come up with a sort of “death watch” list.

 

First on my list is Midwest.  They just announced they’re grounding their MD-80 aircraft and, as a result, cutting several important routes while expanding their codeshare with Northwest Airlines (who now owns a “passive” 47% stake in Midwest.)

 

Giving up routes such as Milwaukee – Los Angeles does not bode well.  With only Boeing 717 aircraft, they have limited themselves to routes that are “heartland” oriented.  For instance, the 717 can’t make it from MKE to LAX.  It can fly from Kansas City to Los Angeles (that route stays for now) but who wants to fly from MKE to LAX via MCI (MCI stands for Mid Continent International by the way)?  The airline business is, first and foremost, a network game and Midwest just cut 40% of its network putting itself below the critical mass in my opinion.

 

The proposed merger with Airtran would have saved them but they made a deal with the devil (Northwest) and Northwest has no interest in Midwest surviving really. 

 

Next up is Frontier.  Their hub is Denver and they have already cut back their focus cities.  While their fleet is new and fuel efficient, part of their business model counted on being the only LCC (Low Cost Carrier) game in town.  Not so true anymore. 

 

They have United Airlines above them as a legacy carrier operating a substantial hub in Denver and offering a nicely segmented set of seat choices and a global frequent flier program.  Below them is Southwest Airlines.  Southwest has entered that market with a vengeance and contrary to denials on te part of Southwest, it is crystal clear they intend to put Frontier out of business.  Much of Southwest’s growth has been focused on Denver and their CEO has already stated their intention to put more capacity into that city.  Denver can support two airlines, not one.  Since Frontier is already in bankruptcy, they’re my pick for going away. 

 

The only saviour is an airline that fits into their network and I can’t identify one that really meshes well with both their route network and their fleet. 

 

My third pick is Virgin America.  This is an airline that doesn’t quite know what it wants to be.  On the one hand, they want to be a trans-continental, high value, high service airline.  On the other hand, they want to be perceived as the west coast version of Jet Blue.   Trans-continental flights can’t make money using the equipment they have (Airbus A319/320) and their base, SFO (San Francisco) can’t support a real hub operation with good traffic given the competition they have from both legacy carriers and established LCC’s.

 

 

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Not you, the consumer. Oh, we know your type these days. You buy on price and frequency. Next is loyalty to your frequent flyer plan (and some of you even buy based upon gathering your FF miles ahead of price.) You aren’t going to change. You never really have and you never really will. You are the girlfriend/boyfriend who promised to change and never did.

 

It’s time for airlines to fly smart. No, really, it is.

 

Southwest Airlines pioneered the modern strategy that most airlines try to emulate in one form or another. They have a single type of aircraft (Boeing 737) and trade high load factors for high utilization of aircraft and crews. It’s a model that works for them and even for some others. Legacy airlines have adopted a modified model that included narrowing the fleet types which allows not only fewer costs in equipment but also permits airlines to use their staff across a broader range of aircraft.

 

But it appears (to me at least) that that strategy in the current economic climate is going to prove flawed. The truth is, the airline industry tends to have to re-invent itself every 30 years or so. That reinvention has taken the form of a revolutionary change in aircraft or, in the case of the 70’s, a new regulatory climate. Traditionally, it’s aircraft.

 

One of the criticisms of the proposed Delta / Northwest merger is the mish-mash of fleet types they’ll have. The CEO’s of both Delta and Northwest have responded that it in fact appears to be a big advantage in the merger because it will permit them to “right-size” each city pair with the proper aircraft. What this means is that with different fleet types comprimised of aircraft capable of varying efficiencies and loads allows them to fit the right aircraft to the right flight.

 

For example, a flight from Atlanta to Nashville might typically carry an average of 90 passengers per flight and Delta might be using a Boeing 737 for the flight segment that carries about 130 passengers. That means their using a new (high capitol costs but more fuel efficient) airplane to fly the route with an average load factor of 69%. It’s a short flight segment so the fuel efficient engines of the 737 don’t play as big a role in savings as they would on a longer flight. Post Merger, Delta may put a Northwest DC-9-40 on the segment that carries about 110 passengers. Suddenly the capital costs are extremely low (the airplanes were paid for years and years ago and the costs to operate it are maintenance and periodic refurbishment), the load factor is now 81% and flight has about similar fuel and labor costs. What’s more, that 737 can now fly on flight segments with average loads that are much closer to its capacity and which provide greater revenue yields as well.

 

More airlines in the US need to re-examine their fleet strategies. Almost all flights being flown by regional jets of 50 seats or less *lose* money now. Particularly when they are used for “long and thin” routes such as DFW / CLE (Cleveland). An airline of real size (US Legacy carriers but also LCC carriers such as SWA, Jet Blue and Airtran) can benefit from a diversified fleet.

 

There are countless “shuttle” type routes that could yield far more profit by using new, advanced turbo-prop aircraft such as the Bombardier Q400 and ATR-72. There is no rational justification to use regional jets on short segment routes when compared to these advanced turbo-props for instance.

 

An airline could, for instance, fly a Q400 on flights between Dallas and Austin offering 70 seats per flight and make money by filling only half of them per flight. Time flying between cities would be virtually the same as Southwest Airlines’ Boeing 737 and seating would be about as comfortable. The capital costs, maintenance, fuel and labor costs for that aircraft are all significiantly less than the 737 but offer about the same comfort and convenience.

 

Reduced fleet types made sense in the 80’s and 90’s because airlines were focused on the hub and spoke model. It allowed an airline to use aircraft interchangeably and since fuel costs were extraordinarily low, load factors could be as low as 60% and an airline could still make money.

 

Today, airlines need aircraft that are more pin-point appropriate for their routes. Short segment shuttles should be flown by Q400’s while longer segments with greater density should be handled by 737s and A320s. Large trunk routes should be served by Boeing 757s, Airbus A320/321s and even smaller widebody aircraft such as the Boeing 767 and Airbus A330. Longer, thin routes should be served by the upcoming Boeing 787 and A350-900 aircraft while long, high density routes will be better served by the Boeing 777, Airbus A350-1000, Boeing 747-800 and Airbus A380.

 

There will be increased demand for a new kind of aircraft. One that is a re-birth of the original DC-9 and Boeing 737. A 100 to 120 seat aircraft that can fly 25% more efficiently over route segments of 500 to 1000 nautical miles. Bombardier (Canada), Embraer (Brazil), Mitsubishi (Japan), AVIC (China) and Sukhoi (Russia) are all working on such aircraft or already have such aircraft available for order. Boeing and Airbus don’t.

 

The days of flying a regional jet such as an Embraer ERJ-145 or Bombardier CRJ-200 are over. They cannot fly profitably short or long, thin routes anymore as they offer, at best, only 50 seats and a product that is quite unpleasant for trip durations over 1 hour.

 

Legacy airlines no longer can afford to “sit” on routes to protect them for use at later date. All of the capacity cuts made so far are squarely aimed at routes that do not generate sufficient revenue to justify their existence. To serve those routes in the future, they’ll require an aircraft whose economics ENSURE profit.

 

That means airlines will seek to merge and become bigger because size permits greater fleet diversity and fleet diversity means more revenue per passenger. Even airlines such as Southwest, Airtran and Frontier will have to begin considering the value of “right sizing” their fleet to their customers. To some degree, Airtran does that with their mixed fleet of Boeing 717/737 aircraft.

 

Greg

Filed under: Airline Fleets by ajax
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