Friday, May 19, 2006
Legacy Airlines Get
Resourceful
By Ted Reed
TheStreet.com
Beaten-down legacy
airlines, tired of losing battles to low-fare competitors, are finding ways to
win occasionally.
Although the six legacy carriers have lost
close to $40 billion over the past five years, some are showing surprising
resilience in battles with their nemeses. One encounter is shaping up in
Charlotte, N.C., the biggest hub for US Airways Group unit US Airways, where
low-fare carrier JetBlue Airways plans to start service.
Another is
taking place in a little-known corner of the airline industry known as "yield
management," where complex software programs continuously adjust fares in
response to ticket-purchasing patterns. In both cases, legacy carriers appear to
be using their superior resources to their advantage.
US Airways has
responded aggressively to JetBlue's plans to begin flying between Charlotte and
New York's Kennedy International Airport on July 12. It has cut fares between
Charlotte and New York's LaGuardia Airport, which is more convenient than
Kennedy, being closer to Manhattan, and has also announced plans to start its
own Charlotte-to-Kennedy service. "We're not going to let them come in and take
our customers," Scott Kirby, US Airways executive vice president, said Tuesday
at the airline's annual meeting in Charlotte.
But it's gone further than
that.
Early this month, US Airways moved to block JetBlue's fare increase
of $25 to $50 each way on the majority of its east-west advance-purchase fares.
"We believe US Airways' action represents further evidence of increased legacy
hostility aimed at stunting discount-carrier revenue recovery," JP Morgan
airline analyst Jamie Baker wrote in a recent report. Despite the US Airways
move, JetBlue did not rescind its increase.
"US Airways feels really
feisty, and they are fighting a tactical battle, trying to confuse the enemy,"
says airline consultant Robert Mann. "They drained the pool in Charlotte before
JetBlue came, taking out the high prices; then they failed to match the transcon
fare increase."
Part of the game, Mann says, is that US Airways "knows
JetBlue isn't doing a sophisticated job of revenue management." On a conference
call last month, JetBlue CEO David Neeleman acknowledged as much, saying the
airline will start "using science to move average fares up where the company
needs them to be."
JetBlue recently hired Rick Zeni, formerly a
revenue-management executive at US Airways, to oversee changes. "This is an
example of an area where JetBlue has to go back and tweak the simple systems
that had given it an advantage when it started out," Mann says.
Revenue
management, as it happens, is an area where a few legacy carriers, particularly
AMR Corp. unit American Airlines, may have an upper hand. In a recent report,
Calyon Securities analyst Ray Neidl says legacy carriers are taking advantage of
an opportunity to improve revenue per available seat mile, not only through
ticket-price increases, but also through better yield and seat-inventory
management. "You could call it the revenge of the legacy carriers," Neidl
says.
American's long-term investment in yield-management systems is
helping it to maximize revenue in a period of limited capacity and high summer
travel demand, says spokesman Tim Smith.
"We have good technical tools,
and we obviously have years of experience using them, along with human
intervention, to more accurately forecast demand sooner in the process," Smith
says. "We perhaps have more degrees of options, so we can fine-tune not only
demand by route, but also demand by individual flights on a route."
Among
American's capabilities, Smith says it can quickly shut down low-fare "buckets,"
or groups of similarly priced tickets, when demand starts to rise for a specific
flight, and can also compare the relative value of passengers' full itineraries
before giving one a lower-fare seat on a certain flight.
So far, the
improvements have been hard to capture statistically, although first-quarter
results compiled by Eclat Consulting of Reston, Va., show that American produced
an 11% improvement in passenger revenue per available seat mile (PRASM) without
any change in overall capacity.
Some legacy carriers showed higher PRASM
improvement, but largely as a result of reducing capacity and eliminating the
least-profitable flights. "American has done a good job," says Eric Ford,
Eclat's vice president and a former director of domestic pricing for US Airways.
"It is easier to shrink capacity and grow PRASM than it is to grow both capacity
and PRASM."
Eclat's numbers also show 10% PRASM improvement by UAL Corp.
unit United Airlines, despite a 1% capacity increase. Top performer AirTran
Airlines showed 11% PRASM improvement despite 24% growth, while Southwest
Airlines also showed growth in both areas. Overall, most legacy carriers
continue to have higher absolute PRASM than low-fare competitors.
"The
network carriers, through the complexity of their systems and fare rules, and
higher fare structures, are achieving better revenue performance," Ford says.
"Of course, it's their higher costs that have necessitated those more
complicated systems and higher fare structures."
Capacity and PRASM Growth
A first-quarter results comparison
Airline
Capacity
PRASM
US Airways
(-16%)
22%
America West
(-1)
15
Northwest
(-11)
13
Southwest
9
12
AirTran
24
11
American
0
11
United
1
10
Average
0
10
Delta
(-9)
7
Continental
10
5
JetBlue
27
2
Source: Eclat
Consulting