hugolover

Very true, if I had just a few years left I'd go for it. But I wouldn't advise someone setting out for Plat or just achieved it. Particularly if, like me, they were young and expecting a bit of value from it. As most will be in their 40s and 50s it really is a different assessment.

San Gottardo

Care to elaborate?

Just like you I do see the risk of them alienating some passengers that are strictly anti-LCC (that is what I called their big gamble in an earlier post above). But

1) they mitigate that risk by offering perks to their loyal customers, by offering a "full service" (I put that in brackets because I believe that other than the curtain separating it from rows behind it has everything premium classes have today, but it isn't sold as Business Class)
2) plus they bet on the fact that they won't lose that many pax. Whom would they lose them to? The other big airline groups are strong competitors on routes that require a transfer, especially longhaul - but on those routes LH still offers its full service mainline product via FRA and MUC. Shorthaul nonstop routes? There isn't that much competition from full service carriers into secondary German cities. Some BA, some AFKL, and very limited AZ, AY and IB. THe rest is all Star Alliance partners ,often in joint venture with LH. But frankly it would an illusion to think that AF, AZ and IB capture big market share - just go to the LH forums where people are extremely unhappy about LH and the Germanwings move, but almost nobody says he'll use AF or AZ instead. BA is the real danger. So in the end all they risk losing is those SENs that used to fly LH C class to London, Italy and Finland to those other compeitors. The others are negligible. And they won't move to AB either, because AB basically offers the same thing.

3) Still, the risk does exist, but they trade the uncertain development of passenger appreciation against the certain benefit of doing their business at lower costs.

So I think whilst many people do not like the Germanwings move, the impact will not be that humongous. LH is doing some other very stupid things to its mainline product and to M&M which makes its lose loyal customers that are much more exposed to competition. But Germanwings? Smart market analysis and true cost advantage.

But I'd like to hear why you don't think so.

Oh, will it really? Trouble is that as a manager in this capital-intensive industry you cannot take a trial-and-error approach and see what happens. Better do the analysis before. And I haven't come across any line of argument that goes beyond headlines and that explains why AF chose the route they chose (I might not be convinced of that argument, but so far I haven't even seen one)

stimpy

Unless we have a mole here, we are all outsiders and I wouldn't expect any of us to know about any real market analysis or studies AF has done. That is proprietary information. However one thing they made clear to us at the Do was they have learned a lot of lessons from how DL has fought LCC competition in the US. They said not everything they learned applies to the Euro market, but some things are universal and will be implemented here.

San Gottardo

Careful reading and analysis of their annual report, other financial information, shareholder presentations, analyst reports, plus that of other airlines, plus industry studies (plus some industry analysis that I happen to have) gives you a pretty good picture.

We may be outsiders, but we can be informed outsiders.

stimpy

You may get some high level direction from that and you may also get some insight into decisions that were made in the previous years. But that isn't going to give you access to proprietary market analysis and certainly not detailed corporate strategic decisions that are happening right now.

San Gottardo

It is accepted wisdom in the airline industry and by all airlines that in order to make the LCC model work a whole range of costs needs to be addressed and that mixing an LCC-style offering with costs created by having services/processes/back office related to non-LCC offerings (FFP, customer service, high sales costs, etc) does not work. It is also accepted wisdom that making customers pay for certain elements of the offering is not sufficient to make an LCC model work.

I don't need any insight into analyses and strategic decisions to confirm this.

There obviously is a possibility that AF is the first company to break that logic, but I cannot imagine how and that precisely is why I ask all those that find this such a great idea from a strategic point of view to sketch how it could work (at least in theory, we can then still wait for reality to prove us right or wrong). Without such a line of reasoning I find it hard to give much merit to that point of view.

orbitmic

I would be interested to know what they consider to be these 'universal' things as there are two major problems here:

(1) the European low costs AF has to compete with are very different from the US low cost DL has to compete with. In fact, there isn't much differentiating the Jet Blue and Southwest of this world from the majors, be it in terms of service (in fact,if anything, the so called US low cost maintain a free checked luggage allowance which the majors don't, and the complementary snacks, drinks, entertainment, and suitcase you get on Jetblue are among the least bad of US airlines) or price (again proportionally very close to current majors' pricing, which is not the case of European low-cost airlines, including post-Mini)

(2) In the land of liberalism and free and fair competition, it so happens that major US airlines have for many years behaved in an explicitly oligopolistic way, imitating each others' pricing (on many itineraries, the exact same lowest fare across the major airlines), policies (e.g when withdrawing free food, when withdrawing free checked luggage allowance on domestic flights for non-elite customers and charging exactly the same fees of $25 for first bag and $35 for second bag, on withdrawing the second free bag on international itineraries, etc). In our much less liberal EU, airlines actually do compete and policies and fares are not harmonised, so what AF is doing will not necessarily be imitated by BA or LH.

I think that these two points considerably limit the notion of what they can imitate, if only because it seems to me that 'low cost' in the US simply means something entirely different (arguably essentially single class) from 'low cost' in Europe (essentially much lower fares and historically lower service)

NickB

Arguably, this is how a competitive market works when that market is not atomistic.

Indeed. In addition to the factors you mention, another very important one is that LCCs in the US are network carriers allowing connections whereas European LCCs like FT or U2 are strictly point-to-point and systematic in minimising costs, which their US counterparts are not to the same extent, notwithstanding the fact that Southwest might have been the grandfather of them all that inspired the MoLs of this world.

stimpy

You guys are looking at a very tiny portion of the business. There is a lot more to running an airline than fares and checked bag fees. You asked for universal? How about aircraft fleet management? Maintenance? There is a lot, lot more. And over the last 6 months DL's share price has gone up, partly due to better management of the NW merger. The KL merger isn't the same of course, but there too you can find universal methods to improve financial performance.

And BTW Southwest recently added some baggage fees and other extra fees. http://www.latimes.com/business/mone...,6077354.story

orbitmic

They only introduced a weight limit and fees for bags over that weight (before there was no limit). The first two bags are still free if under lb50 each.

I fully agree with you that things like fleet management, back office management, etc are extremely important (not just in terms of low cost competition but in terms of good management in general) but if that is the direction we are going, again, the most important of all is still HR management, and there DL and AF could not be more different. That is, ultimately, the no1 cost (even quite a bit higher than fuel costs) and that is the part that AF are shyest about by a long long shot.

orbitmic

Arguable and indeed argued although contrary arguments also exist based on market heterogeneity, comparative advantages and segmentation. For example, arguably airlines offering indirect flights between a and b should lower the price to be competitive against airlines flying nonstop thus offering a different/ better product. In the us, they don't tend to.

In any case I'm glad the us low cost partly disprove it by still giving for free what the free majors charge for!

And fully agree with your point on full connections vs point to point.

San Gottardo

So we agree then. It is more that slashing the cost of free catering, free baggage, etc. respectively make passengers pay for them.

Fuel is of course a big item, and so is financing (AFKL Is heavily indebted), and last but certainly not the least labour cost. To take just the example that you mention above plus all other mergers in the US: why do you think agreements with pilots and FA unions were always central to all of these mergers, and remains the critical point in all ongoing merger discussions (eg US-AA). Given that despite recent changes AFKL still is in a high labor cost situation, has an overbloated administration and management, inefficient processes and high cost of debt its starting situation to be a successful LCC is is not the strongest in my mind.

Given this, the LH way of running a separate carrier with truly lower costs - albeit with the risk of losing revenues from passengers who dislike not having a separate business cabin - seems smarter than the AF way which puts the LCC offer under the high cost umbrella of the main brand, and whilst there is no risk of alienating people with the use of a new brand there still is a risk of losing people by the overall degradation even of the non-LCC parts of the offer.

Or is there a flaw in my reasoning?

EDIT: I just realized that orbitmic picked up that same point, but he was typing faster. Thus: +1 to orbitmic

NickB

Oh, entirely agreed. Things like aircraft utilisation, maintenance costs, etc... are crucial to the LCC model. But a lot of these things are not compatible with a full service carrier model. LCCs, for instance, keep their maintenance (and aircraft buying) costs down by simplifying their fleet down to, ideally, a single model. This is not something that full service carrier can replicate. If the message is that you have to keep your maintenance (as well as other costs) down and maximise use of your assets, then fine. But that does not tell us much there. And, frankly, this is something that all mainline carriers have learnt from LCCs and have been working on for over a decade.

You stated that AF is learning from DL's experience in fighting LCCs. What we are saying is that, given that US LCCs are very different from European ones, the learning is going to be limited.

If all you mean is that AF has picked up tips and tricks from DL on keeping its costs down on this or that, then fair enough. But let us describe it as it is rather than suggesting that it is learning from the experience of the other in "fighting LCCs" as such. This suggests specific measures related to the LCC model rather than finding ways to keep costs down to remain competitive (not just with LCCs but also other full service carriers).

What some of us would argue is that what is being picked up from DL's LCC experience are things like modular (to use bmi's former terminology) unpackaging of the product to re-sell its components as extras, it might simply not work. If what is being picked up are not LCC-specific things but rather more generic issues on cost control, then fine but the evidence of this is, ummm, not obvious, is it?

stimpy

Perhaps I wasn't clear enough about the DL thing.

We asked AF's CEO what he was going to do in the face of huge losses in the Euro market. One of the points he made was that AF's long time partner DL, whom they are very close to, has done an excellent job competing with LCC's. And that AF has identified areas that they can apply here in Europe to first of all reduce their losses, and long term become a better competitor in the market. He did not go into details and thus we rely on our speculation here.

And of course HR is a huge issue, especially if you compare pension which US airlines have been able to effectively eliminate (LX and SN too, eh?). We all know about French labor issues. I specifically asked about that and was told that all the employees of AF are well aware of the difficult situation and would be more than usually accommodating. I'm sure we are all skeptical about how far the syndicates will bend, but so far AF is progressing in their plans. So while some here are pessimistic, I and some others here are cautiously optimistic.

NickB

OK, I get you now.

Obviously, we do not know how significant what they are supposed to have learnt is.