cerealmarketer

I recall at least one of those two corporate accounts turned over well before the late 2015 swtich of PS.

I think he's conflating the date of the airport switch with the decision to remove 3 cabin, which was the bigger help to AA, and a deliberate one. AA's decision to step up 3 cabin was made during its bankruptcy, well before Kirby came on the scene with the merger, though he ultimately made the case to keep it. I recall Parker expressing some skepticism, so maybe Kirby was the advocate.

I don't think the two studio contracts left because of EWR/JFK the airports - they left because UA no longer had 3 cabin, while another carrier chose to keep it.

The decision hastened the exit (as did JetBlue's aggressive pricing).

On his other points...

Since he left AA...

AA at JFK cut capacity about 10% this year

Did anyone pull AA/US market share? - I get the sense it did not increase in NYC and that Delta / JetBlue were the share winners.

They also pulled 3 cabin from the LAX-SYD route and shuffled it over to Brazil

Will be curious to see where he stands on 'product quality.' My read is frequency and hard product is his definition - things that either directly drive revenue on/off like a flight frequency, or show up as capex rather than an operating expense. And soft things that eat up operating expense like good meals, coffee (who still serves FreshBrew...), frequent flier program are less in his definition of quality.

But maybe he will surprise fliers and be less of a margin tyrant, but I'm not making that bet and he has more traditional shareholder concerns in mind. Though his defiance on capacity is a sign he's willing to tee off shareholders a bit.

radiowell

After reading 15 pages of the thread, it is debatable whether the issue is JFK itself or the other end (LAX in particular). Either way, I hope Kirby continues to be bullish on LAX, and UA learns from this "mistake" of the previous regime. (I'm looking at BOS-LAX, to be clear).

minnyfly

Incorrect. I'm factoring in everything necessary for the microeconomic equation. Economically, the only reason it can be wrong to leave and wrong to re-enter is a remarkable increase in unique one-time capital costs (slots in this case) and/or the short-term loss of previous business is too great to re-enter for the long-run (making it minutely marginal). Planes, people, terminals, and ground equipment are either still with UA (planes and crews), would have minimal start-up costs in a long-term equation (people and equipment), or would have had to be re-negotiated or rebuilt whether you stayed or left (terminals), leaving them out of the equation. Automatically that means the operation cut was minutely marginal to the network profit and greatly worth consideration for cut. In fact, on an opportunity cost basis with airlines running profits well above a fraction of a percent, Kirby is implying that it was probably a good decision to leave.

How minutely marginal was JFK to the network if Kirby is telling the whole truth? Let's take an extreme example that slots now cost 150 million to acquire (over ten times what UA sold theirs for), and the lost network profit from leaving JFK is 20 million a year at a healthy 15% margin (133.33 million in annual network revenue was lost by leaving JFK). First off, in the long-run you'd pay the 150 million for slots and reenter JFK tomorrow if physically possible. This is an investment that would quickly be positive. So this isn't a fair fight. Let's divide 20 million evenly and say UA lost 5 million of network profit and 33.25 of network revenue last quarter due to leaving JFK. Their operating revenue was 8.420b and pre-tax profit exc. specials was 329m, leaving a 3.9% margin. Add the 5m to the profit and 33.25m to the revenue, and the margin is now 3.95%. Half a tenth. And that is an extreme example in favor of moving the margin and makes returning to JFK the right decision.

The bottom line is that if Kirby is telling the whole truth and is economically competent, UA's margin loss from JFK can't be more than a rounding error.

P.S. The argument that you can't win traffic back is completely flawed. If that's true, why is Kirby trying to "win back" traffic at EWR? It's gone. It can't be regained! That argument assumes that the market is not competitive and demand is not fluid in the long-run. The argument sounds good, but it's a fallacy.

FWAAA

You may be right overall, but your numbers don't line up with the first quarter results. UA's pre-tax profit margin in the first quarter was 2.3%, not 3.9%:

http://newsroom.united.com/2017-04-1...17-Performance

The income statement in the first quarter earnings release clearly states the 2.3% pre-tax profit margin, excl special items.

minnyfly

I said "operating". The 2.3% was not operating income. That included non-operating income (loss).

channa

Of course it can be regained. But at what cost?

Once it's lost, it's more costly to regain it. If they could flip a switch and get the customers back in a week or two, sounds like they'd do it. Problem is they're gone, many formed new loyalties to airlines (or now shop around when they didn't in the past), and companies signed contracts with competitor airlines.

Can that be re-won? Of course it can. But that will take significant time and expense to do so.

tphuang

AA/DL/B6 are not selling those slots. There is a market value to them only if there are sellers.

Your only option is to trade DCA/LGA slots + gate space somewhere for JFK slots + gate space with DL/B6.

Just to use economics as an example. Before B6 entered BOS/LGA shuttle, the same day walk up far was over $443 and now it's $129. https://www.wsj.com/articles/the-bos...-up-1482336839

That's more than $300 for each seat.

Let's say delta has 14 flights a day each direction with average of 100 seats per flight. Let's say the load factor is 70% on average and the O/W tickets are $100 cheaper each way (I assume that not all tickets will be of the same day walk up type). That is 100 * 14 * 2 * 100 * 0.7 = 196000
Over 365 days, that's 196000 * 365 = 71 million.

That's the affect of B6 using 6 slots on LGA for BOS/LGA route. If 6 slots for the relevant competitors can have that much economic impact in one year, why would UA's compeittors on this route sell them for $10 million each?

Bottom line, nobody is selling.

spin88

+1. And I might add that customers need to be won back one by one. To give an example, I know fly DL SFO-JFK. 2-3-4x/year. I am PLT on DL and happy, if UA restored PS it would not get me to go back to UA on that route as my business is now primarily with DL and VX/ We all hear how it takes years to build up a route's traffic, well when OALs serve the route it takes even longer.

But the real problem is that there is basically no UA FF base left at JFK. Those who stayed are now ex-EWR. What United would really be doing is competing for LAX/SFO based flyers, and that will be a real struggle, particularly ex-LAX.

Getting back into JFK will only occur if (a) someone wants to sell slots/space quickly, and UA has the cash, or (b) someone really really stumbles, giving UA a short to wade back in.

minnyfly

What cost? I just told you! It's peanuts if Kirby is economically competent and telling the whole truth. At most today's cost is a few million a year.



That's quite the unfounded statement. Have any evidence to back it up? UA sold their slots. AA and B6 made deals in 2014. Leasing slots sometimes works. My basic estimates dramatically inflated the cost of buying JFK slots over recent history. It still wasn't enough to justify Kirby's comments and implications. An airline will make a deal at the right price for them. If JFK was truly that important to UA, they'd buy slots at a very high price.

DCA/LGA slots are generally much more valuable than JFK slots. If anything your argument makes it cheaper and easier for UA to re-enter JFK because there are more options than simply buying JFK slots.

The bottom line is that you or I don't know who's selling and for what price. But the price has to suddenly be astronomical for UA not to re-enter JFK.

You're not an example of a customer lost because of UA leaving JFK. Therefore your type of customer loss is meaningless.

The data sinoflyer listed a couple pages back show UA isn't struggling at all with LAX/SFO flyers. They're doing very well in LAX and killing it at SFO.

Deals occur on a regular basis at JFK. And UA definitely has the cash.

sbm12

When was the last time more than a handful of slot pairs traded owners at JFK (excluding UA closing its operations there)?

One or two slots might move from time to time but it is not an especially active market, especially in large volumes (i.e. a dozen or more slot pairs all at once).

spin88

Jeff sold Delta 30 of UA's JFK slots for $14,000,000 that deal is past. There is not a single airline at this point that is in the market to sell, and United only sold because Delta was going to sell them their EWR slots, they did not need them, and UA figured they would take out a competitor. DOJ put an end to that...

JFK only recently became slot controlled, making the market much hotter. Delta would love more slots (they have 31% of them) as would B6. VX/AS are also in the market. United may be able to buy a few odd timed slots, but there is simply no airline that is going to sell them a bank of slots to reopen service, unless United pays crazy, crazy prices. Then they need staff, to reopen a UC, gates, etc.

My guess is that they would probably have to pay something like $100M+ to get enough slots, and another $100M+ for gates, renovation, a new decent UC. Then they would have to run premium configuration A/C - which they don't currently have enough of - and run the service at a loss while they tried to build up traffic.

But assuming United did this? What is United's competitive advantage over DL/B6/VX/AA? Why would anyone take United?

fly18725

I'm pretty sure it was 2010, when AA leased 16 DCA slots to JetBlue for 24 JFK slots. They completed a sale in 2014.

Before that, it was probably VX launch of JFK in 2007, though I don't recall where the 8 slots came from.

Basically, it will be difficult if not impossible for United to return to JFK in any meaningful way.

minnyfly

I've mentioned some already. AA and B6 made a deal involving JFK/DCA slots in 2014 after previously leasing. UA and DL made a deal in 2015 (changed in 2016 when the government changed EWR slots). That deal indicated a low price for long-term JFK leases (14 million for 24+ slot pairs). It happens when the price is right. The price has to have increased exponentially for Kirby's initial statements to have a chance to be economically correct.

Publicly announcing that it was the "wrong decision" won't help with any potential JFK slot negotiations. Kirby has given no indication that slots are the issue (which again might not be true, but that also means what he does say can't be taken as truth either).

Arguing that acquiring JFK slots is the problem is not supported by any evidence. Kirby's statements don't say it. Previous deals don't say it. Current environment at JFK doesn't say it. Math doesn't say it.

Do think previous management was so stupid that they sold their JFK slots for 10, 20, or maybe 30+ times under market value? Because that has to be the current market rate for Kirby to have a chance to be vindicated.

Adelphos

I haven't read all of the thread, but with the changes in American's mileage program, UA is generally know perceived to be the best frequent flier program of the three majors. UA could use this to its competitive advantage in a market like NYC, especially versus AA. However, UA's reliance on EWR to the detriment of JFK and LGA put it in a bind - many customers avoid them due to Newark (no matter if their rationale is sound or not), or a better schedule/lower price may simply be available elsewhere. AA, DL, even JBLU have access to all three airports. I fly out of and into all three based on schedule, pricing, availability, etc, and I think I am pretty typical.

I fly JFK to SFO/LAX due to corporate contracts (good for close-in bookings) and attractive business class pricing when booking on leisure a few months out. If I have to book on economy, Delta or Virgin have the best offerings. People love Mint, though I haven't tried it. Jet Blue's terminal in JFK outclasses anything UA (or AA for that matter) can offer. The point is that the NYC market is extremely competitive, and UA is at a disadvantage by not covering all three airports.

cerealmarketer

And those JFK slots will become even less valuable if the LGA perimeter rule gets lifted. Which you'd hope happens when the infrastructure upgrades are complete in 5 years. And what Delta definitely wants for ponying up its share for improvements.

And the real premium transcon service will be out of LGA, making the JFK whining look trivial.