"Airlines waging classic dogfight"

Wednesday, October 19, 2005

Airlines waging classic dogfight 
Hope seen for legacies in war with low-cost carriers
By Richard N. Velotta
The Las Vegas (NV) Sun


SAVANNAH, Ga. -- Airline experts are split over who the winners and losers
will be when the battle between legacy airlines and low-cost carriers shakes
out.

But one thing is clear -- Las Vegas isn't likely to suffer, since both have
a presence at McCarran International Airport.

Discounters Southwest and US Airways dominate the local market with 34.8
percent and 22.5 percent shares of seats into the market, respectively. But
legacy or major players United, American, Delta, Continental and Northwest
have their own niche.

Boyd Group President Mike Boyd, speaking at the company's 10th annual
aviation forecast conference Tuesay, has even come up with a third aviation
category -- "second-tier carriers" -- which he doesn't even consider to be
airlines. Las Vegas also has its share of those.

"These are jet carriers which focus on leisure and vacation passengers
only," Boyd said of carriers such as Las Vegas-based Allegiant Air. "Their
main destinations are Orlando (Fla.) and Las Vegas, and they usually have
some kind of a package deal for their customers.

"There's nothing wrong with that, but they really aren't providers of air
service."

Allegiant is joined by Sun Country Airlines, Spirit Airlines and Hooters Air
as second-tier operators.

So which airline will survive the constantly changing industry that is
important to Las Vegas because it delivers nearly half the city's tourists?

While many analysts have said low-cost carriers are the future of the
industry, Boyd is known for his contrary views. While some say the
hub-and-spoke system used by most legacy carriers is inefficient, Boyd says
it will help save that segment of the industry -- if they can fix other
problems before running out of cash.

Rapidly rising fuel costs are the primary reason several legacy carriers
have had to file for bankruptcy, Boyd said. The cost of jet fuel has risen
from $1.57 to $2.18 a gallon over the past year, a 40 percent increase, and
it's up 211 percent since January 2004.

Since 2000, airline costs have changed dramatically: In 2000 fuel accounted
for 12.7 percent of a company's expenses; today it's 20.3 percent. Labor
costs, meanwhile, have dropped from 37.3 percent in 2000 to 29.7 percent
today.

Boyd said he believes expenses other than labor and fuel are where companies
will focus cuts in the future to make airlines financially viable.

There still is some fat to trim in regulatory matters, at airports and in
operational efficiencies, he said. But those cuts won't be easy.

Boyd, a longtime critic of inefficient regulatory bodies, said the nation's
air traffic control system, operated by the Federal Aviation Administration,
has an estimated $8 billion in excess costs and failures in the system. But
airlines "lack the gumption" to challenge those failures, he added.

Airport costs also are going to be scrutinized. Boyd cited strategies and
recent moves by Southwest as an example.

Southwest has told Denver International Airport that it wouldn't fly there
because costs are too high. More recently, it waged a losing battle in
Seattle, where it sought access to Boeing Field, an airport closer to
downtown Seattle, as an alternative to Sea-Tac International Airport, which
it said is its most expensive station.

"The airline doesn't have to fly to your airport if your costs are too
high," Boyd told the conference, which included many airport managers.

McCarran generally protects itself from rising costs with revenue from
concessions such as its slot machines to offset higher expenses.

Boyd also said airlines would consider new operational efficiencies to cut
costs. Among those are cutting the number of gate employees and arriving at
gates on time instead of early.

There is a tendency for airlines to try to arrive early, but then aircraft
must wait for another plane to clear the gate before parking. Airlines could
better serve customers -- and save fuel -- by throttling back and arriving
on time instead of arriving early and waiting.

He also said low-cost carriers would be confronted with their own issues
thanks to their popularity.

"It's going to be a dog-eat-dog environment with lots of new capacity coming
on line," Boyd said.

He cited new aircraft for JetBlue and Southwest in coming months. That will
increase capacity in the market and raise competition, which could affect
the legacy carriers.

Airline analyst Ray Neidl, another conference speaker, said mergers could
help solve some problems confronting distressed legacy carriers.

Neidl of Calyon Securities in New York said merger speculation was fueled
when Delta and Northwest filed for bankruptcy protection on the same day
last month in the same New York courtroom, but he doesn't think that is on
the horizon -- at least for now.

America West's acquisition of US Airways saved that airline from
liquidation, but the Justice Department frowns on mergers because of
antitrust concerns, he said.

The government could help the industry out of its financial woes without
offering any subsidies, he said. Tax and fee cuts on what he considers to be
an overtaxed industry would help the airlines. The Justice Department
allowing carriers to develop partnerships for joint planning, marketing and
profit sharing would also help.

Neidl differs from Boyd in suggesting that reduced capacity could help the
industry overall. Independence Air, which operates primarily on the East
Coast from Washington's Dulles International Airport and has a couple of
daily flights to and from Las Vegas, is on most analysts' radar screens as
the next carrier that could file for bankruptcy.

Not surprisingly, no airline represented at the conference expects its
rivals will go away. And the carriers all have strategies for becoming
profitable in an increasingly competitive world.

Delta and Northwest outlined some of their big-picture plans and had little
to say about their Las Vegas operations, other than to note that they would
continue their current courses.

Both want better productivity from their respective workforces and
additional resources in their international markets. While neither is
looking to put nonstop flights from overseas into McCarran, both have
established hub-and-spoke networks that can bring travelers to the city with
one stop and a change of planes.

Paul Matsen, Delta's executive vice president and chief marketing officer,
said after the airline cuts labor costs by renegotiating contracts,
downsizing its fleet and eliminating unprofitable routes, it would continue
its "Operation Clockwork" plan of increasing efficiencies.

The airline plans 11 new international routes this year and has added the
equivalent of 39 aircraft to its fleet by adjusting schedules to allow more
flying time for existing planes, he said.

Northwest also will focus on international travel and is looking to reduce
costs by flying a new aircraft, Boeing's still-in-design 787.

Tom Bach, Northwest's vice president of network planning and revenue
management, said it has 18 firm orders and 50 options on the jet, which will
be made of a carbon composite that is lighter but stronger than aluminum.
Engineers say as a result, the jet would be 20 percent more fuel efficient
than existing planes.

Through its international partner KLM, the airline hopes to develop the
growing market of India with flights to three cities.


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