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Fri "The Australian"
Hard lessons as Concorde exits
Robert Gottliebsen
October 24, 2003
When the Concorde flies between London and New York for the last time today, it signals the failure of an air service that was based entirely on demand from upmarket passengers.
Yet in theory it should have worked because, based on what happens in the Australian market, traditionally around 2.5 per cent of the passengers provide about a fifth of the revenue.
While Concorde has shown that it is difficult to rely solely on business and other upmarket travel, a string of global discount operators have shown that you can do the reverse and make money offering a commoditised, low-priced airline service.
So it is no coincidence that, as the Concorde heads to the museums, Qantas is not only planning a discount airline but is recruiting executives from Ryanair, which in Europe provides a discount service that makes Australia's Virgin Blue look like it's running the Concorde.
Ryanair's expertise is stripping out all but the basic essentials of airline travel. But, as so often happens in Australia, the future structure of the airline industry will revolve around the enterprise agreements of each of the players.
Many other industries, including banks and manufacturers, are also shaped by the enterprise agreements that companies negotiate with their staff.
In the last century, Qantas and Ansett operated from the same enterprise agreement. What changed airlines in Australia was the ability of Virgin to secure a totally new enterprise agreement.
Under this agreement, counter staff could be swung into helping people board the aircraft and cleaning it. The first officer would be prepared to assist cleaning if it was necessary to get the aircraft away on time.
This flexibility is the essence of a discount airline. But Virgin claims that it also enables it to achieve a far greater "on time" score.
At the moment, Qantas dominates the 2.5 per cent of airline travellers who generate a fifth of the revenue by providing an array of value-added services. But the surveys are showing that, while the add-on services are very welcome, what the business passenger needs more than anything else is on-time travel.
And, when labour agreements are not flexible and the former upmarket competitor Ansett is out of the game, it inevitably leads to planes being delayed or cancelled - particularly during a cost-reduction phase.
Virgin must see its on-time record as its greatest potential opportunity to seek business travellers. The great danger to Virgin is that as it increases market share so its people will look enviously across at the Qantas work practices. Qantas has more people doing what is essentially the same job. Inevitably the gap will narrow.
But a Ryanair-style discount airline will require work practices and systems that are even more flexible than Virgin's. If such an agreement is reached, it will make the next Virgin enterprise bargaining session - due in about two years - a lot easier.
Whether Qantas can succeed in the discount airline business will depend on whether it can arrange a totally different enterprise agreement. But, of course, in the next few years it is going to be much easier for New Zealand aircraft to operate in Australian skies and vice versa.
In New Zealand, Qantas has the sort of enterprise agreement that it will need in Australia, and it is conceivable that, if Australian talks fail, the discounter could be based across the Tasman.
What Concorde showed was that an airline needs each flight to be filled with people from various segments of the passenger market. For domestic airlines the risk is that the service is going to be commoditised as discount fares become a bigger and bigger part of the industry - at least in the short-haul business.
Robert Gottliebsen writes for The Australian and hosts Business Daily on ABC Asia Pacific TV.
=========================================
Hard lessons as Concorde exits
Robert Gottliebsen
October 24, 2003
When the Concorde flies between London and New York for the last time today, it signals the failure of an air service that was based entirely on demand from upmarket passengers.
Yet in theory it should have worked because, based on what happens in the Australian market, traditionally around 2.5 per cent of the passengers provide about a fifth of the revenue.
While Concorde has shown that it is difficult to rely solely on business and other upmarket travel, a string of global discount operators have shown that you can do the reverse and make money offering a commoditised, low-priced airline service.
So it is no coincidence that, as the Concorde heads to the museums, Qantas is not only planning a discount airline but is recruiting executives from Ryanair, which in Europe provides a discount service that makes Australia's Virgin Blue look like it's running the Concorde.
Ryanair's expertise is stripping out all but the basic essentials of airline travel. But, as so often happens in Australia, the future structure of the airline industry will revolve around the enterprise agreements of each of the players.
Many other industries, including banks and manufacturers, are also shaped by the enterprise agreements that companies negotiate with their staff.
In the last century, Qantas and Ansett operated from the same enterprise agreement. What changed airlines in Australia was the ability of Virgin to secure a totally new enterprise agreement.
Under this agreement, counter staff could be swung into helping people board the aircraft and cleaning it. The first officer would be prepared to assist cleaning if it was necessary to get the aircraft away on time.
This flexibility is the essence of a discount airline. But Virgin claims that it also enables it to achieve a far greater "on time" score.
At the moment, Qantas dominates the 2.5 per cent of airline travellers who generate a fifth of the revenue by providing an array of value-added services. But the surveys are showing that, while the add-on services are very welcome, what the business passenger needs more than anything else is on-time travel.
And, when labour agreements are not flexible and the former upmarket competitor Ansett is out of the game, it inevitably leads to planes being delayed or cancelled - particularly during a cost-reduction phase.
Virgin must see its on-time record as its greatest potential opportunity to seek business travellers. The great danger to Virgin is that as it increases market share so its people will look enviously across at the Qantas work practices. Qantas has more people doing what is essentially the same job. Inevitably the gap will narrow.
But a Ryanair-style discount airline will require work practices and systems that are even more flexible than Virgin's. If such an agreement is reached, it will make the next Virgin enterprise bargaining session - due in about two years - a lot easier.
Whether Qantas can succeed in the discount airline business will depend on whether it can arrange a totally different enterprise agreement. But, of course, in the next few years it is going to be much easier for New Zealand aircraft to operate in Australian skies and vice versa.
In New Zealand, Qantas has the sort of enterprise agreement that it will need in Australia, and it is conceivable that, if Australian talks fail, the discounter could be based across the Tasman.
What Concorde showed was that an airline needs each flight to be filled with people from various segments of the passenger market. For domestic airlines the risk is that the service is going to be commoditised as discount fares become a bigger and bigger part of the industry - at least in the short-haul business.
Robert Gottliebsen writes for The Australian and hosts Business Daily on ABC Asia Pacific TV.
=========================================
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Why should prospective new recruits to a QF LCC reject a jet job at what in most cases could mean a substantial increase in pay and conditions so as to protect mainline pay and conditions?
After all, mainline doesn't seem to be doing too much about it themselves except for being up to their neck in ****e and saying 'don't make waves'.
See the thread "Erosion of Pay and conditions - what are we doing about it' and see how many QF pilots addressed this issue.
Les miserables are at the gate - for less than you are getting paid now.
After all, mainline doesn't seem to be doing too much about it themselves except for being up to their neck in ****e and saying 'don't make waves'.
See the thread "Erosion of Pay and conditions - what are we doing about it' and see how many QF pilots addressed this issue.
Les miserables are at the gate - for less than you are getting paid now.
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Not quite sure how Gottliebsen did his calculations, and got "2.5% of the passengers provide about a fifth of the revenue".
Lets take a QF international and a QF domestic example to check it out. First international:
SYD-LHR = 17016 kms great circle; say about 34000 return kms. For simplicity, two classes of pax: business class @ $A8500 return and discount economy @ $1700. BTW it doesn't change much if a more complex mix is used. Gottliebsen had "2.5 per cent of the passengers provide about a fifth of the revenue" which I interpret as 2.5% in business class. Business class runs @ 25 Oz cents per pax-km. Discount economy @ 5 cents per pax-km. So per 100 pax, the 2.5 business pax provide 0.625 cents per km, and the 97.5 economy pax provide 4.870 cents per km. All up, that's 5.495 cents per km, and the business class provides 11%. The figure might be conservative, because when the corporate deals are put in, the business class fare drops to 21-22 cents per pax-km. Maybe my interpretation was wrong, and he meant 2.5% in first class. Well, change the mix to be 2.5% in first class, 70% load factor in business and 85% load factor in Y class; with one of the 14F/79J/265Y 747-438 Longreach aircraft. F is $A12345 return. The 2.5% in first class are still only 12% of the revenue.
Now domestic: SYD-MEL; say about 1410 return kms. Two classes of pax: business class @ $A474 return and various discount economy @ $200. Gottliebsen had "2.5 per cent of the passengers provide about a fifth of the revenue" which I interpret as 2.5% in business class. Business class runs @ 33.6 Oz cents per pax-km. Discount economy @ 14.2 cents per pax-km. So per 100 pax, the 2.5 business pax provide 0.839 cents per km, and the 97.5 economy pax provide 13.810 cents per km. All up, that's 14.649 cents per km, and the business class provides 6%. Again the figure is conservative, because when the corporate deals are put in, the business class fare drops to 26-28 cents per pax-km.
Nowhere is business class (or first class) providing a fifth of the revenue. The business class argument is a smokescreen in Australia for the more complex drivers behind the fundamental business change that Qantas are driving for with the LCC. Possible flight crew cost change is another smokescreen, and IMHO is one that won't be pushed too hard. These aren't the things which are the major cost differentiators between mainline and low-cost operation for any airline, and the QF LCC agenda is focused elsewhere.
Lets take a QF international and a QF domestic example to check it out. First international:
SYD-LHR = 17016 kms great circle; say about 34000 return kms. For simplicity, two classes of pax: business class @ $A8500 return and discount economy @ $1700. BTW it doesn't change much if a more complex mix is used. Gottliebsen had "2.5 per cent of the passengers provide about a fifth of the revenue" which I interpret as 2.5% in business class. Business class runs @ 25 Oz cents per pax-km. Discount economy @ 5 cents per pax-km. So per 100 pax, the 2.5 business pax provide 0.625 cents per km, and the 97.5 economy pax provide 4.870 cents per km. All up, that's 5.495 cents per km, and the business class provides 11%. The figure might be conservative, because when the corporate deals are put in, the business class fare drops to 21-22 cents per pax-km. Maybe my interpretation was wrong, and he meant 2.5% in first class. Well, change the mix to be 2.5% in first class, 70% load factor in business and 85% load factor in Y class; with one of the 14F/79J/265Y 747-438 Longreach aircraft. F is $A12345 return. The 2.5% in first class are still only 12% of the revenue.
Now domestic: SYD-MEL; say about 1410 return kms. Two classes of pax: business class @ $A474 return and various discount economy @ $200. Gottliebsen had "2.5 per cent of the passengers provide about a fifth of the revenue" which I interpret as 2.5% in business class. Business class runs @ 33.6 Oz cents per pax-km. Discount economy @ 14.2 cents per pax-km. So per 100 pax, the 2.5 business pax provide 0.839 cents per km, and the 97.5 economy pax provide 13.810 cents per km. All up, that's 14.649 cents per km, and the business class provides 6%. Again the figure is conservative, because when the corporate deals are put in, the business class fare drops to 26-28 cents per pax-km.
Nowhere is business class (or first class) providing a fifth of the revenue. The business class argument is a smokescreen in Australia for the more complex drivers behind the fundamental business change that Qantas are driving for with the LCC. Possible flight crew cost change is another smokescreen, and IMHO is one that won't be pushed too hard. These aren't the things which are the major cost differentiators between mainline and low-cost operation for any airline, and the QF LCC agenda is focused elsewhere.
Moderate, Modest & Mild.
Well Col., after your last post above, I suggest that you delete the entire thread titled, "Erosion of Pay and conditions - what are we doing about it" - as you have effectively answered it yourself! 
And OverRun has aptly demonstrated why beancounters are effectively screwing every airline they are allowed to get their hands on!
The mindset of accountants working for airlines appears to be capable of ONLY treating an airline as another transport business, and hence they work in miles or kms as the basis for their calculations of cost structure, as if the aircraft were a taxi, truck, or bus.
Is it any wonder that so many companies are being sent to the wall BECAUSE of this ignorance.
As an example, OverRun, fewer miles (achieved by track shortening, as is sometimes offered by ATC) may NOT necessarily result in a cost saving in aircraft operation (depending upon the decision of the pilots) - and as a matter of fact may even INCREASE costs. However to people who think of aircraft as simply another form of transportation, this concept is probably quite inconceivable.
And OverRun has aptly demonstrated why beancounters are effectively screwing every airline they are allowed to get their hands on!
The mindset of accountants working for airlines appears to be capable of ONLY treating an airline as another transport business, and hence they work in miles or kms as the basis for their calculations of cost structure, as if the aircraft were a taxi, truck, or bus.
Is it any wonder that so many companies are being sent to the wall BECAUSE of this ignorance.
As an example, OverRun, fewer miles (achieved by track shortening, as is sometimes offered by ATC) may NOT necessarily result in a cost saving in aircraft operation (depending upon the decision of the pilots) - and as a matter of fact may even INCREASE costs. However to people who think of aircraft as simply another form of transportation, this concept is probably quite inconceivable.
Last edited by Kaptin M; 25th Oct 2003 at 19:04.
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Interesting figures OverRun but I would check those Business class fares to Mel. Last time I bought a flexi fare economy ticket it cost me $450!
Business class more like $900 I would suggest!
Business class more like $900 I would suggest!
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Hows this for a scenario:
'Skimpy' is started up using Impulse model and AOC, the existing 14 717's and drivers. This is toped up by 9 new 738s crewed by mailine pilots.
Over 12 months the 717's are phased out and replaced by new 738's which come from the original QF capital expenditure of 6 billion. These are crewed by mainline, and the surplus Impulse drivers slot into mainline as S/O's.
Upside:
QF has existing 737 pilots ready to go as well as training infastructure. Impulse gives them the start up as well as AOC and excellent business model.
Mainline pilots keep the career prospects for junior pilots and the surplus drivers due to 'cannibilised flying' have a place to go. The "goodwill" of ALL mainline pilots is maintained as I believe that from the 744 down they are all concerned about this LCC issue and what will happen to Captains kids as well as being the 'the thin edge of the wedge'.
Impulse drivers get to swan around the world for a couple of years making about the same money, if not more for some, before getting back into a window seat. More importantly, they get job security that they have not had before.
Just a bit of lateral thinking.............
'Skimpy' is started up using Impulse model and AOC, the existing 14 717's and drivers. This is toped up by 9 new 738s crewed by mailine pilots.
Over 12 months the 717's are phased out and replaced by new 738's which come from the original QF capital expenditure of 6 billion. These are crewed by mainline, and the surplus Impulse drivers slot into mainline as S/O's.
Upside:
QF has existing 737 pilots ready to go as well as training infastructure. Impulse gives them the start up as well as AOC and excellent business model.
Mainline pilots keep the career prospects for junior pilots and the surplus drivers due to 'cannibilised flying' have a place to go. The "goodwill" of ALL mainline pilots is maintained as I believe that from the 744 down they are all concerned about this LCC issue and what will happen to Captains kids as well as being the 'the thin edge of the wedge'.
Impulse drivers get to swan around the world for a couple of years making about the same money, if not more for some, before getting back into a window seat. More importantly, they get job security that they have not had before.
Just a bit of lateral thinking.............
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Good thought SHRAGS, but doubtful I think.
I know of several guys flying the 717's who have been turned down by QF for a job, even twice for a couple of them!
So, for that reason, I don't think the company will come into giving instant mainline employment to those guys, despite the fact that they are technically employed by qf already....
I know of several guys flying the 717's who have been turned down by QF for a job, even twice for a couple of them!
So, for that reason, I don't think the company will come into giving instant mainline employment to those guys, despite the fact that they are technically employed by qf already....
Sorry SHRAGS but I also think yours is an unlikely outcome.
Like I said on page 1 "fifty bucks and my left nut" that Impulse will play a part with regard to crewing Skimpy. However, I omitted that I also think Jetconnect will have a big part to play as well. From my research on Jetconnect they have a strong experience base to work with( heaps of ex AN737 pilots). If QF Flight Operations does not recognise the potential of this from Jetconnect it will have wasted a great resource.
If Skimpy is even going to stand half a chance at success, it is going to have to be a 'lean and mean outfit'. "Out with" the staff travel, superannuation, LSL, bonuses, and all the other frills that go with the present. "In with" the pay for your endorsement(and yes I would imagine the Impulse crews will have to do this as well) , heaps of overnights with crappy allowances, minimum rest and working harder than ever before.
That is why I doubt the mainline guys are going to want to even bid for it, if they get a chance to.
Like I said on page 1 "fifty bucks and my left nut" that Impulse will play a part with regard to crewing Skimpy. However, I omitted that I also think Jetconnect will have a big part to play as well. From my research on Jetconnect they have a strong experience base to work with( heaps of ex AN737 pilots). If QF Flight Operations does not recognise the potential of this from Jetconnect it will have wasted a great resource.
If Skimpy is even going to stand half a chance at success, it is going to have to be a 'lean and mean outfit'. "Out with" the staff travel, superannuation, LSL, bonuses, and all the other frills that go with the present. "In with" the pay for your endorsement(and yes I would imagine the Impulse crews will have to do this as well) , heaps of overnights with crappy allowances, minimum rest and working harder than ever before.
That is why I doubt the mainline guys are going to want to even bid for it, if they get a chance to.
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Hoss, remember my analogy the other day? Bet your wife, bet your job, but never bet your balls
Superannuation is a legal obligation by employers in Australia. Dunno about INZiD however.
Bargearse, I don't think the QF decision has anything to do with EAA/Sunstate. Remember we are all seperate business units. Nobody "owns" the flying. Sure, It'll be disappointing to be bypassed yet again, but QF will do whatever they see fit.
Had lunch with a couple of Impulse dudes the other day and it does sound like they are in the box seat. Expect an announcement in the next couple of weeks.
If Skimpy is even going to stand half a chance at success, it is going to have to be a 'lean and mean outfit'. "Out with" the staff travel, superannuation, LSL, bonuses, and all the other frills that go with the present.
Bargearse, I don't think the QF decision has anything to do with EAA/Sunstate. Remember we are all seperate business units. Nobody "owns" the flying. Sure, It'll be disappointing to be bypassed yet again, but QF will do whatever they see fit.
Had lunch with a couple of Impulse dudes the other day and it does sound like they are in the box seat. Expect an announcement in the next couple of weeks.
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Does that mean that all the ex-Impulse 190 crews who retain 'seniority' in Impulse are the walk up starts for recruitment to Skimpy or will they look to the 'street'?
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Detroit News
Low-fare airlines' prices challenge major carriers
Discount lines take 28% of U.S. tickets
By Joel J. Smith / The Detroit News
When Melanie Golden was looking to buy an airline ticket to fly to San Diego to attend a friend's wedding, she had three criteria for selecting her carrier: price, price and price.
"I chose Southwest," said Golden, 31, of Plymouth, a recent Walsh College graduate. "I couldn't find a ticket any cheaper. Every airplane is basically the same. One seat fits all. I don't care whose logo is on the plane. I just want a cheap ticket."
Golden is like hundreds of thousands of other cost-conscious travelers nationwide. Whenever possible, they're ignoring big name carriers with pricey tickets in favor of low-cost, no-frill airlines.
Travel on discount airlines is soaring at the expense of the major carriers. About 28 percent of all domestic tickets are now purchased from low-fare carriers, while just 13 years ago that number was less than 3 percent.
Major airlines recognize the threat imposed by the discounters and are struggling to dramatically lower their operating costs before they lose more customers.
Richard Anderson, CEO of Northwest Airlines, said that Northwest is forced to cut operating costs so the airline can afford to match low-fare airlines or risk losing more passengers.
"Low-cost carriers are having an ever-increasing impact on our fares," Anderson wrote in an employee newspaper. "Just as many people today are more likely to go out of their way to shop at chain discount stores such as Wal-Mart or Costco, so are our customers prepared to trade some of the conveniences of network carriers for the lower prices of discount carriers."
"As a general rule, we need to meet low-cost competitor prices or lose business," Anderson wrote.
Northwest, which handles 75 percent of the passengers at Detroit Metropolitan Airport, is particularly concerned because 70 percent of its domestic routes also are served by at least one low-cost carrier.
The flying public certainly has benefited from the influx of low-fare carriers. When Spirit Airlines began offering a nonstop flight between Detroit and Los Angeles a year ago, it forced Northwest to drop its last-minute purchase price from $418 to $198.
The same thing happened when Spirit began service to Myrtle Beach, S.C. Without a weekend stay, Northwest's price was $545, but today it's less than half that price.
"There's an increasing threat of the growing low-cost market share and the pricing pressure that causes," said Doug Steenland, Northwest's president. "The challenge is going to be for the network carriers to get their costs in line so they can be fully price-competitive with low-cost carriers. When that happens, I think you'll see a stall in the growth of low-cost carriers."
Not everyone believes the big airlines can match the discounters' operating costs.
"The major airlines will never be able to get their costs as low as the discount carriers," said Darryl Jenkins, director of George Washington University's Aviation Institute in Washington, D.C. "You can only reinvent yourself so much.
"The sleeping giants are the low-fare carriers that are starting out and don't have to work with all the restrictions that the legacy carriers are faced with," Jenkins said. "This won't be a pretty battle."
Currently, Metro Airport is dominated by Northwest, which operates its largest hub there through a new $1.2 billion terminal and has more than 500 daily departures.
But Metro also has three low-fare carriers operating daily flights: Spirit, Southwest and America West. Others, such as Jet Blue and Frontier, are considering operations there. Spirit is the second biggest carrier at Metro, handling about 5.4 percent of the passenger traffic; Southwest is third with 2.8 percent.
Spirit is growing rapidly in Detroit, expecting to double its size in the next five years. Passenger traffic has jumped nearly 20 percent in the last 12 months, while Northwest and its affiliates have grown less than 5 percent.
"We're growing and doing very well," said Ned Homfeld, chairman of Spirit Airlines, which originally started in Detroit, but now is based near Ft. Lauderdale, Fla. "We are as good as the majors. We want to give consumers a product that meets or exceeds that of the major carriers. They now see they have to compete with us."
Some critics argue that once the major airlines finish cutting costs and can compete one-on-one with the discounters that the low-fare carriers will be the losers.
"What people have missed is they think Northwest is this great big dinosaur that is just sitting there letting people eat them," said Michael Boyd, president of the Boyd Group, an aviation consulting firm in Evergreen, Colo. "That's not true. Northwest is a lot more efficient today than it was two years ago."
Northwest has implemented $1.4 billion in cost cuts so far by closing up facilities, laying off more than 5,000 employees and cutting back on some routes.
With such budget-trimming moves, "The low-fare carriers market share could very well level off and shrink," Boyd said. "You're going to see that because the Northwests of the world are going to come back swinging."
Spirit's Homfeld disagrees.
"I don't think the low-cost carriers will be driven out of the industry," he said. "The low-cost carriers have grown and matured and have a strong foothold now. We have a good product and it's not as simple as just pushing us out."
Southwest officials believe the only way major airlines can compete with discount carriers is to drastically cut operating costs, something that would face stiff opposition from the labor front.
Northwest is an example of that. Last spring, the airline announced it was seeking $950 million in concessions from its seven labor unions, hopefully by early summer. To date, no concessions have been approved.
"The major carriers are just going to have to cut their costs because customers are voting with their pocketbooks," said Gary Kelly, executive vice president and chief financial officer at Southwest, which has been operating 32 years.
"We would be foolish to think our competitors will continue with very high costs. We have to be prepared for that," Kelly said. "But in a sense, we will be better with improved competition from the majors. It will cause us to be motivated to improve ourselves even more."
Currently, operating costs for the top six major airlines -- Northwest, American, Continental, Delta, United and US Airways -- averages about 10 cents per available seat mile. The same cost average for seven discount carriers is about 25 percent lower or 7.4 cents an available seat mile.
Bernie Han, Northwest's chief financial officer, said that 40 percent of the cost per available seat mile (CASM) is made up of employee wages and benefits. The remaining 60 percent consists of other operating costs, such as fuel, aircraft facilities, maintenance and travel agent commissions.
==========================================
Low-fare airlines' prices challenge major carriers
Discount lines take 28% of U.S. tickets
By Joel J. Smith / The Detroit News
When Melanie Golden was looking to buy an airline ticket to fly to San Diego to attend a friend's wedding, she had three criteria for selecting her carrier: price, price and price.
"I chose Southwest," said Golden, 31, of Plymouth, a recent Walsh College graduate. "I couldn't find a ticket any cheaper. Every airplane is basically the same. One seat fits all. I don't care whose logo is on the plane. I just want a cheap ticket."
Golden is like hundreds of thousands of other cost-conscious travelers nationwide. Whenever possible, they're ignoring big name carriers with pricey tickets in favor of low-cost, no-frill airlines.
Travel on discount airlines is soaring at the expense of the major carriers. About 28 percent of all domestic tickets are now purchased from low-fare carriers, while just 13 years ago that number was less than 3 percent.
Major airlines recognize the threat imposed by the discounters and are struggling to dramatically lower their operating costs before they lose more customers.
Richard Anderson, CEO of Northwest Airlines, said that Northwest is forced to cut operating costs so the airline can afford to match low-fare airlines or risk losing more passengers.
"Low-cost carriers are having an ever-increasing impact on our fares," Anderson wrote in an employee newspaper. "Just as many people today are more likely to go out of their way to shop at chain discount stores such as Wal-Mart or Costco, so are our customers prepared to trade some of the conveniences of network carriers for the lower prices of discount carriers."
"As a general rule, we need to meet low-cost competitor prices or lose business," Anderson wrote.
Northwest, which handles 75 percent of the passengers at Detroit Metropolitan Airport, is particularly concerned because 70 percent of its domestic routes also are served by at least one low-cost carrier.
The flying public certainly has benefited from the influx of low-fare carriers. When Spirit Airlines began offering a nonstop flight between Detroit and Los Angeles a year ago, it forced Northwest to drop its last-minute purchase price from $418 to $198.
The same thing happened when Spirit began service to Myrtle Beach, S.C. Without a weekend stay, Northwest's price was $545, but today it's less than half that price.
"There's an increasing threat of the growing low-cost market share and the pricing pressure that causes," said Doug Steenland, Northwest's president. "The challenge is going to be for the network carriers to get their costs in line so they can be fully price-competitive with low-cost carriers. When that happens, I think you'll see a stall in the growth of low-cost carriers."
Not everyone believes the big airlines can match the discounters' operating costs.
"The major airlines will never be able to get their costs as low as the discount carriers," said Darryl Jenkins, director of George Washington University's Aviation Institute in Washington, D.C. "You can only reinvent yourself so much.
"The sleeping giants are the low-fare carriers that are starting out and don't have to work with all the restrictions that the legacy carriers are faced with," Jenkins said. "This won't be a pretty battle."
Currently, Metro Airport is dominated by Northwest, which operates its largest hub there through a new $1.2 billion terminal and has more than 500 daily departures.
But Metro also has three low-fare carriers operating daily flights: Spirit, Southwest and America West. Others, such as Jet Blue and Frontier, are considering operations there. Spirit is the second biggest carrier at Metro, handling about 5.4 percent of the passenger traffic; Southwest is third with 2.8 percent.
Spirit is growing rapidly in Detroit, expecting to double its size in the next five years. Passenger traffic has jumped nearly 20 percent in the last 12 months, while Northwest and its affiliates have grown less than 5 percent.
"We're growing and doing very well," said Ned Homfeld, chairman of Spirit Airlines, which originally started in Detroit, but now is based near Ft. Lauderdale, Fla. "We are as good as the majors. We want to give consumers a product that meets or exceeds that of the major carriers. They now see they have to compete with us."
Some critics argue that once the major airlines finish cutting costs and can compete one-on-one with the discounters that the low-fare carriers will be the losers.
"What people have missed is they think Northwest is this great big dinosaur that is just sitting there letting people eat them," said Michael Boyd, president of the Boyd Group, an aviation consulting firm in Evergreen, Colo. "That's not true. Northwest is a lot more efficient today than it was two years ago."
Northwest has implemented $1.4 billion in cost cuts so far by closing up facilities, laying off more than 5,000 employees and cutting back on some routes.
With such budget-trimming moves, "The low-fare carriers market share could very well level off and shrink," Boyd said. "You're going to see that because the Northwests of the world are going to come back swinging."
Spirit's Homfeld disagrees.
"I don't think the low-cost carriers will be driven out of the industry," he said. "The low-cost carriers have grown and matured and have a strong foothold now. We have a good product and it's not as simple as just pushing us out."
Southwest officials believe the only way major airlines can compete with discount carriers is to drastically cut operating costs, something that would face stiff opposition from the labor front.
Northwest is an example of that. Last spring, the airline announced it was seeking $950 million in concessions from its seven labor unions, hopefully by early summer. To date, no concessions have been approved.
"The major carriers are just going to have to cut their costs because customers are voting with their pocketbooks," said Gary Kelly, executive vice president and chief financial officer at Southwest, which has been operating 32 years.
"We would be foolish to think our competitors will continue with very high costs. We have to be prepared for that," Kelly said. "But in a sense, we will be better with improved competition from the majors. It will cause us to be motivated to improve ourselves even more."
Currently, operating costs for the top six major airlines -- Northwest, American, Continental, Delta, United and US Airways -- averages about 10 cents per available seat mile. The same cost average for seven discount carriers is about 25 percent lower or 7.4 cents an available seat mile.
Bernie Han, Northwest's chief financial officer, said that 40 percent of the cost per available seat mile (CASM) is made up of employee wages and benefits. The remaining 60 percent consists of other operating costs, such as fuel, aircraft facilities, maintenance and travel agent commissions.
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Mon "The Australian"
No-frills do not fly well with a full deal
By Steve Creedy
October 27, 2003
No-frills airlines are here to stay but full-service carriers are becoming smarter about ways to deal with them, British Airways chief executive Rod Eddington says.
While the budget airline phenomenon has been a boon for the consumer, the BA boss doubts the wisdom of full-service airlines starting low-cost airline offshoots.
In an interview with The Australian, Mr Eddington declined to comment on plans by partner Qantas to start a low-cost carrier next year. But he reiterated the stance taken when he sold British Airways low-cost Go subsidiary to Easyjet.
"We sold Go because I put a simple proposition, which was that no full-service network carrier had ever successfully been able to operate a full service network airline and a no-frills carrier in the same market," he said.
"Plenty have tried. Most recently KLM sold Buzz and Air Canada, who set up several, including Tango and Jazz, went bankrupt.
"So a simple observation: no one's ever done it."
Mr Eddington, whose airline has endured an explosive growth in low-fare carriers in one of the world's most aggressive markets, said Go had confused BA's customers and staff.
The low-cost offshoot had also prevented a vigorous competitive response to low-cost competitors by mainline BA.
He said BA's short-haul business had been losing £300 million a year when he arrived at the airline but executives had seen Go as its main response.
"We're much smarter now about how we compete with the no-frills carriers," he said. "We have greater use of the web, we've completely changed our pricing distribution strategy and we've been much smarter about what we do and how we do it."
The BA chief said the British carrier had pioneered what he regarded as the sensible full-service response to no-frills carriers.
The carrier had pulled off low-yielding routes in favour of those with a reasonable mix of premium and leisure traffic.
It had also replaced widebody aircraft on shorthaul routes with smaller Airbus A319 and A320 aircraft flying high frequencies to drive business travel.
"And then use the net intelligently to sell the back of the aeroplane," he said. "Unashamedly learn some of the lessons from the no-frills carriers."
Mr Eddington said BA's lower fares had been well received but it also meant the airline had to lower costs because yields were thinner.
The airline was taking a million pounds a year out of its cost base but did not expect to ever match those of the no-frills competitors.
However, travellers would continue to pay a premium to travel on a full-service network and advantages such as Heathrow departures, pre-assigned seating and backup aircraft.
"The question is how big a premium will they pay and are your respective cost bases such that you can earn a living off that premium," he said. "You've got to get your costs aligned in an intelligent, sensible way."
Steve Creedy travelled to London courtesy of BA.
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No-frills do not fly well with a full deal
By Steve Creedy
October 27, 2003
No-frills airlines are here to stay but full-service carriers are becoming smarter about ways to deal with them, British Airways chief executive Rod Eddington says.
While the budget airline phenomenon has been a boon for the consumer, the BA boss doubts the wisdom of full-service airlines starting low-cost airline offshoots.
In an interview with The Australian, Mr Eddington declined to comment on plans by partner Qantas to start a low-cost carrier next year. But he reiterated the stance taken when he sold British Airways low-cost Go subsidiary to Easyjet.
"We sold Go because I put a simple proposition, which was that no full-service network carrier had ever successfully been able to operate a full service network airline and a no-frills carrier in the same market," he said.
"Plenty have tried. Most recently KLM sold Buzz and Air Canada, who set up several, including Tango and Jazz, went bankrupt.
"So a simple observation: no one's ever done it."
Mr Eddington, whose airline has endured an explosive growth in low-fare carriers in one of the world's most aggressive markets, said Go had confused BA's customers and staff.
The low-cost offshoot had also prevented a vigorous competitive response to low-cost competitors by mainline BA.
He said BA's short-haul business had been losing £300 million a year when he arrived at the airline but executives had seen Go as its main response.
"We're much smarter now about how we compete with the no-frills carriers," he said. "We have greater use of the web, we've completely changed our pricing distribution strategy and we've been much smarter about what we do and how we do it."
The BA chief said the British carrier had pioneered what he regarded as the sensible full-service response to no-frills carriers.
The carrier had pulled off low-yielding routes in favour of those with a reasonable mix of premium and leisure traffic.
It had also replaced widebody aircraft on shorthaul routes with smaller Airbus A319 and A320 aircraft flying high frequencies to drive business travel.
"And then use the net intelligently to sell the back of the aeroplane," he said. "Unashamedly learn some of the lessons from the no-frills carriers."
Mr Eddington said BA's lower fares had been well received but it also meant the airline had to lower costs because yields were thinner.
The airline was taking a million pounds a year out of its cost base but did not expect to ever match those of the no-frills competitors.
However, travellers would continue to pay a premium to travel on a full-service network and advantages such as Heathrow departures, pre-assigned seating and backup aircraft.
"The question is how big a premium will they pay and are your respective cost bases such that you can earn a living off that premium," he said. "You've got to get your costs aligned in an intelligent, sensible way."
Steve Creedy travelled to London courtesy of BA.
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Wondering why Eastern and Sunstate have not been involved thus far. I think if QF are trying to get away from an entrenched culture that the regionals would be a great source of potential.
Does AIPA know that QF actually operates other aircraft than the 747?
Does AIPA know that QF actually operates other aircraft than the 747?