flyYX

http://milwaukee.bizjournals.com/mil...html?ana=yfcpc

I took the time to listen to the Republic conference call today while working at my computer. Bryan and Sean called Midwest a virtual airline and a drag on Republic's earnings. I like their bluntness on this and I feel they have a chance to turn Midwest around.

You can listen to the conference call here: http://biz.yahoo.com/cc/0/108720.html

hazelrah

I also listened to the 3Q earnings conference call, FlyYX, and I concur that they were blunt.

I got the following points:

• Midwest is a virtual airline
  
• THe problem with Milwaukee is cost, hence the redployment of the Airbii to MKE
  
• MKE will be a drain on earning throughout 2010
  
• 30-40% overcapacity in MKE market

BlueHorseShoe2000

Here are a few snippets from Republic's Q3 2009 earnings call related to Midwest that I found interesting:

1) Republic considers Denver, Milwaukee and Kansas City hometown markets for the branded operations. In recent weeks Republic has started to mention the importance of Kansas City more and more.

2) Significant charges relating to the write-down of goodwill at Midwest will be taken in Q4. Additional transition and restructuring charges will be booked for Midwest in Q1 of 2010. As a result, these charges will negatively impact Republic's earning for the next couple of quarters and this was to be expected.

3) Republic expects both Frontier and Midwest to be profitable by the end of 2010.

4) Smaller gauge equipment works well on many of the core Midwest routes.

5) E175s may be added to the Midwest fleet in the future.

6) The E190s will be maintained in a dual-class configuration (it sounds like the 2x1 section in the front will remain).

7) Despite the competition, Midwest continues to maintain a strong revenue premium. So why is Midwest losing money? Here's what Sean Menke had to say:

"Quite simply, it is a cost problem. We intend to fix this cost problem by using Frontier’s operated Airbus A319s in the high demand low-yield market and by using very cost-efficient EJet operated by Republic in Midwest core business market. In other words, we turn Midwest into a virtual airline and the Midwest brand is alive, well and rebuilding. Effective this past Tuesday, all Boeing 717 aircrafts have been removed from service. We now operate cost-efficient Airbus equipment from Milwaukee to Los Angeles, Phoenix, Las Vegas, Orlando, Tampa, Fort Myers, and Boston. As we work through the integration, we hope to continue to build on our recent momentum and reestablish our preferred position in Milwaukee."

Bryan Bedford's take:

"Milwaukee is going to be a drain for everybody who is operating there despite all the harsh words and the strong rhetorics, the fact of the matter is Midwest continues to produce a double digit – and you can go look at the T100 data and figure this out yourself, and head-to-head market producing a double-digit premium on RASM to our competitors in Milwaukee and now we have got products with Frontier A319s and the Republic operated Embraer 190s that are in worst case are going to be a push with the operating cost of our competitors and in some cases we think lower than our competitors. So you take the brand value, which again despite the harsh words, the brand has real support in Milwaukee."

8) The business community has informed Republic that it will continue to provide strong support for Midwest going forward.

knope2001

From the most recent fare data -- 2nd quarter of this year -- Midwest had a a fare premium over AirTran in every competitive market:

4.3% ….... Atlanta
43.3% ….. Boston
23.3% ….. Denver
24.1% ….. Las Vegas
24.3% ….. Los Angeles
26.5% ….. La Guardia
7.8% ….... Orlando
26.3% ….. Seattle
19.6% ….. Tampa
38.8% ….. Washington

Supporters of low-cost carriers bang the drum of Cost constantly but never want to talk about the revenue side of things. Well, with Midwest costs are coming in line with LCC's, their planes are as full or fuller, and they generally have a higher portion of local traffic. Am I missing something here?

hazelrah

Yes, your data is backward looking. With Southwest on the scene the status quo is changing.


How in this economy and pressure on the bottom line an employer would allow his employees to select a carrier with a fare premium is beyond me.

BlueHorseShoe2000

Then I guess you're not familiar with the corporate contracts many businesses have with airlines.

Where I work, our procurement department has negotiated contracts with United, Southwest, and Midwest among a few other international carriers. The only way we can book a non preferred carrier is if the fare difference is greater than 200 bucks. Compliance with this policy is strictly enforced as well. There are big benefits and perks that come with these contracts that I won't get into here.

These types of contracts are in place at businesses of all sizes. Over the years, Midwest has done a very good job in securing these types of agreements with many companies, some even outside of MKE or MCI.

blucys

Has to do with schedule as well...I fly MKE-BOS virtually every week and having that ~8pm return from BOS is a major factor in my selection...And many times there isnt even a price difference between Midwest and Airtran.

flyYX

I think bringing the A319's to MKE is very smart but I am not so sure about the Stretch Seating that Frontier is going to install. What kind of seat pitch is going to be in regular coach? There will still be 136 seats in the aircraft. I feel the A319 is comfortable as is and shouldn't be changed. This is coming from a long legged 6'2" passenger.

BlueHorseShoe2000

Frontier has tossed around the idea of having a premium seating section for a few years now.

JetBlue did something similar a few years back and it apparently has been very successful. However, they actually removed six seats from the A320s.

BlueHorseShoe2000

Just how much things change in MKE over the next year or so remains to be seen.

Southwest is not always the lowest game in town. The benefit of having Southwest in MKE is that they have traditionally been a lot more rationale when it comes to setting fares, etc.

Bryan Bedford did say in the earnings call that despite the competition Midwest continues to maintain a strong revenue premium in MKE. Will this continue as Republic re-builds the Midwest route network?

I do think there will be a big shake-out in MKE after next summer. In the meantime, everyone should take advantage of the very low fares available.

blucys

I agree, the Frontier A319 was really comfortable last night (great legroom)...But, I didnt have anyone sitting in the middle seat, so there was that added bonus...Not knowing what the detailed configuration at this point it is tough to make any conclusions on the "stretch" effect.

newsmanhoss

This is very true indeed. I have seen many cases where Southwest wasn't the lowest in town on certain routes.

For some travelers, however, Southwest might not have the lowest base fare, but could still be cheaper due to the lack of bag fees. I wonder how long WN will be able to hold out on that. Many people always look at the base fare and forget to factor in the bag fees.

Southwest has been doing a great job of marketing this advantage. If, over the long haul, they plan to remain the last big carrier without these fees, they should continue to hammer away at this competitive advantage so that people who check bags get in the habit of automatically adding in bag fees when comparing with fares on other carriers.

BlueHorseShoe2000

I've actually seen instances where Southwest has had the highest fares among multiple carriers serving the same route. There are many people who automatically think Southwest has the cheapest flights and will not do any comparison shopping. It's a great position for Southwest to be in.

As for the no baggage fees, I think Southwest has backed itself into a corner here. They've seen how much additional revenue this has brought in at other carriers yet can't really benefit from it. They'll get skewered if they do a 180 and starting charging for checked bags. As a result, they need to look towards other sources of ancillary revenue. Southwest's CEO recently acknowledged this.

knope2001

I wonder, too. If you look at AirTran's profit this past quarter, it's essentially fully reliant on the ancillary revenue -- primarily bag and seat assignment fees. That's a bit of a generalization because they seem to be carefully timing their special items each quarter, so without the anciallary revenue this past quarter perhaps they still would have figured out a way to produce a profit. However the importance of anciallary revenue is quite clear in their results.

AirTran Q3 2008 versus 2009
Total passenger revenue decreased 16.5%, mostly due to average fare plummeting from $96.07 to $81.04. So how did they make money? Aside from the obvious answer of lower fuel costs, their "other revenue" grew by about $30 million, from $38m to $68m. That's primarily increased bag and seat fees. Considering they made $10.4 million in the quarter (about a buck sixty per passenger carried) I think it's a safe bet that bag and seating fees are critical to them. Southwest has kind of backed themselves into a corner on bag fees, and their options essentially seem to be (a) fight to earn enough additional business at better fares to offset the fee loss, or (b) eat crow and roll out bag fees. The harder they push as (a), the more difficult ever going to (b) will be. But if we see any sort of fuel spikes like last summer, I'm guessing crow will be on the menu. I really don't like bag and seat fees, but they are the way of the world these days.

hazelrah

The juries still out on the efficacy of the bag fees. There is no doubt that the bag fees are a short term tonic to the bottom line. As an example Delta has implemented the bag fees and pumped up its revenue stream; however its traffic keeps falling like a stone. it can't cut capacity fast enough. Also they have had to cut base fares in a competitive marketplace. To me the bag fees just seem another price obfuscation mechanism.

That being said, your assertion that Southwest has backed itself into a corner is incorrect. I've followed the Southwest earning conferences and Southwest has never said -"we will never implement a baggage fee". On the contrary WN management has said we've studied the issue, we elected not to have the bag fees, but that does not mean that at some point in the future this policy won't change. For the moment the no baggage fee is used as a succesfull marketing strategy.