BoeingBoy

Then where is the extra revenue they both think will occur coming from? US is at or near the top of the list of highest cost carriers so I'm not sure that the effect would be minimal. You tell me - if you sell a product that's in demand and can limit your competition plus get a bigger share of production capacity, do you raise prices on that product or lower them?

And just where did either US or DL guarantee to serve those cities for the long term? And why can't US fly to those airports today if they're so interested in the consumer benefits - they already have about 50% of the DCA slots.

That argument, which US and DL used, was rejected because those other "one market" airports have significantly lower average yield than DCA/LGA. It's amazing how free entry helps keep yields lower than at the artificially constrained capacity airports. And those constraints at DCA/LGA are what US & DL are counting on to keep out more competition while they capture a bigger share of the market.

All correct. Of course, airlines (like US and DL) would complain about the additional delays and the money it was costing them and insist that the government do something - preferably by goring someone else and not them.

Airlines (and their supporters) are great about castigating the government for meddling in free enterprise when they don't like what the government is doing but just as vocal for getting the government involved when it suits their needs.

FAA regs, security costs, airport facilities, government backed loans, and on and on, the airlines have a history of wanting it both ways. This is no different.

Jim

iahphx

Yeah, in 2001 there were many airlines still struggling to adapt to the deregulation environment. HP, for example, had a mediocre business plan and WN was trying to drive them out of business and take PHX and LAS for their own. But HP was fully solvent -- they were just closing on routine financing in Sept. 2001 that got pulled out from under them.

Look, it would be nice to believe the free market would have provided alternative financing, but when it comes to terrorism, it's hard for the private sector to accurately weigh the risks. EVERY airline would have been shut down after 9/11 due to the inability to buy liability insurance because the private sector wasn't selling it to airlines. Under your twisted reasoning, we should have let them all fail.

The ATSB was probably toughest on HP because they went first. There were a few later mistakes, no doubt politically influenced. US, for example, didn't really have a viable business plan when they got approved. But, as we all know, the political process is not entirely efficient. Still, to argue that the program was anything other than an extraordinary success is to engage in revisionist history at its worst.

BTW, the reason the big boys who later went Chap. 11 didn't get ATSB money was because they didn't want it -- they thought the terms given to HP were too onerous. Indeed, they were. They then managed to mismanage their companies into bankruptcy. Smarter management teams -- like CO and AMR -- did not. Personally, I think the bankruptcy process is a worthwhile one, but I suppose some of you might suggest that bankruptcy should mean the end. I don't think the public is worse off because, like HP/US, CO also found smart management after exiting Chap. 11. Without bankruptcy law, we almost certainly would have lost our country's best airline. The process seems to work.

flg8rmatt

I ask this in all seriousness: Really? Weren't the last bits of regulation gone by 1982 or 1983? It took the industry over 20 years (and counting?) to adapt to deregulation?

iahphx

It's still adapting. Gov't regulation makes it quite difficult. Heck, US and DL can't even swap slots!

DoubleHaul

It is absolutely true, and legacy carriers are still dealing with the transition from regulation to deregulation. The primary arena: Labor.

Pre-deregulation, airlines could generally keep labor happy with raises, improved work rules, etc. because through the CAB they could get fare increases to make up for them.

Most of the healthy carriers remained profitable enough up through the early 90s to keep their pre-deregulation labor structure intact. Even in the mid to late 90's profitability rebounded enough to restore many previous cuts. Then 9/11 hit: with the labor structure still essentially unchanged from the regulation era.

Since then, the legacies have gone to extreme measures (most via Ch. 11) to reduce labor costs. Still, they have not been able to completely recreate their labor cost structure to fit today's environment. (And I don't just mean base pay rates; things like seniority levels, work rules, benefits packages, scope clause issues, and per diems all have an impact). Not surprisingly, cuts have left employees bitter, to a large extent because they can collectively remember the "good old days."

The LCCs don't have that problem. Having never operated under regulation, they crafted their labor structures to specifically fit their business models. The poster child, WN, manages to keep its costs low despite having some of the highest pay in the industry. It was able to specifically put together a labor program that met its cost goals and kept employees content. It has been a similar situation for the other successful LCCs.

BoeingBoy

Yeah,after those profits during most of the 90's they were struggling...


Talk about twisted logic - they would all have failed if two didn't get ATSB backed loans?

Actually the ATSB was toughest on the airlines that asked for but didn't get an ATSB backed loan. And the next toughest on the airline that got an ATSB backed load with conditions attached. HP, being the first of the bigger airlines to ask for the ATSB backing probably got off easiest.

BTW, the reason the big boys who later went Chap. 11 didn't get ATSB money was because they didn't want it -- they thought the terms given to HP were too onerous. Indeed, they were.[/quote]

Any examples of those "onerous" terms that no one else wanted to incur?

Isn't it Parker that is a lover of consolidation, which includes airlines disappearing as a possibility?

No, Bethune went to CO in an attempt to prevent another bankruptcy, not as a result of exiting the first bankruptcy.

It was CO's bankruptcy that resulted in changes to bankruptcy law to prevent other execs from doing what Lorenzo did in CO's bankruptcy.

If one is going to use the industry's history for examples, one really should know that history...

BTW, really smart management finds ways to compete. It doesn't need to reduce competition to survive.

Jim

flg8rmatt

Makes sense. Thanks for the explanation.

BoeingBoy

Laying it all at the feet of labor is a straw man argument. After all the labor cost cuts, why do the legacies still have costs that are higher than the low cost carrier? It's not labor expense per hour. It's the business model that the legacies still adhere to - and other than some short-lived experiments with low cost operations within the legacy model there's been no attempt to change the business model.

And some here want the government to support the inefficient business model so the legacies can continue to have a disadvantage in costs that employees will have to pay for.

What it comes down to is "Keep the government out" when it adversely affects what MY favorite airline wants to do but "Where's that government help" when something is needed to help MY favorite airline out.

Jim

MikeLaw

I think the Government knew full well that the parties would not accept these conditions. However, this lets them effectively reject the transaction while appearing to approve it. Clever media manipulation, if you ask me.

BoeingBoy

I disagree - this is the same as the UA/US merger that never happened. Even though DOT had approved that merger with some changes that the carriers agreed to, the DOJ said that it would create too great a concentration of slots in one carrier's hands and that was when UA/US combined would have had a smaller percentage of DCA slots than US currently has.

Jim

DoubleHaul

There are several ways to make their respective operations more profitable without necessarily increasing fares. Say US wants to add PNS-DCA service to attract military traffic, but can't today because it does not have the slots at DCA. It gets slots through the swap and adds a morning and evening roundtrip between the two markets. US would not have to raise fares over those it currently charges for a connection in CLT in order to make the new nonstops profitable. In fact, there is a decent chance that more low fare bucket seats would be available between the two cities because the PNS-DCA passengers would no longer be competing for seats with all the other traffic flows utilizing the PNS-CLT and CLT-DCA legs.

Does this mean that DL and US not try to increase yields where they can? Of course not. But if they get too frisky, then the traffic can simply take a less expensive option via another carrier's hub - which is not a reduction in service from where they are today.

They did not...and if they had they would have been lying. This industry changes so quickly that any long term guarantee is pretty hollow. US could use its current slots to fly anywhere it wants within the context of the perimeter rules, but is presumably using them where they are most profitable (from DCA). The point of the swap is that they could use the extra slots at DCA in a far more productive manner than they use their existing slots at LGA. Benefits are not a one way street. Successful new DCA routes for US, made possible because of the slot swap, would benefit both the airline and the passengers. If the passengers don't see a benefit, then they won't use it, and US won't make any money.



I don't completely disagree with you here. I think its a little of both. I think that cross-airport competition does have some effect, but not nearly to the extent that same airport competition does. I am not completely convinced however, that lower yields should be the only consideration, however. Is it really that onerous a choice to have to decide to fly from LGA and pay more, or save money but put up with the inconvenience of flying from JFK? Still, I understand the point of wanting both...close in convenience and LCC fare levels.

I'm not sure that any of the airlines would scream for slot controls. To the best of my knowledge, they have not done so in the past (I could be wrong...please let me know if I have missed something). If that were the case, then DL would probably jumping up and down to have ATL slot controlled, since it is very congested and DL already holds a dominant position.

I do think that they might get a bit more vocal about increasing capacity via a legitimate ATC modernization plan (not the laughable NextGen).

Airlines, like any business, are going to do their best to act in their own best interests, and the best interests of their shareholders. I can't begrudge them that as long as they act legally. Some things they want are reasonable, and some aren't. Frankly, I think that way too many mergers have been approved, going all the way back to the regulated days.

From what I can see, it just looks like to me that this slot swap would be pretty neutral from a customer standpoint. It could be slightly positive, or it could be slightly negative. So I really don't see any practical reason for the DOT to condition its approval on surrendering slots to LCC competition.

DoubleHaul

Hello again! We need to get together for lunch or something.

My intent was not to "lay all the problems at the feet of labor." I was using it as an example of how carryover from the regulation days still has an impact on the legacy carriers today. You are actually helping me make my point in asking your question. The basic pay framework of the legacy carriers was established under regulation to fit that environment. Consequently, no matter how much pay is cut, it is very difficult to compete with the LCCs on a labor cost per ASM basis, simply because the LCCs were able to tailor their overall compensation packages to suit their business model from the beginning. This makes nobody happy. I really wish there was some way for the legacies and their pilots to start over with a clean slate...I can't help but think that they could work something mutually beneficial out if both sides would come to the table with an open mind and a pure heart. Unfortunately there has been so much mutual mistrust and ill will in place for so long that its really a pipe dream.

I am curious about what you believe the major problem is with the legacy's business model.

I realize that I am probably coming across as a DL and/or US fanboy in this thread, but in reality I am not - I just think that the slot swap would help them without unduly harming the public interest. In other situations I might be in extreme opposition to what they are trying to do. I really don't have a favorite airline right now. (And if I did have a favorite airline, it sure as heck would not be US Airways. I don't think I can ever forgive them for what they did to Piedmont!)

BoeingBoy

Last first...

[QUOTE=DoubleHaul;13372714]Consequently, no matter how much pay is cut, it is very difficult to compete with the LCCs on a labor cost per ASM basis, simply because the LCCs were able to tailor their overall compensation packages to suit their business model from the beginning.

That is because the legacy model is less efficient at producing ASM's per employee, not because of compensation rates. Just look at WN (the most efficient low cost carrier model) vs the legacies. Nothing in the legacies employee compensation other that at AA is better than at WN, yet WN has lower employee compensation per ASM than the legacies. Even AA has lower average employee compensation than WN despite not terminating the DB pension plans, retiree health care, etc. The difference is completely how many ASM's are produced with the number of employees, and that comes back to the business model.

I'd hope you were kidding. It is inefficient compared to the low cost carriers, especially WN. Lots of airport facilities, lots of employees, lots of equipment/planes because of the nature of the legacy hub/spoke model.

Jim

BoeingBoy

With 50% of available slots US can't fly routes like PNS-DCA non-stop any time they want? I guarantee you that if US thought such routes would be more profitable than some of the routes they already fly (like ILM-DCA) they'd drop the current route and add the "more profitable" route.

If military routes are so important, why did US say they'd offer non-stop service to MYR (a truly leisure destination) and not FAY (One of if not the biggest military installations in the country (personnel count)?

So fares will go up, which I think is what I said. Plus it'll be easier to increase fare if no more lcc competition is allowed.

Which would benefit passengers more - more higher cost non-stops or lower fares from low cost competition? With all the slots US currently has, would not being able to serve a few markets nonstop be better than not being able to serve any new non-stop markets? Or is it just the new competition that US doesn't want.

And you're right. But the airlines/public/Congress did want something done about congestion before NextGen was a dream. And, of course, no incumbent airline wanted to shoulder the cost of reducing it's flights at those airports to ease congestion.

Absolutely. And notice that the consumer isn't in there anywhere. That's for the government to worry about.

One could certainl say that $10 to $20 higher fares will have little effect on a consumer but taken in total for all consumers at an airport the effect gets very large very quickly. Throw in the low cost competition (and frankly that's mostly who would benefit from the slot divestiture other than AS and maybe AC) and the advantage to the consumers as a group gets even bigger.

In many ways we're saying the same thing but come to different conclusions. US, at DCA, wants to increase the advantage it already has without allowing any more competition. That's understandable enough, but not justification enough from a consumer standpoint for the feds to say "Fine, go right ahead." DL is a somewhat different case - they want to establish a domestic hub at LGA (and JFK/EWR don't have the facilities for another hub) - something US already effectively has at DCA. Plus DL wouldn't end up with as high a percentage of slots at LGA as US would at DCA. US, as far as I know, has no beyond perimeter slots at LGA so DL wouldn't gain the advantage of getting more beyond perimeter slots. On the other hand, DL does have some beyond perimeter slots at DCA, but I haven't seen if any of them are included in the proposed swap.

Jim

DoubleHaul

Sure, they could drop existing flights and replace them. What they want to do, though is add flights that might not be as profitable as the ones they operate today, but are more profitable than the ones they fly using their slots at LGA. (The ones they want to trade).

I was just using PNS as a random example. Any city that currently lacks nonstop service could be substituted.

I can only go back to my point that neither US nor DL is currently charging one cent less than they have to, and that swapping slots will not change that. Can I say for sure that NO markets will see any increase in average fare? Of course not. But I think that these situations would be isolated, and that there is a pretty good chance that just as many, if not more, markets would see average fares drop, even without more LCC flights.

That is the ten-million dollar question, and I think that the answer depends on your point of view. Smaller cities could derive tremendous economic benefit from new nonstop service to DCA or LGA, even with a legacy carrier pricing structure. On the other hand, if you live in DC and have a condo in FLL, a $50 average RT fare reduction because of new LCC service might save you $500 a year if you fly it 10 times (or it might save you 45 minutes plus gas to get to IAD or BWI 10 times a year). From my perspective, the former offers more overall value, but again, it depends on individual points of view.



That's one of the brutal things about the airline industry...what is good for each carrier individually can be a big problem for the industry as a whole. You might be surprised regarding the second sentence. Supposedly, AA has offered to give up LGA slots, under the condition that they be retired, not given to another carrier. They were denied. So they are still flying presumably unprofitable services, because the alternative, having them go to a LCC, is a worse outcome. I would give even money that if you gave AA/DL/UA/CO/US half an hour of antitrust immunity to discuss slots at DCA and LGA, they would come out of the room with an overall reduction - again, as long as the slots could be retired, not farmed out to LCCs.



I'm going to have to make some distinctions here that may seem minor, but that I think are very important. Overall, I don't think that the consumer needs government protection in what is in most cases a routine transaction. An airline offers a seat for a given price. If it is worth the consumer to pay that price for the transportation, he or she does so. If not, the seat either remains unsold or is sold to someone else to whom the price is worth it. Its a transaction freely entered into by both parties. In a deregulated environment, new entrants are free to come in and offer their own service and price to consumers. Again, under most circumstances, no intervention is required.

There are clearly some situations where barriers to entry exist (that's why this thread is here, after all). Slots, limited international rights, etc. will require some arbitrator to make a judgement on what is in the best interest of the public (or at least what is politically popular). Other situations (merger approval, antitrust issues, etc.) also require some government oversight.

In general, however, the goverment got out of the everyday route/pricing/capacity business when regulation went away.

(Note: none of my reply in this section refers to the safety oversight retained by the FAA).

$10-$20 bucks spread across all passengers would absolutely be relevant. I just don't see anything close to that kind of fare increase resulting from this swap.

I actually don't even think AS would get any benefit, since I don't see them wanting to start service anywhere that would be allowed under the perimeter rules. The divestiture requirements were clearly crafted so that they could only be used by the major LCCs. There is no argument that having a larger LCC presence would lower fares at DCA and LGA. What's less clear is whether or not lower fares is the only "public benefit" that can accrue from additional air service.

The only quibble I have here is that I don't think that DL could operate a true "hub" at LGA because all the slots are for specified time frames. I would not foresee them being able to horse-trade enough slot times to establish true hub-and-spoke connecting banks. They would, however, have enough mass to offer significant transfer opportunites, regardless of whether or not it has defined connecting banks.

You are right, we are approaching the same thing from two different points of view.

In summary:

I don't think the DOT needs to be inserting onerous conditions on a transaction that would help DL and US without materially harming competition.

You don't think that the DOT should allow a transaction that would increase market concentration at two access-restricted airports without conceding slots to allow more low-fare competition.

Fair enough?