Old 01-10-2008, 06:36 PM
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ToiletDuck
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Part two................
Sector Two: "LCCs"

Plan On Seeing Some Real Competitive Bloodshed
Maybe Some Alliances. Even Desperation Mergers

Like Small Lift Providers ("regional airlines"), this sector - commonly, if somewhat inaccurately, called "low cost carriers" - is not well suited for an economic downturn.

Too much capacity coming on line, and revenue streams that are often vulnerable to competition and to an economic downturn. Most of these LCCs do not have the fleets to access the growing business and industrial traffic at emerging small communities in the Deep South, nor the international flows they generate.

By all means, do ignore the nonsense from some academics who gurgle on about how LCCs are driving Comprehensive Network Carriers out of domestic markets and into international flying. It would be nice if these guys bothered to learn about the industry. Essentially there has been no CNC "driven out" of a major market by an LCC.

In 2008, the shift selector at some LCCs may move into "S" - survival. Bank on it: there will be some very aggressive intra-sector LCC marketing moves aimed at taking on, and taking-out, some LCC competition. We are talking competitive bloodshed.

The reason is simple. Unlike Comprehensive Network Carriers, most LCCs don't have the ability to downsize quickly and cost-effectively. And as noted above, they are not particularly well postured to access the strongest emerging revenue flows. Result: they may turn on each other.

Okay, Just What Are LCCs? Carriers within this general category actually have little in common, other than being grouped on the basis of the fact they are not comprehensive network carriers. CNCs are comprised of diverse fleets, diverse route systems, and very diverse revenue streams.

The only thing LCCs have in common, and even here it's a bit fuzzy, is that they tend not to have diverse fleets, tend not to have diverse route systems, and tend to focus on low-fares in high-density markets. Tend is the operative word.

While the media and academics talk about LCCs like it's some monolithic sector of the industry, it isn't. There was nothing in regard to LCCs on those tablets Moses brought down from Mount Sinai. Fares? CNCs tend to match. Low costs? Not necessarily - Southwest has high labor costs, albeit spread over a lot of ASMs.

Simple fleets? Only in the mushroom-garden minds of college professors who haven't entered reality in decades. Frontier has three distinct types of lift - Airbus 318/319/320s, E-Jets (leased in from Republic), and 74-seat turboprops. AirTran has 717s and 737s - very different aircraft. jetBlue has 100-seat E-Jets and 150-seat A-320s. Even Southwest operates two types of 737s.

No Frills? Not much in common here. jetBlue has leather seats, TV sets, and seat selection. Frontier has TV and seat selection for its customers, too. AirTran has XM radio, and a business class cabin. Southwest doesn't charge for the first two checked bags.

But the nice point is that we know generally what carriers are within the LCC grouping. And it's a grouping that's facing a very nasty 2008.

The Southwest Tiger. The carrier that will be driving strategies in this category in 2008 will be Southwest. It knows that it has high labor costs that will eventually catch up with it. It knows that its slowly-vaporizing fuel hedges represent a slowly-closing window of competitive opportunity. It also fully recognizes the vulnerabilities of its current product compared to those of its competition. It knows it has a motivated workforce, but isn't swan-songed by happy-news written about it. Southwest knows it has to fight for the future, and that it isn't an invulnerable airline juggernaut.

A competitor that ruthlessly understands its strengths and weaknesses is dangerous to its rivals. That describes Southwest. It knows it must expand, and pounce on new revenue streams - even if it means decimating competitors. The days are over of happy co-existence, where WN entered markets, filled 737s with smiling, largely net-new fare-driven passengers, and flew on. Southwest needs market share, and it is very likely going to put competitors in its cross-hairs.

It also needs to build its business-travel base - which, beyond product enhancements, means clawing for share in existing markets. Watch for some very aggressive expansions - aimed specifically at pulling traffic out from under perceived-weaker competitors - in 2008.

A La Carte Pricing & "Unbundling" - two more buzz-terms, referring to the concept of charging a base fare, and nickel-and-diming the passenger for everything else. Early seat assignment. Pillows. Baggage check. "Just pay for what you want" is the concept. Well, consumers generally expect those things, and except for the low-fare vacation sector - which isn't very brand-loyal - a la carte pricing has only limited potential for most low-fare carriers, as well as CNCs.

First, it adds moving parts to the process. The money has to be collected and accounted for. The passenger has to go through some additional processing to hand over the loot to get his bag checked. Second, for major carriers, it exposes them to competitive reaction. If the high-paid advisors lurking in the basement at United convince the CEO to charge for baggage check, and American doesn't follow suit, UA is competitive toast.

Finally, the unbundling thing isn't a cash bonanza - it is, by definition, hitting the customer up for some things he/she takes for granted, and it will take in marginal amounts of new revenue, when the costs of collection, accounting, and monitoring are considered.

What About The New "ULCCs?" There's a new buzz-term out there: the "ultra-low cost carrier." The type that charges for everything, and, according to the parrots in the media, have super-low costs that give them a huge advantage. They're the wave of the future, according to some stories.

Like, Skybus. The carrier which reported 7.8 cent ASM costs - which are high - while paying flight attendants 9 bucks an hour, charging for sodas on board, and having a RASM of 4.4 cents. Gonna make it up on volume, no doubt. The lore is that Skybus is a clone of Europe's very successful Ryan Air, and therefore it has a slam-dunk model, which includes seats for as low as ten bucks.

Unfortunately, this isn't Europe. Skybus isn't Michael O'Leary. And peddling seats at $10 and $25, ten at a time on each flight, only means the first 20 seats of your 70% load factor simply don't count, because you're essentially giving them away. And - memo to the media - the "frills" that Skybus leaves off are not that much of a cost-burden to the competition. The "ancillary revenues" from charging for pillows and snacks and the like, are chump change.

Finally, an airline carries people. It is a people-intensive business. People have problems. An airline that brags about not having a telephone number for people to call has taken a powder from reality. It's unknown which second-rate B-school class might have conjured up this concept, but it's not going anywhere in the real world.

It's a business plan that, if left unchanged, will indeed take the airline someplace. Directly to point of financial impact.

But watch for lots of buzz about "ULCCs" and "ancillary revenues" and such in the early part of 2008.

LCC Consolidation? Possible - But Only To Slash Capacity. There are a number of potential combinations of LCCs - none of them made-in-heaven - that could take place in 2008. All would be driven by a need to circle the wagons in a downturn and/or as a refuge in case Southwest decides to make the most of its current fuel cost advantages and expand carnivorously.

The only problem is that there simply are not many synergies to be gained. Frontier and jetBlue have Airbus fleets, but the two route systems have very little to offer each other from the standpoint of being a combined stronger airline. Both would retain their relative strengths and weaknesses. AirTran and Frontier have an innovative web-sharing plan, but the two fleets could not be more incompatible. Spirit could look at jetBlue - but most of what Spirit has on its route system jetBlue can get by itself.

Then there is the foreign connection, represented by the Lufthansa investment in jetBlue. The gossip lines lit up like the tree in Rockefeller Center when that deal was announced. This is the first tie-up that will lead to great international traffic flows, is the talk.

Probably not. There isn't much real connectivity potential between Lufthansa's three JFK departures and jetBlue. There are facility issues. There are competitive options that are already in place. Most likely: Lufthansa saw a sound financial investment. Period.

But this is the brave new world of $100 oil. Anything is possible. Southwest could buy Frontier, simply for the purpose of gaining more Denver dominance, and take the cost of eventually sorting it out operationally. Not likely.

But two years ago, neither were oil prices expected to be at the century level.
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