I’m back with part two of the Phoenix Aviation Symposium airline CEO panel. In part one, the CEOs talked about consolidation. In this post, they talk about competing and cooperating with low cost carriers.
On Competing with Low Cost Carriers in Europe
British Airways CEO Willie Walsh: I think what we’ve seen in Europe in 2009 has been more the impact of the truly global economic downturn [than low cost carriers (LCCs)]. People in the EU talk about BA losing to Ryanair, easyJet. There’s no evidence to support that. BA is holding market share relative to these guys because we’ve been competing with them for 20 years. I think we’ve been able to adapt to their sort of competition that they present us. It’s really a case now that the consumer has choice and can really understand what’s available. So a lot of the consumer media in the UK has recognized that there’s very little difference in terms of overall price between established carriers, network carriers and low cost carriers.
What we witnessed was a truly awful economic environment. Ryanair and easyJet suffered as well. They scaled back their growth, saw significant falling profitability and they struggle just as much as everybody else. The main issue for BA was the impact on premium travel. IATA estimates that 7 to 8% travel in premium and generate 25% of revenue. For BA, 13% travel in premium classes and generate 45% of revenue. We’ve seen some evidence of premium customers on short haul within Europe and moving away from the premium cabin. That doesn’t mean they’re moving from network carriers to low cost carriers. It means they’re moving from the front of the aircraft to the back, and I think that’s a structural change. Long haul premium travel is cyclical and there’s clear evidence that it’s now recovering. I’m convinced from everything I’ve seen that the competition between LCCs and national carriers will continue.
Qatar CEO Akbar al Baker: The same is true for LCCs in our region. Now, it’s a fashion in our region. The geography does not permit low cost carriers flourishing because we do not have deregulated skies. We do not have secondary airports, we have the same cost base. We are hardly losing our market share. Everyone asks when Qatar launches an LCC. We will do it when an LCC entrance into our market will impact share and it’s not happening because people in our region still want to travel on a full service carriers. They realize there is so much of a hidden cost in my region from low cost carriers. The fare will become nearly the same.
On the Convergence of Business Models Between LCCs and Legacy Carriers
JetBlue CEO Dave Barger: I don’t think the LCC concept will be gone even though there’s a migration that’s going on . . . . I don’t think the true LCC model goes away.
Republic CEO Bryan Bedford: I think the models are converging. What we’ve seen through forced financial restructuring are legacy carriers that have to rethink their business model. The product is moved more toward what the LCCs have been doing and LCCs have been moving more toward the legacy model – business class cabins, TVs, wi-fi. We’ve seen more amenities on the LCCs; less amenities on the legacies. So there’s a product convergence but the networks are so powerful.
Moving away from domestic to more balanced between international and domestic. As these alliances crystalize, some of the LCCs are going to wonder where do we go? How can we move people from small town America to the world? We see Southwest trying to create their own marginal expansion internationally. At the end of the day it’s a network business, and we’re trying to figure out ways to differentiate the product because the customer has decided to show a great amount of loyalty.
US Airways CEO Doug Parker: I think you’re right, there’s definitely a convergence. I think of it more that we end up having lower cost structure but more it’s hub and spoke airlines vs point-to-point carriers. JetBlue and Southwest connect a lot of people but they don’t have a hub and spoke which gives them a cost advantage. It used to be in the 90’s and 2000s that used to be largely generated by labor costs. You could have a model that worked; ran a hub and spoke out of Phoenix but had much lower costs than the other hub and spoke carriers because we had much lower labor costs. That you can’t do anymore because of what’s gone on with the legacies.
You have to get the cost advantage by avoiding hub and spoke. I don’t think you can start an airline doing the same thing in a different city and use a cost advantage. Southwest contracts have higher labor costs but they have much lower costs because of their model. The consumer won’t be able to differentiate but the LCCs won’t be flying to places like Asheville, North Carolina.
“We see Southwest trying to create their own marginal expansion internationally.”
Really? Are there some indicators out there? Or is it just a “Ok, at some point they have to start flying to Mexico/Canada/Caribbean, don’t they?”
I think they have said on the record that once their Res system can handle all the data required for intl travel they will begin flights. Question is to where. Canada seems like a hot point for them lately.
Just to add, although I am not a great big fan of WN, people always talk about the WestJet and Volaris code shares as a great way to feed WN. What about WN launching flights on their own metal to feed their respected systems>? I think we will soon see WN birds in other Countries.
There’s not much opportunities in Canada though. Taxes and Fees are high, and alternate airports really don’t exist. If Air Canada can barely get 50-seaters to work even with Star feed, then Southwest service might be limited to 1 or 2 dailies from MDW or DEN to Vancouver, Calgary, Edmonston.
Ridiculous costs at Toronto make it impossible. Maybe a codeshare with Porter (who already flies to MDW) will work. This might actually be good. Let’s hope.
I’ve said it before, and I’ll say it again. WN consistently makes money. US does not. It’s very nice that US is proud of it’s service to every last ‘burg up and down the East Coast, but in the end, they need to take a serious look at their business model and perhaps select one that is consistently profitable. (As opposed to barely eking out a profit in great times, and being a black hole of capital under any less-than-perfect conditions.)
I find it interesting that Doug Parker talks about the disadvantages of the hub-and-spoke system while he’s repositioning his airline to fly out of its hubs more and more. I realize it’s a matter of playing to where their strengths are but it should be interesting to see how they repostion their flying in the future. If US is to survive as a stand alone carrier, which I believe is their best option at this point, it’s going to have to become more of a LCC a la America West than the legacy carrier that was US Airways.