Delta and American Airlines have matched US Airways and United Airlines with $200 domestic change fees for those who want to change their tickets.
We think this is a mistake on the part of all these airlines and an opportunity for non-traditional, non-network carriers. What’s the opportunity? The chance to court some business travelers.
We tend to think of the business traveler as this road warrior who is traveling by airline 4 days per week and . . . not so much. The real business traveler travels barely enough to get real status in a frequent flier program and usually their status is so long that they do not get the upgrades they hope and pray for.
In fact, for most of those business travelers, it’s a back of the bus experience over and over again.
Southwest and JetBlue and others such as Alaska Airlines now have a greater opportunity to court businesses and their traveling employees by pointing out a lower “all in” cost to get where they need to go.
Ever wonder where Randy Babbitt went after his time at the FAA and his departure due to drunk driving charges in Virginia?
I didn’t either. I assumed he retired quietly and given his background, he was well positioned for retirement.
Today I learned that Mr. Babbitt is working for Southwest Airlines as Senior Vice President -Labor Relations. This isn’t a bad thing as Mr. Babbitt and his family actually have a long history in labor relations within the airline industry. His father was a founding father of ALPA and Randy Babbitt is a 25 year veteran Eastern Airlines pilot who also served in leadership positions wtihin ALPA including serving as president of ALPA for 8 years.
I recognize that Southwest Airlines has to evolve just like any other airline in this business. I also believe that its core principles don’t have to change either. It’s not an airline that got where it is by being a Me Too! enterprise.
So what’s up with all the small but cumulatively damaging mis-steps lately? I’m talking about new CFO Tammy Romo channeling an AA executive on fees and now Southwest’s new television commercial.
[youtube http://www.youtube.com/watch?v=IKVxuBeEQTc&hl=en_US&version=3&rel=0]
What the hell? Someone found an old American Airlines commercial, filed the serial numbers off, sprayed some new paint on aircraft and re-used the same actors to create an incredibly flat commercial for a great airline.
This is not evolution and it isn’t going to attract the business travelers either. The business travelers know what Southwest looks like. THEY TRAVEL THE AIRLINE REGULARLY.
So why not espouse what the airline really is and be proud of it? My own father, a man of probably 6 or 7 million miles flown in his lifetime, prefers Southwest Airlines out of his home airport. He can afford to fly who he wants, when he wants and he’s got enough AA and UA miles to buy a 787. And he buys Southwest.
That commercial was made by someone who not only doesn’t get Southwest Airlines but who is also afraid to embrace the People Culture that airline has. Want to see what Southwest really looks like?
Several days ago, I wrote about new Southwest Airlines CFO Tammy Romo making comments about perhaps putting restrictions and/or fees onto the Wanna Get Away fares of Southwest. Today, I was told that she also was asked at the JP Morgan Conference if Bags Fly Free was an essential part of Southwest’s brand and her answer was “no”.
I disagree vehemently. Not only has it been an acknowledged huge revenue driver for Southwest Airlines, it is the component that keeps Southwest Airlines on the right side of “customer friendly” as a brand.
Get rid of this feature and you have just lost the ability to distinguish between Southwest and the other members of the Big 4 going forward. And I think CEO Gary Kelly knows that.
So is CFO Tammy Romo going rogue in the attempts to drive policy and make a name for herself? I might expect that of someone who was new(ish) to the company but Romo has 20 years with Southwest.
So is someone sending a trial balloon up to see how both customers and analysts react to the idea? This isn’t really SWA’s style but I suppose anything is possible.
Or has crazy broken out at Southwest Airlines and we’re about to witness the demise of greatness?
The Dallas Morning News Aviation Blog has a story about new Southwest Airlines CFO Tammy Romo indicating that Southwest would be looking to tighten up restrictions on the Wanna Get Away Fares that are Southwest’s most affordable. This occurred at the JP Morgan Chase Transportation & Defense Conference and one questioner indicated his own experience with these fares and the fact that he was asked for no additional money to change a ticket. Surprise was expressed that there was money being left on the table as he was ready to pay a change fee and found there was none.
Now we are getting into dangerous territory for SWA in my opinion. First, while there is no “fee” to change a ticket, it’s often misunderstood that a change in the ticket results in no extra cost. That’s not true. The user has to pay the difference in fares and that often can be considerable.
Second, change fees for such tickets will never be a big revenue driver but they can be a huge discriminator when it comes to adding customers. It’s like the bag fee thing only better. If I were Southwest, I would advertise the hell out of this and drive more traffic my way.
Third, Southwest perhaps should look at every time it has in place today but that doesn’t mean it should change every item in place either. Should Wanna Get Away Fares be restricted? Probably to some degree. I would say that charging a $25 fee to change a ticket would be of no real impact to Southwest but at the same time add incremental revenue where it would be appropriate to add incremental revenue.
But I would also be very careful of letting analysts drive my focus in these areas. Analysts are paid to find anomalies in data and point them out. They are not paid to quantify intangibles. Southwest’s success is based a great deal on the intangibles that the airline offers and I would be very careful not to corrupt that perception. Furthermore, just because a very well paid people earning considerable 6 figure salaries are willing to pay change fees does not mean the consumer of Southwest’s services is willing to pay these.
Southwest’s advantage is in delivering a high value experience. Every fee is potentially an item that diminishes that value.
Brian Lusk of Southwest Airlines’ own blog has passed away. I didn’t know him and I had to find out on the Cranky Flier website but I wanted to make my own mention of it because Lusk really did some great Flashback Friday blog entries for the Southwest Blog over the years. They never once failed to suck me into their time capsule and take me on a cool trip through aviation history.
My sympathies to his family and to his Southwest Family.
Curiously, Lusk’s last entry had recently drew me in (again) because it had the covers of various SWA corporate annual reports. I have some about 15 year’s worth of Braniff’s.
The US Airways / American Airlines merger should inspire Southwest Airlines to search for opportunity in this union. Southwest’s ability to do business in the Dallas Fort Worth area has been constrained by American Airlines for more than 20 years.
The argument that Southwest has rid itself of the Wright Amendment at Love Field may come to mind, I would argue that they remain fairly constrained at Love Field and particularly so when compared to other high density metropolitan areas such as Chicago.
For instance, the maximum number of gates at Love Field were reduced from 32 to 20 and Southwest is limited to using just 16 of those gates. The other 4 go to SuperLegacy airlines (of which American Airlines is one.) Furthermore, if Southwest were to introduce any services at DFW airport, it would lose gates at Love Field.
It’s a deal with the devil that got made because of political considerations instead of reality. I wouldn’t criticize Southwest for making the deal but I would urge that the deal be revisited at this point.
Frankly, I would urge that Southwest being penalized for instantiating services at DFW be changed. The truth is that Southwest has been boxed into this area for decades and while a successful strategy for Southwest, it has impacted competition in the DFW area. American Airlines owns DFW as an airport like few hubs are.
Southwest is now seeing competition from both ULCC carriers such as Spirit and SuperLegacy such as American Airlines. It fills a niche that more would like to enjoy. But the idea that people in Fort Worth avail themselves of Love Field for Southwest fares is a bit amusing to me at this point. They just don’t.
The legacy airline playing field will be leveled with this latest merger. In fact, 4 airlines will dominate the landscape when it is completed:
Delta Airlines
United Airlines
American Airlines
Southwest Airlines
I think it’s time we stop listening to the economic arguments made by the first 3 now that they all enjoy costs that are as low or lower than Southwest. Instead, let’s start promoting competition between those airlines like we never have before.
There is a story on USA Today’s website lamenting the disappearance of the Southwest Effect and using Atlanta and Southwest’s entrance into that market as an example of it not working anymore.
The Southwest Effect is the effect Southwest has had on poorly served markets when it has entered the market. In short, Southwest stimulated a great deal of passenger traffic every time it entered a new city and this was cited all the way back in 1993.
The problem is that the airline industry is a very different beast today. In 1993, Southwest was a one of a kind airline. By 2000, we saw airlines such as JetBlue with enhanced service products start to take-off. Others, such as Airtran, were performing their own Southwest maneuevers in various markets.
Starting in 2008, industry capacity started to contract and has largely done so for over 4 years now. Legacy airlines have gone through bankrtupcy and now often enjoy labor rates that are on par with most low cost carrier labor rates. In some cases, they’re lower.
No one has quite managed to replicate Southwest’s productivity though. Despite exceptionally high labor rates, the airline still manages to be one of the most productive in the industry and continues to keep its customers exceptionally happy.
It’s true that Southwest has evolved. It is no longer seeking to be the absolute lowest fare on the block. They’ve discovered that they can grow as the airline who offers the best value on the block. A strategy that I agree with because high value is chased by people with good incomes.
In the case of Atlanta, I think it’s silly to expect Southwest to stimulate traffic. That has been the fortress hub of Airtran for more than a decade and if there was any traffic to be stimulated by low fares, Airtran already did so. There is a reason why Southwest bought Airtran and it wasn’t because it wanted Boeing 717s.
Southwest is now adopting new strategies where I do think we’ll see traffic stimulated. Those routes are to Central and South America as well as the Caribbean. There is a reason why United (Continental) panicked over Southwest’s desire to build an international terminal in Houston: There is both traffic to be “stolen” as well as generated with that operation in an area where legacy airlines have been enjoying exceptionally high (and profitable) fares for quite some time.
In fact, if Southwest figures out this international flying and is able to manage it with its productivity needs, I think we’ll see Southwest stimulate traffic to Mexico, Central America and Canada. All markets that could use some good old fashioned competition from someone like Southwest.
Will they do so on Hawaii routes? No. In fact, I actually believe that Southwest would be better off with a code share parter on Hawaii routes than operating such routes by themselves. There is a great deal of capacity on those routes as well as a great deal of competition. Why not simply strike a deal with Hawaiian Airlines and move on to other areas that yield more traffic, more profit and offer more potential? Hawaii might have been a good idea in 2005, it isn’t today.
At the end of the day, there is something important to remember about Southwest: They aren’t in business to create cool things like the “Southwest Effect”, they are in business to earn a respectable profit. Anything that comes from meeting that goal is secondary and its presence or absence isn’t indicative of the airline. What should be lamented, if it ever does happen, is Southwest no longer providing a profit after 40 years. So far, it not only hasn’t happened but there is no evidence of a trend towards it happening.
Southwest Airlines CEO Gary Kelly made a statement in a TV interview where he said never say never when it comes to adding baggage fees at Southwest Airlines.
Before anyone over interprets: He also said that there are no plans to do so in 2013.
He also said that he believed that Southwest’s customers would tell SWA if it wanted that unbundled fee added and he is absolutely right. The customers will indicate to Southwest just how much of an unbundled carrier it wants it to be and that is as it should be.
It occurs to me that Southwest could soundly smack airlines such as Delta, American and United by lowering its fares and adding a baggage fee. I doubt the revenue picture would change much at all on a per passenger basis but the fundamentally lower fares would put real pressure on the SuperLegacy airlines (with or without their lower costs.) Why? Because those carriers have a unique disadvantage against Southwest with respect to costs: The SuperLegacy Airlines all incur the hub & spoke network costs that Southwest avoids. And while Southwest pays some of the highest labor rates in the industry now, they also get the highest productivity in the industry as well. That offsets those costs considerably.
Imagine you are American Airlines and Southwest lowers fares against you on the top 25 routes out of the DFW area and adds a baggage fee that is $5 cheaper than yours. If I’m the AA CEO, I reach for the Tums.
Hawaiian Airlines has made an order for the A321NEO which, I think, causes trouble for Boeing. It’s a validation of the A321 as a 757 replacement that, I think, Boeing didn’t need showing up given its desire to sell the 737MAX-9. It is increasingly clear that the new A321 isn’t going to be the dog that the current A321 has been. Good on Airbus.
Hawaiian is clearly going to make trouble for a couple of airlines with this purchase. The first is Alaska Airlines. When Hawaiian takes delivery, it can start to compete with Alaska on the smaller routes such as Bellingham to Hawaii. Hawaiian succeeds quite well in this area when it goes up against other airlines with its Airbus A330 and Boeing 767 aircraft. It knows how to attract the right passengers at the right fares.
The other airline that, I think, will be a surprise to some is Southwest. It’s clear that Southwest has been eyeing the Hawaiian markets for some time and it has even talked about its need to gain ETOPS experience in order to do this. I think Hawaiian is responding to this threat by bringing its games to the kinds of markets Southwest might be tempted to enter.
And that brings me to a criticism I have for Southwest: This airline isn’t responding in a very agile way to opening up new markets and opportunities. By the time it studies and prepares for new flying outside its comfort zone, the opportunity is often gone. Witness its vaunted codeshare deal with WestJet and Volaris as more evidence. Southwest could have been flying those Hawaiian routes as soon as this year but the conventional wisdom is that Southwest won’t have itself ready for this challenge until 2015 or about 2 or more years from now.
Southwest Airlines has made a few announcements that I think signal some more evolution in the future. First was SWA VP Bob Jordan announcing that some time in 2013, Southwest will begin charging a cancel fee of a sort.
Currently, once you buy a ticket on Southwest, you essentially buy a “value” that should you miss or cancel your flight, you can use the credit towards a future flight (generally you must use this credit within 12 months). Southwest plans to charge a “cancel fee” if you don’t call and cancel your flight. This new service fee will be oriented towards SWA’s most restrictive fare categories.
In addition, Southwest is preparing to engage in a multi-stage codeshare rollout with Airtran. Southwest will start slowly with a test beginning at the end of this year with several intermediate phases to follow and a complete roll out finished by April. This is a big milestone for Southwest in its merger integration.
At first glance, one would be tempted to believe that these two items are fairly unrelated but they aren’t. Southwest chose Amadeus software for its new reservations system and these two items signal that the software implementation has come quite a way.
It has to have or Southwest would be unable to implement the above steps. I’m pretty impressed that Southwest has progressed this far in a new system implementation over the last year and I don’t think Southwest would be talking about these items if it hadn’t fairly solved most of its problems in these implementations. Furthermore, I think it speaks well of choosing a tried and true system in Amadeus rather than asking someone to write all new software.
Airlines do better adjusting their business model to fit well tested software than they do creating all new systems.
Leeham News has a short blog entry referencing this article about Southwest and its Airtran merger and integration. It is difficult to figure out where to begin in trashing this story. But let’s take a shot at it:
Southwest Airlines will remain a single aircraft type using the 737 in the various variants it has today and in which it plans to have in the 737MAX. The 717 has been offloaded to Delta and will be gone in a fairly short period of time.
Airtran is not based around the 717 solely. It, too, uses the 737-700 which is also a significant part of the Airtran fleet.
Airtran is a hub and spoke operation but it’s major hub is Atlanta only with significant focus cities (a la SWA) elsewhere.
Airtran does not operate just primarily into major hub airports. It has had a significant number of flights into cities that are smaller than the typical SWA destination that it made profitable using the 717.
As SWA takes over Airtran routes, it’s adapting them to SWA’s point to point model.
SWA has huge focus cities which kind of resemble hubs.
Atlanta was the only airport that SWA could fly into in that area. There was no smaller, inner city airport.
SWA has been operating into and out of major hub airports already. Notice its operations, for instance, into La Guardia and Newark airports. It’s operated out of LAX for a long, long time. Phoenix as well. Same for Denver. It’s figured out the “how to operate at a major airport” problem for a long time.
Airtran does present Latin American opportunities but also Caribbean opportunities and SWA has already announced plans for Puerto Rico as a first step.
It completely misses the point that Airtran, as a subsidiary operating entity gives SWA the chance to accelerate international flights via the Airtran reservations system.
I’m sure people see my point. This isn’t SWA’s first rodeo and for sure it knows how to deal with a variety of destinations and airports. What it completely ignores is SWA’s already high and rising labor costs which is an area of concern. The creators of that “report” would know this if, you know, they had listened to Gary Kelly’s concerns expressed at a variety of quarterly earnings calls.
No, this isn’t an announcement of Southwest Airlines serving its first international destination. Puerto Rico, you see, is a United States Territory. Airtran already serves Puerto Rico (and several international destinations) and this is an announcement of Southwest replacing Airtran service with Puerto Rico with Southwest service.
That said, it should provide some real experience to Southwest in serving an off-shore destination and help them identify weaknesses in preparation for serving true international destinations. One wonders if Southwest taking advantage of the human capital it has in Airtran for doing international services.
Over the last 40 years, a lot of criticism has been made of Southwest at various times and Southwest has managed to prove people wrong about its decisions over and over again. For instance, analysts are just screaming for Southwest to put baggage fees into place and Southwest just as adamantly refuses to do so.
I’m a fan of Southwest for many reasons. First and foremost for their track record in delivering annuals profits. They work hard to do this and should be admired and appreciated for it. The truth is, I think their stock gets short shrift over and over again on this point alone. It’s as if everyone has been waiting 40 years to pounce on a failure of theirs.
I think they’ve been very smart to keep baggage fees out of their system. It’s a key discriminator at this point and by now they have enough hard fact to back up this decision. People need to give this a rest.
They are starting to take flack for their fare prices going up and up but I don’t think that this is deserved. Southwest is as good at revenue management as anyone else and better than most. And even though it hits me in the pocketbook, fares *should* go up some.
They take hits for their high(er) labor costs now. Yes, their labor is paid very, very well. Their labor also delivers very, very well. Yes, their pilots earn exceptional salaries but they also work like mad to earn it. This is a group that actually fights to take on more flights rather than fewer each month. When the company needs operational efficiency, they deliver in a variety of forms. Peace and efficiency from a labor group is a vastly underrated value in my opinion. j
They do have hubs although they are referred to as focus cities. They aren’t traditional hubs and Southwest works a hub like no one else. They deliver more people through their gate space than is generally imagined possible. They skillfully schedule flights through these hubs to not only make connections possible but also to offer many, many one-stop, no plane change flights between some rather unusual city pairs. And do it so well that they can deliver a total travel time that meets (and sometimes exceeds) the performance of non-stop flights on other airlines.
But I am unimpressed with two aspects of Southwest Airlines.
I’ve said it before and I’ll say it again: Where the hell is an upgraded IT system? An airline of the size and scope that SWA is should not be using a relic reservations system that has Braniff International’s original COWBOY system at its core. It was a great move on SWA’s part to buy it and incorporate it in the 1980’s. That was truly a smart way to go. It was fine that they kept building on top of it all through the 90’s and even in the early 2000’s.
It’s appalling that Southwest hasn’t fixed this glaring problem in the last 5 years. The airline has changed and the airline industry has changed. Southwest hasn’t changed its IT systems to meet those challenges well. It’s long overdue. My greatest fear is that they are working on this internally, too. Building a strong, world class reservations system for an airline of its size is no trivial task and should have been outsourced to someone who had a system on the shelf. Given the state of reservations systems in general, it defies my imagination why SWA wouldn’t have bought into one of the strong legacy systems and moved on with other tasks. SABRE or SHARES could have done the job and done it at a fair price.
I also don’t like the feelings I get with SWA’s merger integration. I don’t get a sense of urgency on SWA’s part to get this done. Certainly not when SWA is predicting that merger integration won’t be complete until 2015. The minimum time it would be for that is 27 months from now. It’s likely to take as much as 36 more months and only if the airline manages to get the Airtran system talking to the SWA system.
I have an ugly feeling that SWA is going to use the Airtran reservations system as its “international” reservations system, too.
I think the merger integration has distracted the airline from looking at growth opportunities elsewhere. Yes, the airline grew with the addition of Airtran. It’s now contracting considerably and it bothers me that we don’t see Southwest making any growth moves at present. More than anything, I get a sense that SWA is creeping into conservatism just because the entire industry is as well.
Where is the next big purchase of slots at Newark or La Guardia or Washington National?
What preparations are being made to exploit Dallas Love Field in 2014 when the Wright Amendment goes away?
We saw a move in Houston to create an opportunity for international destinations in Central America and then. . . everything went silent.
I honestly think SWA needs more help in their merger integration. In particular so that they can get their creative executives back to work on developing more growth and more profits.
Terry Maxon of the Dallas Morning News has a summary of 3rd Quarter Earnings that brings clear light to how airlines have done these past 3 months. Before going further, let me say that both companies and pundits like to exclude special items from their analysis of earnings. It is the airlines’ way of saying “Yeah But!”
Yeah, but if we had not screwed up on our hedges, we would have made this much. Yeah, but if we had not had to pay off a bunch of senior employees to leave, we would have made this much.
I don’t like Yeah Buts. Special items occur every month, every quarter and every year. More so than ever before. It’s time to accept that it is what it is regardless of how special items affect performance. Now on to a few observations:
Delta Airlines is doing exactly what CEO Richard Anderson said was necessary in the airline industry. They are raising their margins considerably to truly cover their capital costs as well as their operating costs. Well done. Very, very well done. Admittedly, they are farthest down the road in the New World Order of consolidation but it is a consummate performance nonetheless.
Alaska Airlines: Ditto! They are playing their game perfectly right now.
Hawaiian Airlines: Again, well done and particularly so in light of where their market was just a few short years ago when it comes to competition. Yes, they face less complex challenges than continental US airlines but they still are performing well.
US Airways: I’ve already said it once this week. These guys know how to run an airline and earn a profit even under trying circumstances. They make a better case for merger with their financial results than any PR machine could make publicly in the news.
United Airlines: It’s time for these guys to get a little more on the ball. One begins to sense a certain lag in realizing their synergies and having a seamless system. Special items shouldn’t be killing your entire net income at this point.
JetBlue: Nice job but kind of a yawn. We’ve been seeing roughly the same level of performance for years with no substantial growth whatsoever. I’d rather have Alaska Airlines than JetBlue at this point.
Southwest: I think their recent performance reflects their merger. What I think hasn’t been brought up but should be is that their merger isn’t exactly brand new at this point and the lag is primarily due to how ill equipped they were to absorb another airline with respect to their systems. Consider this: SWA has made noise about how their IT systems impact their ability to do business with the rest of the world for a bit over 5 years. They are operationally seeking to do business with the rest of the world in many different ways and they are certainly changing the way they operate to be more in line with a legacy airline. SO WHY HASN’T THE IT PROBLEM BEEN ADDRESSED AGGRESSIVELY AT THIS POINT?
American Airlines: B’ah. Even with artificially contained costs and a fairly friendly bankruptcy judge, they continue to lose money. What’s the definition of insanity? Doing the same thing over and over again expecting a different result?
Summary: It’s no surprise that the two top performers are also partners and close ones at that. These are airlines that know what they’re doing and who exercise strict discipline in operating their airlines. Yes, I’m talking about Alaska Airlines and Delta.
No one is talking about growth, everyone is talking about capacity restraints and raising margins. Well, all except American Airlines. That alone speaks volumes.
Spirit Airlines has launched two daily non-stop flights between Dallas / Fort Worth (DFW) and Houston (IAH) starting today. The flights from DFW to IAH are an early morning and a early evening flight and I can see how those would be satisfying enough for the casual traveler that is Spirit’s target customer. From IAH to DFW, there is a mid-morning and mid-evening flight that also appear to be fairly satisfying at this time. Prices show to be Spirit’s typical ultra-low cost fares with some showing to be as little as $30 each way (without fees).
I think Spirit is targeting opportunity it sees in this market pretty smart. Some of this is aimed at Southwest and it’s original customers who have seen SWA prices rise considerably over the past several years. This won’t hurt Southwest because that airline is selling frequency and value now that earns a revenue that is consistent with its needs.
It’s more of a strike at American Airlines. It hits at their airport and with times that actually fit OK into the day trippers that exist between those two airports but who don’t find Love Field (DAL) or Houston Hobby (HOU) convenient.
I expect we’ll see more and more flights from DFW to other Spirit destinations over the next 12 months and most will be aimed squarely at AA routes.
Laura Wright, CFO of Southwest Airlines, has announced her upcoming retirement. Wright will retire on Sept 20th but remain within the company until the end of the year to assist in the transition to her named successor, Tammy Romo (current VP of Planning).
Wright is one of many exceptional airline executives that sit at Southwest Airlines. Frankly, I’ve often wondered why some of those executives don’t get headhunted by other airlines as they tend to be the very cream of the cream of the crop. Wright’s talent as CFO as well as her ability to partner with SWA executives is an excellent example.
As always, I expect that some will speculate on change at Southwest Airlines with a newcomer. The thing is, Southwest not only has great executives, they are a great training ground for upcoming executives. These people get mentored into the company in ways not seen at any other airline. And somehow they are kept in the fold.
The truth is that SWA could lose half of its executives overnight including the CEO and I think they would barely miss a beat in operating the airline. Wright was mentored by CEO Kelly and has no doubt mentored a number of people at SWA as well. Her calm guidance will be missed when it comes to publicly talking about the airline.
Mexican LCC carrier, Volaris, has announced it will begin service to Denver with twice weekly flights starting on the weekends and then moving these flights to daily as the peak season begins. The airline will serve the route between Mexico City and Denver.
The truly interesting thing in this is what isn’t being said . . . at least not yet.
Volaris is Southwest Airlines’ international partner in Mexico. The two airlines have a code share of sorts in place today (although it requires purchase of tickets from each airline to get the flight(s) you want.) Southwest is supposed to be working on technical solutions that will allow it to truly do a seamless codeshare with Volaris and other operators. So far, Southwest has been awfully quiet on this and when asked it generally responds that it has enough on its plate with the Airtran integration.
This would appear to be an opportunity for Southwest to enjoy more feed back and forth with Volaris given how big Southwest is in Denver. But no one has said a thing about it and it is entirely possible that nothing will be done to expand on it.
I’ve begun to suspect that Southwest has looked at its Volaris opportunities and balanced them against the capabilities that Southwest has bought with Airtran. Owning Airtran, Southwest is able to institute direct flights to Mexico and control the feed and revenue stream without having to cooperate with another company. It hasn’t figured out how to codeshare with Airtran operations any better . . . yet. But there is incentive to do so and it’s notable that in its purchase of Airtran, SWA likely does have a pathway to international operations in Mexico that is more clear.
Furthermore, SWA’s desire to operate Houston Hobby as a kind of “international focus city” to Mexico and Central America signal that it may be more interested in serving those destinations itself. I think this is exactly what is going on. Southwest sees opportunity and, more importantly, I think it sees a way to operate to those destinations without necessarily having to establish a large international infrastructure. It’s notable that SWA flights from Houston to Mexico and Central American destinations could be done without crew layovers in international cities. They would be international turns.
It’s time someone ask Southwest what it’s plans are for 2013 and what it’s plans are for international destinations. My bet is a 2015 start date for international operations using a new IT infrastructure.
As was inevitable, there are now public interest groups decrying a merger between US Airways and American Airlines as anti-competitive and bad for the consumer. No surprise.
Industry consolidation has been good for airline profits and we definitely have seen airlines move towards a more sustainable business model as a result. I would, however, credit capacity restraint for as much improvement in airline profits as anything else. Frankly, all of the major airlines in the United States (with the exception of AA) have impressed me with their discipline in the marketplace. It isn’t a discipline ever seen before and after 4 years, I think we’ve seen a transition to a truly different way of operating airlines.
That new model for operating as an airline includes looking at routes in the right manner, for once. They are now being treated as “businesses” and evaluated individually for profitability. In the old model, it was about market share at any cost. The problem with market share at any cost is that it required unfettered, almost violent, competition between airlines on routes and found routes being operated at a substantial loss for years. That has largely stopped now and I applaud the airlines for showing enough discipline over the last 4 years to make that stick.
Airlines also now seem to recognize that defending market share at any cost is a bad model as well. Curiously, the one airline that seems to have continued to trouble itself with defending routes is American Airlines. Until bankruptcy, the airline has “punished” intruders on its “turf” over and over again with high frequency, high capacity and extremely low fares to push out that intruder.
Finally, I think airlines have actually realized that providing a reasonable service experience is important again. It’s not the service model of the 1970s or 1980s, no. However, it also isn’t the embodiment of the idea that all a customer ever wants is a rock bottom price. If price was truly the only key to winning on a route, Spirit Airlines and Allegiant would be exploding with growth never seen before. They aren’t. In fact, what we have seen is that broader offerings of service levels attract more revenue per seat and that’s what airlines need.
US Airways has, in many ways, been a leader in executing change to meet the new industry model. It has figured out how to drive incremental revenue in ways that exceed most any other airline. At the same time, they have steadily improved customer experiences across their lines both on and off the airplane. They are now an airline that can be depended upon to deliver passengers to their destinations reliably and with their luggage. Am I the only one to notice that US Airways is about the only legacy airline to not experience a major public embarrassment over customer treatment in recent times?
American Airlines is actually the antithesis of US Airways and has shown a strong reluctance to acknowledge the industry changes. They’ve pursued market share, they’ve defended routes at all costs, they’ve been more price driven than any other legacy airline and many LCC airlines. They have not upgraded or improved their cabin experiences in any significant way since the 1980s. Their website drives customers away or at least angers customers. Their aircraft are old, inefficient, and painful to fly.
The SuperLegacies, United and Delta, have done quite a bit to improve everything across the board and one thing that AA hasn’t done: evaluated routes for profitability on a regular basis. Furthermore, UA and Delta now see opportunity on routes that have traditionally been owned by American Airlines. They’ve even overwhelmed cities where American Airlines was once a major presence and a dominant player (NYC, Wash D.C., Chicago, Los Angeles).
SuperLegacies are now evaluating competitors routes and going after those routes which are yielding major revenue. Delta and United both are targeting both AA and US Airways as well as holding their own against airlines such as JetBlue and Southwest Airlines.
Yes, American Airlines and US Airways need each other. American’s operations need US Airways executives who know how to methodically fix operations in a lean manner. US Airways needs American’s hubs and routes to build much better network yield. Yes, US Airways can exist quite nicely as a stand-alone airline. It cannot expect to rise to the scale of the SuperLegacies and compete both domestically and internationally over the long term without a merger.
A combined US Airways / AA company nominally looks like the biggest airline in the world once complete. That won’t necessarily be true. There will be consolidation and rationalization between the two airlines but the entity will be a member of the SuperLegacy group and it will have the potential to compete in the market on a level playing field. That’s all they can ask for.
3 SuperLegacy airlines, Southwest (who doesn’t quite fit into any category now), and a smaller stable of LCC carriers looks about right for the modern competitive landscape. At this point, I actually think we will see increased competition over the long term among the Big 4 and that will be good for the consumer. We will not, however, see that increased competition until there is a Big 4 and until those airlines have time to settle their operations in the new competitive landscape. If the US Airways / AA merger were consummated by the end of 2013, I would expect a rational and highly competitive marketplace to be fully emerged by 2017/2018.
If there is an area where I see reduced competition in the US, it’s among the LCC carriers (and doesn’t include SWA). I think the narrowed gap in costs and differences in revenue models between the LCC carriers and SuperLegacies removes the best business argument for an LCC carrier. It will be a struggle for those carriers in the future and we do need them. On the other hand, if a relatively new LCC carrier with rock bottom costs can’t compete against SuperLegacies, the market place has done its job.
So, no, I do not think the proposed US Airways / American Airlines merger is wrong.
I found a rather odd story on the Seattle Post Intelligencer aviation related blog (found HERE) referring to American Airlines indication of interest in possibly having Alaska Airlines as a merger partner. There were two things of interest in this story but before I go on, I’ll just comment that I found it amusing that Alaska Airlines basically replied with a polite response that amounted to “Yeah, we’re happy with where we are today.” And they should be since their own market cap is an order of magnitude greater than AA’s is presently.
The other item is odd. It mentions AA showing interest in Southwest Airlines as a merger candidate. First, I hope Herb Kelleher didn’t choke too hard from laughing. He’s a nice guy and I wouldn’t want to think of him hurting himself. Second, that isn’t a merger, that would for damn sure be SWA taking over *everything*. Third, SWA is much smarter than that and knows how to responsibly represent its shareholders interests in the marketplace.
I hope that the reference to SWA was a mistake on the journalists part. If it wasn’t, then if I were a financial analyst, shareholder or member of the unsecured creditors committee, I would start questioning just what the hell the company leadership is thinking.
