Monthly Archive for September, 2010

Catching Up With Frontier: What Southwest-AirTran Means for Milwaukee

Published
by
Dan Webb
on September 30, 2010
in AirTran, Frontier and Southwest
. 5 Comments

On Tuesday morning, I tweeted about what the Southwest/AirTran merger would mean for Frontier. A couple of hours later, I heard from Frontier’s PR department offering me a chance to chat with Daniel Shurz, Republic’s VP of Planning and Strategy. (Three cheers for social media!)

While Daniel’s official title is from Republic, he was with Frontier before the airline was acquired last year, and before that he was VP of Network Planning and Alliances at Air Canada.

Since coming to Frontier, he and his team have had to deal with plenty – a growing third competitor in Denver (Southwest), combining the Midwest and Frontier route maps, and strategically placing the E-Jet fleet that Republic brought to Frontier.

Frontier is no stranger to competing with Southwest, who has grown Denver very quickly – the city only had a handful of flights in January 2006 and is now one of the carrier’s largest operations. Southwest has also overtaken Frontier as the second-largest carrier at Denver in terms of originating O&D traffic – while United continues to hold the top spot.

And the carrier has also faced very tough competition in Milwaukee from AirTran. Southwest started serving Milwaukee a year ago, but the airline has kept its operation relatively small.

So what does Southwest taking over AirTran mean for Frontier?

Daniel said this could be good for Frontier from a cost perspective: “AirTran is the lowest cost network carrier in the country. Southwest’s costs are meaningfully higher….Assuming Southwest’s costs apply, then the costs of the operation increase. In and of itself, it’s easier to compete with airlines that have higher costs.”

One of the big cost questions is labor. Southwest has some of the highest-compensated employees in the business. Assuming all the workgroups successfully integrate, it would be fair to say that AirTran’s labor cost advantage would disappear.

And, obviously, a cost advantage means that Frontier can better survive in a revenue environment with limited pricing power.

Speaking of cost advantages – this is why I think Republic/Frontier can’t get their hands on the CSeries soon enough. If the CS300 can deliver the cost advantage that Bombardier is promising, that will certainly help improve Frontier’s margins.

Another topic of conversation was that of the SkyWest partnership with AirTran – something I have found very interesting lately. But Daniel’s main point was that the current AirTran scope clause allows for this operation, and Southwest’s does not. Depending on how everything shakes out, those destinations might go away if the partnership ends.

Just to provide some history – two of the SkyWest destinations – St. Louis and Pittsburgh – were previously served with mainline aircraft before SkyWest took them over. In addition, the partnership started with five aircraft, but the latest SkyWest 10-Q has it at four CRJs. Hmm.

Daniel also had plenty to say about the products of the two airlines. Naturally, since we’re talking about Southwest here, the topic of bag fees came up. Daniel did note that it’s a bit easier competing with AirTran, since they charge for bags as well.

He then focused on what he thinks is a big advantage over Southwest – Frontier offers more amenities and choices for travelers.

Of course, Midwest’s cookie, which is now being served on all Frontier flights, was brought up.

Daniel mentioned that some passengers had shifted over from Midwest to AirTran due to the latter’s business class offering. (Many of the E-Jets were all-economy with nothing special.) But Southwest will be converting the AirTran fleet to a single class of service, and Frontier now has Stretch seating fleetwide. It’s not first class, for sure – but it is nicer than plain old coach. So that’s an opportunity.

Also on the amenity front – Frontier offers assigned seating, and Southwest says the combined airline will not have it.

And one fee where Frontier wins – same-day changes. Frontier charges economy passengers $50 for a confirmed change. If you’re on a nonrefundbale fare on Southwest – you need to pony up for the full refundable fare, which can be pricey.

Daniel was also pushing Frontier’s Classic fare, which costs $25 to upgrade from economy, and includes two bags, LiveTV, a lower change fee, and some other features.

Bottom line – Frontier has more frills. I get that. Here’s my one problem with that. Customers need to research to figure that out, or it takes a lot of advertising for a company to show off its differences.

Southwest has “Bags Fly Free” down pat, and they’ve been using their large advertising budget to spread that message, which is easy to remember. Personally, I think some of the Frontier advantages are a bit more subtle, and harder to show off in a thirty-second TV spot.

Frontier clearly has their work cut out for them. They already have tough competition at both of their hubs, and one would assume that the Southwest merger has the potential to intensify that further in Milwaukee. The airline might have a nicer product in some areas – but price and schedule remain to be the biggest factors in the purchase decision.

And – looking down the road a few years – things get more interesting for Republic as a whole once some of the existing CPA agreements with mainline carriers begin to expire. But that could be a whole other blog post.

Anyway – thanks to Frontier for this opportunity. I think this post is long enough as-is, so in a couple of days I’ll share some of the other odds and ends that I discussed with Daniel.

(On a side note – Cranky looked into this topic yesterday. Check it out!)

American Cuts Down San Juan

Published
by
Dan Webb
on September 29, 2010
in American
. 3 Comments

Last year, American announced its new “cornerstone” strategy, where the carrier would focus on Chicago, Dallas, Los Angeles, Miami, and New York. San Juan cuts weren’t announced at that point, but nevertheless it wasn’t in the list. And on Friday American announced to employees that it would reduce the size of the operation by 17 departures, effective April 6. That might not sound like a huge number, but that’s a 30% reduction.

San Juan will keep service to those five cornerstone cities, but service to Tampa, Philadelphia, Washington-Dulles, Baltimore, and Boston will be eliminated. All of these routes have some kind of competition from other carriers, except for Tampa – though JetBlue and AirTran will be launching service next year.

The only non-cornerstone route up North that will remain is Hartford. Why there? Well, there’s no competition at the moment. Luckily, with the DOT DB1B database we can estimate yield on the flights.

For O&D passengers on the Hartford flights, the yield stands at 13.50 cents, over 15% higher than the next non-cornerstone flight, Boston, which was 11.65 cents for the first quarter. So SJU-BDL might not might be a perfect fit into American’s plan, but its revenue performance appears to be stronger enough relative to other routes that it is worth it to maintain service.

American is also ending mainline service to Santo Domingo, butEagle service will continue. The airline also operates mainline service to Caracas from San Juan, and that will also be sticking around.

The carrier will also be trimming its intra-Caribbean American Eagle flights, ending service to Anguilla, La Romana, Nevis, Port-Au-Prince, Port of Spain, and Puerto Plata. My guess – these were the weakest O&D wise. All but Anguilla and Nevis have other service from American. (Not sure if that will change for those two stations – I’m waiting to hear back from American on those topics.)

So my theory – the routes that are being cut were probably the weakest in terms of O&D traffic (both in terms of numbers and/or revenue) to/from San Juan, and most of the connecting traffic can be handled through American’s other hubs – primarily Miami – which is probably the cheaper option.

Quick Thoughts: Southwest to Acquire AirTran

Published
by
Dan Webb
on September 27, 2010
in AirTran and Southwest
. 11 Comments

I was trying to work ahead yesterday – I actually had a nice blog post about American trimming down San Juan ready to go. And then this happened. And all I can say is wow!

Here’s the beginning of the press release – and my quick analysis is below.

At Southwest Airlines’ closing stock price of $12.28 on September 24, 2010, the transaction values AirTran common stock at $7.69 per share, or approximately $1.4 billion in the aggregate, including AirTran’s outstanding convertible notes. This represents a premium of 69 percent over the September 24, 2010 closing price of AirTran stock. Under the agreement, each share of AirTran common stock will be exchanged for $3.75 in cash and 0.321 shares of Southwest Airlines’ common stock, subject to certain adjustments, based on Southwest Airlines’ share price prior to closing. Including the existing AirTran net indebtedness and capitalized aircraft operating leases, the transaction value is approximately $3.4 billion.

The agreement has been unanimously approved by the boards of directors of each company, and closing is subject to the approval of AirTran stockholders, receipt of certain regulatory clearances, and fulfillment of customary closing conditions.

So. Wondering what to think here, especially since the deal announcement is less an hour old, and I (literally) read the press release getting out of bed this morning.

My first big question – labor. Southwest was all about a pilots deal when they attempted to buy Frontier. But the story seems very different with AirTran:

The agreement between Southwest and AirTran does not require Labor approval, and we are approaching the acquisition in compliance with our current CBAs. Integration of the two airlines will require fair and equitable integration of seniority lists (as stated in Allegheny-Mohawk), and negotiation of labor agreements applicable to the combined operation.

It will be very interesting to see how seniority shakes out, especially considering there’s a decent amount of overlap with AirTran’s 737 pilots. Meanwhile Southwest is already in discussions with SWAPA about the -800, and I have to think a major merger announcement can only complicate those.

Speaking of the fleet – what about the 717s? That would (obviously) change Southwest’s single fleet type strategy, but I guess one could say adding a fleet type through an acquisition might be a bit easier than adding it organically (as AirTran already has all the infrastructure set up). Southwest says that “the fleet is large enough to schedule efficiently.” (Just to add more questions, AirTran said a year ago that it was already looking at 717 replacements like the CSeries.)

From a network perspective…this deal is very interesting. Southwest would be able to build up LaGuardia, finally get a presence at Washington National, and most significantly acquire an Atlanta hub operation. Smaller AirTran cities would be interesting, too, mainly because of their size. There are only a couple of Southwest cities that have less than ten departures per day – but plenty of small AirTran markets. AirTran also adds Mexico and Caribbean service.

Meanwhile – the future of the small AirTran-SkyWest partnership is still unknown.

In the product department, there’s a bit more clarity. Southwest says right now that the merged airline will have no first and second bag fees or change fees. Also, it plans to have a single class of service and no assigned seating.

Southwest also says the installation of Wi-Fi across the fleet is still going to happen. What’s interesting is how that proceeds, since Southwest is ramping up installations of Row 44, and AirTran has Gogo installed on the entire fleet.

Anyway – just some of my initial thoughts. There will be an analyst call and press conference (sadly I will miss the live version of the latter), so we’ll see what details are added there.

Some Highlights from Spirit’s IPO Filing

Published
by
Dan Webb
on September 23, 2010
in Spirit
. 3 Comments

Spirit Airlines last week filed with the SEC for a $300 million initial public offering – of which $150 million will be kept, and the remainder used to pay off debt, terminate the airline’s professional services agreement with Indigo Partners (a group that took a majority stake in 2006) and some other things.

While the IPO is exciting in and of itself – I always enjoy the IPO filing the most because it offers a whole lot of data, which is especially exciting for a company that has previously be private.

Of course – we can get a good picture of Spirit’s performance through DOT Form 41 – but generally I much prefer SEC data. First, the data is presented in a format that’s much more accessible, and there’s also data that DOT doesn’t provide. And plus SEC filings contain details and explanations from management – while the DOT data is just the straight numbers.

So a few things I’ve noticed.

First, everyone loves to hate Spirit for their business model. But – it’s working. Ever since Indigo took a big stake in the company and Ben Baldanza became CEO…the company’s results have been improving – and the airline has successfully pulled off three straight years of profitability.

Spirit did, however, post a net loss the first half of this year – $2.8 million – but did earn a $22 million operating profit. Why the change? Spirit cites that its fuel expense was up over 40%  – and the pilot strike was also a big factor. From the airline:

We estimate that the 2010 pilot strike had a net negative impact on our operating income for the quarter and six months ended June 30, 2010 of approximately $19 million consisting of an estimated $23 million in lost revenues, and approximately $4 million of incremental costs resulting from the strike, offset in part by reduced variable expenses avoided during the strike of approximately $8 million.

But I was most interested at examining Spirit’s revenues – as well all know that it has really emphasized ancillary revenues. And the growth in that kind of revenue is staggering. Here’s a graph of total non-ticket revenue – and how much non-ticket revenue makes up of Spirit’s total revenue.

And to add some further color to the first half – Spirit’s $98.1 million in non-ticket revenue was 23.5% higher than the first half of 2009.

Spirit also provided a breakdown of its fee revenue that was very interesting. Baggage fees were the biggest source, followed by Spirit’s usage fee, which one pays while buying a ticket. I’d be very interested to see how this graph looks with data from later on this year, when Spirit introduced its new fee for carry-ons.

Something else that was interesting about revenues is that Spirit has said as they introduce fees, they lower fares, and the filing sheds some light on this. In 2005, Sprit’s revenue per passenger flight segment was $102.16. $98.78 of that was the base fare. In 2009, total revenue per passenger flight segment was up slightly to $110.68 – but the base fare portion of that had gone down to $84.77.

Spirit’s utilization is also interesting. It stood at 8.9 hours in 2005, and was 13 hours in 2009 – a 46.1% increase! So Spirit has been really focused on generating as much revenue it can every day.

And finally – Spirit’s text on customer satisfaction was interesting in terms of customer adjustment:

One challenge that we experienced in connection with the implementation of our ULCC business model was an increase in customer complaints lodged with the DOT. This problem was particularly acute in domestic markets that we had been serving for a considerable period. Elements of our new business model, including unbundling services that were previously included in the product (e.g., baggage and onboard food and beverage) and adopting a high density seating configuration in our new aircraft did not necessarily meet the expectations of our former customer base. We engaged in a concerted initiative to address the rate of customer complaints, including enhancing the clarity of the ULCC model and transparent pricing elements of our product at the point of sale.

In response to customer and other demands, we recently modified our online booking process to allow our customers to see all available options and their prices prior to purchasing a ticket, and have initiated a campaign that illustrates our total prices are lower, on average, than our competitors, even when options are included.

Anyway – that’s what I’ve found so far. The SEC filing is pretty massive so I might find some more goodies. You can examine it yourself here.

United Fined for Not Violating Three-Hour Rule

Published
by
Dan Webb
on September 22, 2010
in United
. 8 Comments

United Airlines has been fined by the Department of Transportation for not violating the new tarmac delay rule.

Really.

First – a little bit of background. United had four flights in May that were bound for Denver, but had to divert to Colorado Springs due to poor weather conditions. They sat in Colorado springs for over three hours, so United reported them to the DOT as flights that had tarmac delays over three hours.

The incidents were reported in the July Air Travel Consumer Report, which contained delay data for May.

Once United had reported these delays to the DOT, they were investigated further. United then determined that in fact the flights did not violate the rule – passengers were given free food and water and were also allowed to deplane if they so desired.

According to DOT regulations, the clock on the three hour rule stops ticking once passengers can leave.

So what does the DOT do? Fine United for wasting their time, of course! The total fine is $12,000 – $6,000 of which is paid now. The other $6,000 will only be paid in the event of any other violations by United.

This just seems silly to me. Did United screw up? Yes.

But this was the first month where the DOT was enforcing the new rule – so this was a bit new to everyone, I think. Not to mention, United screwed up when they said they didn’t – the airline did not benefit from this move. That’s a lot better than, say, not reporting an actual issue to the DOT.

Here’s how this should have been handled – the DOT should have said that they found United did not violate the rule, and they are glad that airlines are taking the three hour rule seriously. It would have been a nice PR opportunity for both parties – the DOT can say the rule is benefiting consumers and United can say they’re committed taking care of their customers.

Instead, Uncle Sam gets a whopping six grand and airlines become more discouraged about being transparent with regulators.

Porter’s Interesting August Traffic

Published
by
Dan Webb
on September 21, 2010
in Porter
. 1 Comment

Porter Airlines is now releasing traffic results. Consider me a fan. Here in the States we can get a good picture of private airlines through DOT’s financial and traffic data – but that isn’t the case elsewhere.

“Beginning a standard disclosure process summarizing our monthly traffic will help inform the market about Porter’s competitive positioning,” says Porter Chief Robert Deluce.

So it’s nice to get a look into Porter. The airline’s planned IPO provided airplane dorks and potential investors lots of information – but this is more current, obviously. And it seems that something has changed with Porter in the past couple of months.

Historically, the airline has run low load factors, and also maintains a low breakeven load factor (49% in 2009, says the airline). And the first half of this year seems to be pretty similar to past years. Load factor improved 4.2 points, to 48.5%, as traffic rose 133% and capacity was up 113%.

But in August? Load factor rose 11.4 points – to 63.9%, thanks to a 105% rise in traffic and a 69% capacity boost. July load factor was up 13 points.

So why the change? Deluce says that “The improvements shown in 2010, particularly in the second half of the year, largely reflect a fully deployed 20-aircraft fleet as of this spring. Capacity is being absorbed rapidly as new routes and additional flight frequencies mature in the market.”

New routes and frequencies can certainly provide explanation these changes – but is there something else going on? Has Porter changed anything with its pricing and revenue management to attract more passengers? I honestly don’t know. Unfortunately, Porter’s traffic release does not have any sort of revenue data. But this is certainly something to be thinking about.

Frontier Lowers Second Bag Fee

Published
by
Dan Webb
on September 20, 2010
in Frontier
. 1 Comment

While I support the ideas of airlines unbundling and exploring ancillary revenue opportunities, I do join the rest of the world in not liking to pay for extra stuff, including bags. So I would like to point out that while bag fees have risen at other airlines – Frontier has reduced its second bag fee from $30 to $20. The move comes after the airline ran a promotion earlier this summer where the second bag fee was $1.

I decided to ask Frontier about the move, and here’s what I heard back:

The decision was pretty simple. First, keeping both the first and second checked bag fees at $20 simplifies things for the customer. It also makes us more competitive with other LCCs.

I agree on both counts – I like how Frontier (and Alaska) charge the same for both bags. It makes the fees more transparent, I thinkk. I’ve yet to find a reason for a $10 spread between the first and second bag fee – I doubt the second one costs that much more for the airline!
As for being more competitive, Frontier’s second bag fee is now in-line with Alaska’s. It’s also lower than AirTran’s after they raised their second bag fee to $25. And the fee is lower than most other legacy carriers. (And, of course, the first tow bags are free on Southwest.) But that also raises the question as to how many passengers use bag fees as part of their purchase decision – and while Southwest has hammered “Bags Fly Free” into everyone’s head with its advertising – do (many) passengers look at the $5-$10 differences?

Not a huge story, but I figured I’d share since it’s a change in the traveler’s favor!

Southwest Makes Progress on Potential 737-800 Addition

Published
by
Dan Webb
on September 16, 2010
in Southwest
. 0 Comments

Last month, Southwest announced that it was investigating the possibility of adding the 737-800 to its fleet, starting in 2012.  It also said that it needs to make a decision by December 1 for that to happen.

In addition to completing its own evaluation of the airplane, the adding the larger -800 would require some modified agreements with the airline’s flight attendants and pilots.

Big progress was made on the labor front yesterday, when Southwest announced that it had reached a tentative agreement with Transport Workers Union (TWU) Local 556 – which represents Southwest’s 9,700 flight attendants. The union’s executive board as unanimously approved the new deal – which will soon be voted on by union members for approval.

So what does the deal entail? Well the current contract will be extended by a year – and will now be amendable on May 31, 2013. In addition, it  “ensures that the contractual variable pay increase (tied to the company’s 2010 financial performance) will not be less than two percent”  and also “calls for company-paid training,” according to the TWU.

Another feature – the TWU says the deal includes “the formation of a labor-management committee to address any ongoing work rule issues.” Southwest says this group “would meet to work on the logistical details related to scheduling and bidding procedures that adding a fourth flight attendant will require.”

So this is good progress – now the big labor item is with Southwest’s pilots, represented by pilots, which is a slightly different ballgame, as the Dallas Morning News pointed out awhile back. Since the -800 requires a fourth flight attendant, this can be good for jobs. But for pilots it’s a slightly different story.

If the next 100 planes Southwest orders are -700s – that would require 200 pilots and 300 flight attendants. But if they were -800s instead – that would require 400 flight attendants, but the same number of pilots.

Southwest and the pilots have been meeting, and thanks to SWAPA’s tweeting we can see how it’s going.

Meanwhile – Southwest has been quiet on other details relating to the -800 – such as the size of any order and the seating configuration. For the latter, I’d love to see Southwest experiment here – specifically with some kind of premium offering. Not necessarily first class – but something along the lines of European domestic business class, or Frontier’s STRETCH or United’s Economy Plus.

Allegiant to Add Extra Seats to Its MD-80s

Published
by
Dan Webb
on September 15, 2010
in Allegiant
. 2 Comments

Allegiant announced on Monday that it would be increasing the seat count on its MD-80s aircraft – from 150 seats to 166 seats. Work is slated to begin in the third quarter of 2011, and is slated to be done by the end of 2012.

The airline operates 48 of the aircraft – and says it owns nine more that will be entering service in 2011 and 2012. Its three MD-87s will stay put at 130 seats.

Allegiant President Andrew C. Levy had this to say in a press release:

These added seats will allow us to grow our capacity with the least amount of risk. This project effectively increases our capacity by 11 percent while lowering our cost per seat. In addition, we expect to fund this through internally generated cash-flow.

So, how does adding seats reduce unit costs? Well, the extra capacity will add some expense – like a fourth flight attendant – but the additional seats mean that fixed costs are spread out more (at least that’d be my guess after a couple of accounting classes :D ).

Photo Credit: Allegiant

I found this pretty interesting, considering that back in 2004 Allegiant removed seats from its MD-80s to go down to the current 150. (Allegiant said that on average the aircraft seated 163, though there were a couple of slightly different seating configurations in service.) I decided to ask them about what’s changed over the past couple of years:

When the decision to move to 150 seats was made, Allegiant was a very different company than it is today. The move to 166 seats has been under consideration for some time now, as we feel it aligns with our current revenue strategy.

The way I read that – each additional seat that can be filled not only represents another fare, but another ancillary revenue opportunity like a hotel room, rental car, etc. And it would appear that Allegiant likes to pack ‘em full – the airline has been running very high load factors this year – with some months right around 90%.

This would also make me think that the math on the fourth flight attendant has changed a bit. Basically, FAA regulations require an additional flight attendant every 50 seats. So by going down from 163 to 150, Allegiant eliminated the fourth, but that’s now coming back. So Allegiant must think the additional revenue more than compensates for this expense.

I was also interested in seat pitch – one would assume that extra seats would mean a reduction in seat pitch. But this won’t always be the case – on some aircraft Allegiant will be doing work like removing unused galley space, creating room for the additional seats. Allegiant tells me most of its fleet already has around 30-32 inches of pitch, with some having around 33-35 inches. Once the reconfigurations are done in 2012 – the whole fleet will have 30-32 inches of pitch. (And that’s not much different from anyone else.)

Airplane Dork Test: The Answer

Published
by
Dan Webb
on September 14, 2010
in Southwest
. 3 Comments

Yesterday, I posted yet another airplane dork test. I always enjoy posting these since they’re fun and also get the comments going. I had posted two of Southwest’s latest ads, and asked to identify the aircraft of competitors with some identifying marks removed. Here are the answers – well at least what I think they are!

The first one was very tricky – and no one in the comments got it 100% right! A big guess was a JetBlue A320 – but its actually a Delta A319.

A JetBlue A320 was my first guess, too, but here’s why it’s not. First, this is an A319. Note the presence of only one overwing exit and the gaps in windows nearby. On an A320, there are two exits and the gaps aren’t there. Second, this Airbus has CFM engines, while JetBlue has IAE engines on its fleet. Finally, the blue paint on the belly slopes downward – while it’s horizontal on a JetBlue aircraft. So with those clues, I came to Delta A319.

The second advertisement was much easier, and many got it right – it’s a Compass E175 that is still in Northwest colors.

The red winglet is the first big clue. Second, even though they’re blurred, these are billboard titles, and the only other E-Jet operator in the U.S. to have those is JetBlue, but only on a couple of E190s (so far). Finally, there’s a partially blocked Delta logo on the jetway.

Thanks for playing!

Airplane Dork Test: Southwest’s Latest Ads

Published
by
Dan Webb
on September 13, 2010
in Southwest
. 17 Comments

So Southwest just unveiled a couple of new ads…and I love them. Both make fun of 1970s-ish cop shows, and they’re done beautifully. I’ve had to have watched them at least 10 times each now and I’m still laughing.

Anyway, both ads show another airline’s airplane – but with the titles blurred out. So I figured it’d be a good time for a quick dork quiz – can you identify the airline and aircraft type. Leave your guess in the comments!

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