The US/DL LGA slot swap [Master Thread]

 
Old Feb 11, 10, 10:24 pm
  #91  
 
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[QUOTE=BoeingBoy;13372901]Last first...

Originally Posted by DoubleHaul View Post
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
I am not kidding at all!

WN has absolutely done an outstanding job of keeping productivity and pay high. I think that it is relevant, though, that they set up the entire airline around this concept from the company's inception. The legacies did not have this luxury. Furthermore, with a few exceptions, Southwest has been able to steadily grow. Growth means more people being brought in at the lowest pay scales, keeping average costs down.

That being said, their business model absolutely contributes to their productivity. What is really impressive, though, is that they have been able to keep revenue at profitable levels WHILE maintaining the overall efficiency of their operation.

Anyone can run a high-productivity airline. Just fly the wings off a few planes, make sure that their ground times are evenly distributed so that gate and ground personnel utilization is maxed out, and schedule the aircraft so that they can be flown by as few crews as possible and spend as little time possible in mtc. The trick is to pull this off while attracting enough revenue to turn a profit - and Southwest has done this, and has been able to keep doing it as it has grown.

That being said, the legacy model has tremendous advantages as well - and I would argue that the model in and of itself is not broken, but rather that a combination of poor decisionmaking, sub-optimal execution, and external factors has led to poor financial performance.

Access-wise, the hub-and-spoke system has been a tremendous success. You can travel Asheville - Johannesburg or Des Moines - Santiago with a single stop. Likewise Fargo - Portland, ME. (These are just examples). Many such markets have multiple options per day on more than one carrier. This was simply not the case prior to the widespread implementation of the hub and spoke systems. Furthermore, average fares have continually dropped, even in markets where there is little or no LCC influence.

The problem has been carriers' collective inability to consistently turn a profit using this model. There are several reasons for this. A major one goes back to the notion that each individual carrier acting in its own best interest can be damaging to the industry as a whole. Rapid growth keeps average costs down, so in the post-deregulation period, the reasonably healthy carriers grew rapidly. While it did temporarily keep costs at bay, it added capacity that was ultimately unprofitable - especially when multiple carriers ended up chasing the same traffic flows (e.g. ORD, DTW, CLE, CVG, STL, PIT all chasing the same connections). Even within an airline, hubs scavenged each other (US at PIT, PHL, and CLT, for example). When demand dropped and fuel costs rose, there was simply too much capacity out there to turn a profit - and it is simply impossible to shed capacity and costs quickly and efficiently enough to keep up with a drastic drop in demand. Often, the best an airline can do is try to keep some revenue coming in in order to pay the bills - which leads to price cuts, which reduces profits further...and the spiral continues.

The expansion of LCCs made things even tougher. Using their cost advantage, they decimated yields on what once were some of the legacies most profitable routes (just a statement of fact, not a criticism). Once again, the legacies often simply had to choose between the lesser of two evils: either fight back and try to curtail LCC growth by increasing capacity and matching fares, or by essentially surrendering and watching the LCCs use their profits to jump in and trash the yields on the next route.

Despite this, some of the legacy carriers are darn close to being breakeven, and not too far from having downright respectable results.

On an operating basis, AA (and Eagle) lost $1,004,000 in 2009 on $19,917,000 in revenue, for a profit margin of -5%.

They spent $5.55B on fuel alone. Average price was $2.01 per gallon. In 1994 it was $1.21 per gallon. Using that figure, fuel cost for 2009 would have been $3.34B.

This alone would have resulted in an operating profit of $1.2B, giving an operating profit margin of 6%.

On the revenue side, they would have needed fares to be only 5.9% higher to break even - or about $15 on a 1,000 mile trip or $35 or so on a transcon.

A combination of these things would have produced some respectable results.

I realize that this in and of itself means nothing. Hypotheticals aren't very productive. I only put them in to show that in the scheme of things, the hub-and-spoke model is not that far from being profitable, even in today's tough environment.

My point in going through all of this is that both the hub-and-spoke model and the LCC model can work - and to say one is right and one is wrong, or one is a success and one is a failure, is not really fair or accurate.
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Old Feb 12, 10, 1:52 am
  #92  
 
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It seems to come down to personal opinion. I didn't count but you said "I think" a number of times. I think the outcome will be different if the deal were allowed to proceed as stipulated, even more so if allowed to proceed as proposed. So we come down to situations that "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)".

Isn't that what's happened?

In condensing your other post -

See, you were kidding with your question. You gave a pretty good explanation of why the legacy model has higher costs than the low cost model (of which WN is the purest example in a bigger airline).

Jim
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Old Feb 12, 10, 5:00 am
  #93  
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Originally Posted by DoubleHaul View Post
...The problem has been carriers' collective inability to consistently turn a profit using this model. There are several reasons for this. A major one goes back to the notion that each individual carrier acting in its own best interest can be damaging to the industry as a whole...
What you've argued is market failure akin to the tragedy of the commons, which raises the question of whether reregulation in some form is necessary to preserve a vital part of the nation's infrastructure. I don't have a firm view on reregulation, but, in getting back to the original topic of the slot swap, it does go to one of Kahn's fundamental rationales for deregulating the industry which was ease of entry and exit. LGA and DCA are slot-controlled, which turns the assumption of ease of entry on its head. As a practical matter, given ATC and terminal congestion, ease of entry at many airports without slots is in fact impossible in practical terms. At airports like PHL, the constraint on WN expansion is gates. At others, traffic volume is such that the practicality of establishing a new hub at a given airport is not realistic, even if the gates were available. In the sense of economic theory, concern over these barriers to entry -- and the consolidation of slots at major airports in the hands of one carrier -- is a credible argument for wanting some sort of divestiture in this deal. In the broader scheme of things, I question whether the assumptions that went into deregulation 32 years ago are even valid anymore. While I don't have a firm view pro or con, I'm at the point where I'm open to the argument, based on the perilous condition of the major network carriers. None of them are in good shape, and another 9/11-type event could send any or all of them over the edge. For such a vital part of the economy, I'm not sure that's a good place for us to be.
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Old Feb 12, 10, 8:03 am
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As far as vital to the economy goes, is it necessary for about every small city (and some large towns) to have air service? Is it vital to the economy that 3-4 carriers compete for passengers at places like CHS or BOI - each trying to eke out a profit?

I can't see re-regulation happening in my lifetime if ever. Besides, how would you regulate? Set fares? Based on who's costs - the highest cost carrier or the lowest? Would it be mandated which carriers served ORD, Washington, NYC? And kick anyone else out? Regulation worked reasonably well for the industry when you only had what are now legacy carriers, but it was the ultimate barrier to entry - the CAB decided who flew where and when.

From the consumer perspective, deregulation led to an overall decrease in fares. According to a GAO study conducted in 1995, average yield for small cities decreased 37% in constant dollars. For medium cities, the decrease was 47%, and for large cities it was 41%. There was an accompanying increase in service - less short haul non-stop but greater connecting service to more cities - especially at smaller cities. The same GAO report cited FAY, which had non-stop service to 9 cities in the SE in 1979 but to only 2 in 1995. Yet one stop connecting service was available to about twice as many cities, particularly cities in the west. This was primarily due to emergence of hubs - under the CAB most service was point to point so the hubs opened up a whole new world of one stop service through the hubs for smaller markets.

Parker is right about one thing - the industry has too many carriers for all to be consistently profitable. But I'm not sure the answer is re-regulation as much as it is to reduce the number through consolidation. And if that consolidation leads to one or more failing, so be it.

Jim
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Old Feb 12, 10, 9:08 am
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Originally Posted by BoeingBoy View Post
It seems to come down to personal opinion. I didn't count but you said "I think" a number of times. I think the outcome will be different if the deal were allowed to proceed as stipulated, even more so if allowed to proceed as proposed. So we come down to situations that "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)".

Isn't that what's happened?

In condensing your other post -

See, you were kidding with your question. You gave a pretty good explanation of why the legacy model has higher costs than the low cost model (of which WN is the purest example in a bigger airline).

Jim
I'll try to stay away from the long-winded responses here.

That is what happened with regard to the slot swap, but I don't think () the DOT made the right decision. You do. That's fine. Reasonable people can disagree over many things.

You are absolutely right about be using "I think" many times. I have to qualify quite a bit of this as my judgement because A) I don't have access to enough hard data to state facts and cite appropriately (much of the relevant stuff is internal for the airlines involved); and B) some of it is speculation based on industry knowledge and experience, which by definition makes it an opinion.

I suppose I could have just kept using IMO IMO IMO IMO, but I try to avoid that.

Going back to the business model issue:

-It is unequivocally true that a hub-and-spoke system, especially one that has international routes and a variety of aircraft types, is less efficient than a well planned and executed point-to-point system that uses a small number of aircraft types (or a single one) and is designed specifically to maximize productivity. This is the cost side of the equation.

-It is also true that a well designed and executed hub-and-spoke system generates more unit revenue than can be generated by using the same assets on a strictly point-to-point basis. The connecting banks create multiple possible revenue flows per aircraft, while the point to point system creates very few.

Cost is only one side of the equation. Revenue generation is the other. Southwest is notable in that it has been able to combine a highly efficient operation with enough revenue generation to remain consistently profitable.

I will make one more statement that I cannot backup with numbers because us "civilians" don't have access to them, but I am 99% sure is true: the primary hubs (for example DL/ATL, AA/DFW, CO/IAH) are consistently profitable for most of the legacies. It is the rest of the systems (like DL/CVG, AA/ORD, CO/CLE) that drag the overall results down. Unfortunately, these carriers can't just jettison the unprofitable flying willy nilly and make everything OK.

Last edited by DoubleHaul; Feb 12, 10 at 9:18 am
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Old Feb 12, 10, 9:38 am
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Originally Posted by BoeingBoy View Post
As far as vital to the economy goes, is it necessary for about every small city (and some large towns) to have air service? Is it vital to the economy that 3-4 carriers compete for passengers at places like CHS or BOI - each trying to eke out a profit?
This is a matter of degree. Short answer, no, it is absolutely not vital for every small town to have ITS OWN air service. At the risk of alienating those who live there, Pueblo, CO is a great example. They continue to maintain scheduled (EAS subsidized) service to DEN. Which virtually nobody uses. COS is about an hour up the road...a shorter drive than it is between DEN and the western suburbs, especially during rush hour. I think it is very difficult to argue that PUB is highly dependent on that service.

On the other hand - reliable, convenient air service access is a tremendous economic development tool. Many companies include air service access as an important part of the decisionmaking process when making facility location decisions. If it is inconvenient to get between headquarters and the plant, they may go somewhere else instead of to your community.

Having three or four carriers is not required...but having access provided through a hub is important (if WN served CHS, it could not provide anywhere near as much overall convenient access as DL via ATL or even US via CLT.)

The conundrum is that 1) too many seats chasing too little revenue is bad for carriers because they can't charge enough to make a profit, yet 2) this is a major component of keeping fares low. It's enough to make you bang your head against a wall!

Originally Posted by BoeingBoy View Post
I can't see re-regulation happening in my lifetime if ever. Besides, how would you regulate? Set fares? Based on who's costs - the highest cost carrier or the lowest? Would it be mandated which carriers served ORD, Washington, NYC? And kick anyone else out? Regulation worked reasonably well for the industry when you only had what are now legacy carriers, but it was the ultimate barrier to entry - the CAB decided who flew where and when.
I'm in full agreement. I can't see reregulation ever happening. I don't know exactly what the answer is to the industry's woes, but I'm pretty sure that reregulation is not it.

Originally Posted by BoeingBoy View Post
From the consumer perspective, deregulation led to an overall decrease in fares. According to a GAO study conducted in 1995, average yield for small cities decreased 37% in constant dollars. For medium cities, the decrease was 47%, and for large cities it was 41%. There was an accompanying increase in service - less short haul non-stop but greater connecting service to more cities - especially at smaller cities. The same GAO report cited FAY, which had non-stop service to 9 cities in the SE in 1979 but to only 2 in 1995. Yet one stop connecting service was available to about twice as many cities, particularly cities in the west. This was primarily due to emergence of hubs - under the CAB most service was point to point so the hubs opened up a whole new world of one stop service through the hubs for smaller markets.
Absolutely. This goes back to my point about the value of the hub-and-spoke system, even if it is technically less efficient than a well run point to point network.

Originally Posted by BoeingBoy View Post
Parker is right about one thing - the industry has too many carriers for all to be consistently profitable. But I'm not sure the answer is re-regulation as much as it is to reduce the number through consolidation. And if that consolidation leads to one or more failing, so be it.
Agree 100%.


Jim - check your PM.
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Old Feb 12, 10, 10:02 am
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Originally Posted by us2 View Post
What you've argued is market failure akin to the tragedy of the commons, which raises the question of whether reregulation in some form is necessary to preserve a vital part of the nation's infrastructure. I don't have a firm view on reregulation, but, in getting back to the original topic of the slot swap, it does go to one of Kahn's fundamental rationales for deregulating the industry which was ease of entry and exit. LGA and DCA are slot-controlled, which turns the assumption of ease of entry on its head. As a practical matter, given ATC and terminal congestion, ease of entry at many airports without slots is in fact impossible in practical terms. At airports like PHL, the constraint on WN expansion is gates. At others, traffic volume is such that the practicality of establishing a new hub at a given airport is not realistic, even if the gates were available. In the sense of economic theory, concern over these barriers to entry -- and the consolidation of slots at major airports in the hands of one carrier -- is a credible argument for wanting some sort of divestiture in this deal. In the broader scheme of things, I question whether the assumptions that went into deregulation 32 years ago are even valid anymore. While I don't have a firm view pro or con, I'm at the point where I'm open to the argument, based on the perilous condition of the major network carriers. None of them are in good shape, and another 9/11-type event could send any or all of them over the edge. For such a vital part of the economy, I'm not sure that's a good place for us to be.
I would not advocate reregulation, but believe me I do understand where you are coming from!
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Old Feb 12, 10, 11:45 am
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What is not mentioned in the great discussions above is the effect on the industry that government intervention has had by not letting the inefficient airlines to go bankrupt, thus allowing for reduced capacity that is needed, allowing for a better product for the consumer (Darwanism) and most likely allowing for more long term employment in the industry as a whole as the efficeint would expand. Deregulation has been a boom to both the consumer and employees. There would not be near the number of industry employees on the payroll or the growth of the airlines if deregulation had not occurred. But as the Easterns, Braniffs and other inefficients were allowed to go away in the past, the current crop were not and this has caused a drag on the industry as a whole.

Last edited by MrMan; Feb 12, 10 at 11:53 am
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Old Feb 12, 10, 11:52 am
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[QUOTE=BoeingBoy;13372901]Last first...

Originally Posted by DoubleHaul View Post
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
And lots of management and overhead. Just look at Dallas and the size of WN headquarters at Love Field vs AA's at DFW.
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Old May 4, 10, 1:58 pm
  #100  
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DOT doesn't buy US-DL alternate slot plan

DOT refuses to budge on the slot divestitures:

http://finance.yahoo.com/news/DOT-ke....html?x=0&.v=1
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Old May 4, 10, 2:46 pm
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Originally Posted by FWAAA View Post
DOT refuses to budge on the slot divestitures:

http://finance.yahoo.com/news/DOT-ke....html?x=0&.v=1
Sad - wonder what kind of scrutiny CO/UA will get. Is Southwest that good at lobbying in Washington ?
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Old May 4, 10, 8:03 pm
  #102  
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Originally Posted by PWMFlyer19 View Post
Sad
Sad? Why?

As Southwest has maintained, the two carriers have no business hand-picking their competition in restricted markets. Auction the slots to the highest bidder and the customer wins.
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Old May 4, 10, 9:56 pm
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Originally Posted by AZ Travels the World View Post
Sad? Why?

As Southwest has maintained, the two carriers have no business hand-picking their competition in restricted markets. Auction the slots to the highest bidder and the customer wins.
Does "the customer" win from Southwest becoming the fourth carrier to fly LGA-Chicago or the first carrier actually flying smaller routes Southwest wouldn't dare fly, like LGA-ITH?

Delta and US Airways have consistently maintained that the DOT has no power to restrict slot swaps in the first place. Delta announced it is going to court to overturn the DOT's decision.
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Old May 4, 10, 10:45 pm
  #104  
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Originally Posted by longtime lurker View Post
Does "the customer" win from Southwest becoming the fourth carrier to fly LGA-Chicago or the first carrier actually flying smaller routes Southwest wouldn't dare fly, like LGA-ITH?

Delta and US Airways have consistently maintained that the DOT has no power to restrict slot swaps in the first place. Delta announced it is going to court to overturn the DOT's decision.
Kirby also mentioned tonight that they are bringing this to the US Court of Appeals.

A big part of the debate depends on how one views these slots - whether they are assets (as US and DL believe) or public possessions (as WN believes). All depends on how one interprets the laws.
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Old May 5, 10, 7:01 am
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Originally Posted by AZ Travels the World View Post
Sad? Why?

As Southwest has maintained, the two carriers have no business hand-picking their competition in restricted markets. Auction the slots to the highest bidder and the customer wins.
Sad because the government should not be involved in this. The only reason they are involved is because of LGA. If it was any other airport in the U S of A, they could horse trade all they want.

Selective restriction is not free market. Look at what American/Jetblue just did at JFK/DCA. Do you think that should have been forced to go to highest bidder ?
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