"Why the big boys won't come back" - Fortune says majors doomed

[flyguy]

Re: \"Why the big boys won\'t come back\" - Fortune says majors doomed

That's a bad analogy. Right now the problem is as you said that there are 4 gas stations on the same corner competing with each other. What is happening is two of them sell only low octane at very low prices. The other 2 sell low octane, high octane and diesel, but lose money on the low octane because the other 2 stations are selling it cheap. They can get away with it because they don't have the extra costs from carrying the other products. This forces the other stations to discontinue sales of the low octane. What the article is suggesting is that the gas stations will merge and liquidate and we'll end up with individual fuel stations each serving its own market. Some will have low octane for general purpose, some will have high octane for high performance vehicles, and others will have diesel. If there are 4 gas stations at the corner but only one that sells the type of fuel you need, there is no competition and that stations can charge as much as they want.

 

[flyover]

Re: \"Why the big boys won\'t come back\" - Fortune says majors doomed

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If there are 4 gas stations at the corner but only one that sells the type of fuel you need, there is no competition and that stations can charge as much as they want.

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There is a big misconception right now about what the "problem" is with the industry. There is too much focus on LCCs. LCCs are one problem. But they have no desire to develop hub and spoke systems and compete with the majors in every market. So they impact some markets.

On the other hand the network carriers developed way too many hubs during the go-go 80s and 90s following deregulation. It seemed smart because they were able to make some (not a lot, but some) money. But if you look at about any city pair you will find every network carrier serves it through theri hubs. This is true in small, medium, and large markets. Who serves ATL to DEN, for example? Well that would be Frontier, Delta, UAL, CAL, American, USAir, and Northwest. (There is probably someone I'm leaving out, ATA for example).This is why none of the majors can raise fares, even in the markets where they have no LCC exposure.

So after consolidation and the shuttering of about half of the hubs, each city pair will still have 2 to 3 carriers competing. They will be able to use larger, more efficient airplanes. They will keep each other honest (fare wise) and if a market gets overpriced more competition will immediately move in. 2 or 3 carriers in one market is more sustainable than 5 or 6.

One of the reasons that turboprops and RJs prolifferated was too many carriers offering too much frequency in each market. RJs have higher seat mile costs than 737s and MD-80s. Certainly much higher than the new e-jets coming. So the consumers will be happy to get back on to some bigger airplanes.

The results will be good. The tonic will taste very bad for awhile. I'd say this article is the most accurate with less hyperbole than any I've seen. I think talking about "niche" markets is a little misleading. Hub and spoke carriers will serve most markets to some extent.

Dave

 

[flyover]

Re: \"Why the big boys won\'t come back\" - Fortune says majors doomed

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That's a bad analogy........ If there are 4 gas stations at the corner but only one that sells the type of fuel you need, there is no competition and that stations can charge as much as they want.

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I must say I don't think I've ever seen that situation before. Is that the way gas stations work where you live? Each one specializing in a certain octane?

Dave

 

[kellwolf]

Re: \"Why the big boys won\'t come back\" - Fortune says majors doomed

I think he was making an analogy to a situation, not relating a real life example. High octane gas station=legacy, low octane=LCC.

One thing we're all forgetting is that the airlines are not only competing with each other, but with trains, buses and personal cars. With the price of gas right now, it's actually CHEAPER to fly to FLL from MCO than to drive (especially if you're an SUV owner). So, naturally some consumers will opt for flying. Others will pay the extra for the comfort of their own car. If the airlines consolidate or find themselves the only one serving a particular market, they CAN price themselves out of sales. I looked into flying from MEM to Appleton, WI for Oshkosh, and it was over $600 a person round trip. Well, if I go, I'm driving. It might take me longer, but I refuse to pay that high of a price for an airline ticket. Northwest is pretty much your only good option in MEM since Delta cut back flights. MEM has pretty much become an outstation for Continental and AirTran since all flights pretty much go through IAH or ATL. There are a lot of people that drive to Little Rock, BNA or JAN to fly out on SWA b/c NWA charges too much.

My point is (and I think it was in there somewhere) that the airlines, even if they are a "monopoly" in their area, still have to compete with other modes of transportation. They can charge whatever they want, but at some point consumers will stop paying those prices and go elsewhere. Then the airline either has to fold or lower prices.

 

[flyover]

Re: \"Why the big boys won\'t come back\" - Fortune says majors doomed

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My point is (and I think it was in there somewhere) that the airlines, even if they are a "monopoly" in their area, still have to compete with other modes of transportation. They can charge whatever they want, but at some point consumers will stop paying those prices and go elsewhere. Then the airline either has to fold or lower prices.

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Exactly. The market will always correct itself. And there are virtually no monopoly airline markets in the US.

 

[flyover]

Re: \"Why the big boys won\'t come back\" - Fortune says majors doomed

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True, but then we have a situation where we're essentially going back to the pre-deregulation days for some places, and a deregulated market in some places.

Maybe that's what needs to be done?

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The deal is we have the vestiges of a regulated industry going through the chaos of transitioning to a de-regulated one. It has been about a 30 year process but the final shakeout is underway. What you are calling "regulated" are markets that can support few competitors. It's all de-regulated now which means competition and consumers will figure out what market needs what level of service.

Dave

 

[asl]

Re: \"Why the big boys won\'t come back\" - Fortune says majors doomed

The main selling point of the large airlines is that in combination with their regional operators they can get you to or from pretty much anywhere. All be it through a different hub!!!
Take my tour of the US two summers ago, I wanted to fly from Manchester,UK and visit people in ABE, Appleton, WI (forget the airport code), MSP, LAX, PDX and then get home. I type in my route with dates, and of course have choices from UAL, DAL, COA, AAL and USA. Who did I choose, the lowest price ... Delta. Yes annoyingly enough I had to goto ATL to get to my 1st stop at ABE, but the all-in price was no where close to buying each leg separately at the lowest price. The large, network majors have their place.

As for too many hubs - I'm not convinced - ABE to Appleton, via CVG - OK well that is fairly on the way.
Appleton to MSP, via CVG!!!!! Well that's ANNOYING, an extra 2 hours in the air because DAL doesn't hub on ORD.
Then LAX to PDX, via SLC, again no hub at LAX or SFO, means I'm flying in land and west, to go straight up the coast!!

Accusing majors of having too many hubs - how can that be?
Maybe DAL has the right number and AAL and UAL and USA have too many??

I have to admit sensible hubbing would seem to be 3 or 4 per major, national, seemingly, one East coastish, one mid-westish and one West coastish, with at least one of them significantly towards the south.

OK, so DAL is OK with ATL and SLC, but DFW is too far south along with ATL. Also to compensate for ATL and DFW's south position they need CVG as well. Solution: get rid of DFW except as a regional hub, avoiding AAL competition and just leave regular mainline services to all the other hubs.

UAL: Washington Dulles - East coast, ORD, DEN, choose one of these and get rid of the other, too close together, and LAX - good choice and SFO!!!! again too close to LAX. And nothing in the southern US!!!!

AAL: DFW and ORD - hmmmm, east coast - New York AND Boston AND Miami (St. Louis is no longer a hub). What a mess!!!!! No west coast hub, unless I'm missing something on their website.

COA: EWR (good choice!!), IAH (another good choice!!!), but nothing West coast at all!!! CLE - why?? it is so close to New York.

NWA: Detroit (OK for mid-west), MSP (2 in the mid-west!!), Memphis (aha- one in the south), nothing West- coast, or East coast!!!!!! All in the middle!!!!!

I won't even try to do USAir!!!!!

If some of the airlines did some hub swapping, say COA gets rid of CLE and takes on SFO or LAX off UAL. UAL should loose ORD and keep DEN, keeping it off AAL toes!

AAL needs to slim down the East coast hubs (i.e. get rid of one) and add in something on the West coast. Not much left though - UAL has LAX and SFO. DAL has SLC, AWE has PHX and LAS. Maybe PDX or SEA.

That is of course if they are going for truly national coverage, of course if a carve up the routes thing starts to happen - and it cuts down to 3 airlines, then COA might specialise in southwest, and south from IAD and the east coast from EWR. NWA would take the middle. UAL seems to have the better west coast coverage. So each of these majors would have national coverage, but have major routes with less competition in their own particular areas. It'll be a split, the cherry-picked routes might be maintained by the majors, with low prives due to the LCC, but the money'll made around their own niche areas, where the hub and spoke works well because that airline has a hub near you. I think that'll work out, and that is what is meant by niches!!! There will still be competition, just it'll be less direct, and more of a threat, as described.

 

[flyover]

Re: \"Why the big boys won\'t come back\" - Fortune says majors doomed

I think you are making my point. Which of course isn't MY point, it's been an observation by many experts, including the head of ALPA that there are about twice as many hubs in the US as can be supported.

You don't have to worry about sorting it all out. The competitors and customers will do that, inevtitably. But when it's all over I'm betting on around half as many hubs as we have now. Time will tell.

Dave

 

[flyover]

Re: \"Why the big boys won\'t come back\" - Fortune says majors doomed

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Both hub-and-spoke carriers.

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Both LCC's too.

The hub-and-spoke system can still work, you just have to know what you are doing.

A few of the ol' majors will inevitably survive, but right now there are too many high cost carriers chasing after too few high-yield customers.

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The semantics get a little tricky. Most people think of LCC carriers as being point to point. Among the hub and spoke carriers some have lower costs than others, but they are hub carriers and therefore accept higher costs for the sake of drawing traffic out of smaller markets.

In the future all the survivors will operate at lower cost levels, no doubt about it, or they won't be survivors. But point to point will always have a cost advantage. It's interesting that because of SWA's maturity and union work force they many have some cost issues to confront in the future.