Low Cost Carriers in the U.S.:Shifting Strategies Required for the Next Growth Phase
William S SwelbarEclat Consulting
3rd Annual MIT Airline Industry Conference“Winds of Change: The Airline Industry in 2004 April 15, 2004
Topics to Be CoveredTopics to Be Covered
The LCC Growth Cycle Matures
Measuring the Levels of LCC Exposure
The Myth of Market Stimulation
Is the Current “Regional Armada” the Right Artillery?
Rethink the Architecture, or Else?
LCCs: This Growth Cycle Matures
The Next Phase of LCC Growth Will Require a Different Mindset About Market SizeThe Next Phase of LCC Growth Will Require a Different Mindset About Market Size
LCC Markets Entered
Total City Pairs
Large Hub Airportsto/from
Large Hub Medium Hub Small Hub
Medium Hub Airportsto/from
Medium Hub Small Hub
Small Hub Airportsto/from
Small Hub
% of Total
Cumulative% of Total
33.0% 47.1%
80.1%
11.1%
91.2%
6.5%
97.7%
2.0%
99.7%
3.0%
100%
35444565157555324
397
199419951996199719981999200020012002Total
38
12151920202410
131
--3023262026312110
187
--34995464
44
--124116--2--
26
--1142--------8
------1----------1
LCC Penetration of Top CMSA Markets —The Battle Rages East LCC Penetration of Top CMSA Markets —The Battle Rages East
Total Los Angeles
40%
Total San Francisco
32%
Total Dallas/Ft. Worth
21%
Total Chicago
17%
Total Washington
19%
Total New York
10%
Total Boston
10%
Total Houston
28%
Large Hub
Medium HubSmall Hub
Total Atlanta
14%
Total Philadelphia
5%
Total Denver
15%
Total Miami19%
Los Angeles 28%
Long Beach 76%
Orange County 33%
Oakland61%
San Jose43%
San Francisco
6%Chicago (ORD)
1%
Chicago (MDW) 75%
Houston (IAH) 4%
Houston (HOU) 74%
Dallas/Ft. Worth (DFW) 4% Dallas/Ft. Worth (DAL)
88%
Washington (BWI) 49%
Newark3%
New York (JFK) 31New York (LGA) 5%
Westchester County
Islip48%
Providence20%
Boston 6%
Manchester 19%
Ontario 64%
Burbank 70%
Washington (IAD) 3% Washington (DCA) 3%
Denver (DEN) 15%
Ft. Lauderdale (FLL) 33%
Miami (MIA) 4%
Atlanta (ATL) 14%
Philadelphia (PHL)5%
March 2004
%
Only 232 City Pairs Are Seen as LikelyNew Candidates for LCC ExpansionOnly 232 City Pairs Are Seen as LikelyNew Candidates for LCC Expansion
232 U.S. Markets With Over 100 PDEWs Have No Low Cost Carrier Service
17 (7%) (Alaska/Hawaii)
19 (8%)Misc. Reasons
135 (59%)Remain
61 (26%)Slot Controlled
All of the Remaining 135 Markets Have IssuesAll of the Remaining 135 Markets Have Issues
Gauging the Competitive Response
135Total
13Other7
Wright Amendment "Blocked" Airports
44Hub to Hub47Hub Dominant
24Served By Secondary LCC Market
The LCCs’ Impact on the Industry’s Segments
Delta and US Airways Have the Most to Lose From Planned LCC GrowthDelta and US Airways Have the Most to Lose From Planned LCC Growth
54
87
66
67
79
84
0 20 40 60 80 100
US Airways
United
Northwest
Delta
Continental
American
Remaining Domestic Revenue
Not Directly Impacted
$ 1.4B
$ 1.0B
$ 3.0B
$ 1.7B
$ 1.0B
$ 2.0B
$ 11.0B
Percent of Revenue Exposed to Direct LCC Competition
YE 2Q 2000 YE 2Q 2003
LCCs Have High Levels of Direct Competition With One AnotherLCCs Have High Levels of Direct Competition With One Another
67
74
79
90
45
93
91
0 20 40 60 80 100
Southwest
ATA
Spirit
America West
AirTran
Frontier
jetBlue
Percent of Revenue Earned in Direct Competition With at Least One Other LCC
Percent of Revenue Derived in Markets Served by Other LCCs 2003
Percent of Revenue Derived in Markets Served by Other LCCs 2000
For Every $ in Revenue by Competing LCC Carriers,
Carrier Earns:
$ 0.23
$ 0.17
$ 0.28
$ 0.41
$ 0.34
$ 2.25
$ 0.62
$ 0.12
$ 0.16
$ 0.37
$ 0.29
$ 2.01
2000 2003
$ 0.98 $ 0.25
The Network Carriers’ Regional Affiliates Have Significant Exposure to the Growing LCC’s The Network Carriers’ Regional Affiliates Have Significant Exposure to the Growing LCC’s
50.9%
76.8%
44.0%
66.8%
68.3%
62.7%
0% 20% 40% 60% 80% 100%
US Airways
United
Northwest
Delta
Continental
American
YE 2Q 2000 YE 2Q 2003
Percent of Revenue Earned in Direct Competition With at Least One Other LCC Percent Monopoly
Markets
10.5%10.9%
11.1%8.0%
9.6%17.0%
18.0%19.9%
6.9%13.3%
13.4%26.9%
The Myth of Market StimulationTraffic Growth Is One Thing…
The Myth of Stimulation —Total Market Traffic Stimulation Is Less Than 12%The Myth of Stimulation —Total Market Traffic Stimulation Is Less Than 12%
1994 - 2002
SouthwestAirTranjetBlueSpiritATAFrontier
1888220354131
+11.2M+7.0M+3.9M+3.6M+2.3M+1.8M
+29.8M
+11.1M+4.8M+1.8M+3.5M+1.3M+1.5M
+24.0Mor
+11.7%
(.1M)(2.2M)(2.1M)(.1M)
(1.0M)(.3M)
(5.8M)
New City PairsIntroduced
Actual Passenger* Stimulation
Ind. Carriers Total Market
Redirected Incumbent Traffic
*Measured 12 months prior to service inauguration by LCC, versus 12 months after
With or Without LCC Presence, Revenue Has Declined Significantly in Markets of All SizesWith or Without LCC Presence, Revenue Has Declined Significantly in Markets of All Sizes
A Look at Revenue3Q 2003 v. 3Q 2000
# MarketsTrafficAvg. FareRevenue
612-9.6%
-17.6%-25.5%
1,256-.7%
-12.9%-13.5%
10,830-2.2%
-12.3%-14.2%
537+.9%
-10.0%-9.2%
8,800-2.1%
-10.4%-12.3%
15,042-2.4%
-10.4%-12.5%
Large Hub Airportsto/from
Large Hub Medium Hub Small Hub
Medium Hub Airportsto/from
Medium Hub Small Hub
Small Hub Airportsto/from
Small Hub
Longer Haul and Shorter Haul Markets Have Produced Very Different Traffic Results But Similar Revenue Results
Longer Haul and Shorter Haul Markets Have Produced Very Different Traffic Results But Similar Revenue Results
Another Look at Revenue3Q 2003 v. 3Q 2000
1,000 Itinerary Miles or Less
Large Hub Airportsto/from
Large Hub Medium Hub Small Hub
Medium Hub Airportsto/from
Medium Hub Small Hub
Small Hub Airportsto/from
Small Hub
TrafficFaresRevenue
-15.2%-10.6%-24.2%
-7.8%-9.0%
-16.1%
-7.4%-11.8%-18.3%
-8.7%-6.3%
-14.5%
-8.4%-10.9%-18.4%
-6.5%-12.2%-18.0%
More Than 1,000 Itinerary Miles
Traffic -3.1% +7.9% +5.9% +13.4% +8.4% +8.4%Fares -24.2% -17.9% -14.5% -16.2% -11.9% -9.2%Revenue -26.5% -11.4% -9.5% -4.9% -4.6% -1.6%
The Next Phase of Growth by the LCCs Will Challenge the Current Network Architecture
The Next Phase of LCC Growth Will Be An Attack on the Network Carriers Through Their Regional Affiliates
The Next Phase of LCC Growth Will Be An Attack on the Network Carriers Through Their Regional Affiliates
LCCs
Mainline
Regional
HubsSpokes
PT-PT
The Problem for the
Regional and Mainline
The Problem for the
Regional and Mainline
Have the Network Carriers Become Too Reliant on the Regional Jet?Have the Network Carriers Become Too Reliant on the Regional Jet?
0%
10%
20%
30%
40%
50%
60%
70%
80%
Per
cent
of N
etw
ork
Pre
senc
e
Mainline to Mainline Connectivity
Source: Official Airline Guide; Eclat Air Service Model
’95 ’00 ’03American
’95 ’00 ’03Continental
’95 ’00 ’03Delta
’95 ’00 ’03Northwest
’95 ’00 ’03United
’95 ’00 ’03US Airways
Current Regional Carrier Capacity Is Not Cheap Capacity On A Per Seat Mile BasisCurrent Regional Carrier Capacity Is Not Cheap Capacity On A Per Seat Mile Basis
Cen
ts p
er A
vaila
ble
Sea
t Mile
0
5
10
15
20
25
1Q95
2Q95
3Q95
4Q95
1Q96
2Q96
3Q96
4Q96
1Q97
2Q97
3Q97
4Q97
1Q98
2Q98
3Q98
4Q98
1Q99
2Q99
3Q99
4Q99
1Q00
2Q00
3Q00
4Q00
1Q01
2Q01
3Q01
4Q01
1Q02
2Q02
3Q02
4Q02
Regional Network LCC Total Network (Including Regi
Despite the Substantial Reductions in Regional Carrier Unit Costs, They Remain 31% Higher than Mainline Unit Costs
1Q03
2Q03
3Q03
onal)
Are All of the Mid-continent Hubs, Reliant on Regional Jet Capacity, Necessary?Are All of the Mid-continent Hubs, Reliant on Regional Jet Capacity, Necessary?
0
25
50
75
100
COCLE
DLDFW
DLCVG
NWMEM
USPIT
COIAH
DLSLC
AAORD
AASTL
USPHL
UAORD
USCLT
DLATL
NWDTW
AADFW
NWMSP
UADEN
Per
cent
of M
arke
t Pre
senc
e C
reat
ed
Thro
ugh
Reg
iona
l Par
tner
Excludes IAD, JFK, EWR, LAX, SFO, MIA (International Gateways)
If Connecting Revenue Is to Be the Target of Planned LCC Growth, the Power of the Hub Will Be Tested
If Connecting Revenue Is to Be the Target of Planned LCC Growth, the Power of the Hub Will Be Tested
0
25
50
75
100
DLATL
AADFW
UAORD
NWMSP
UADEN
USCLT
DLCVG
AASTL
COIAH
NWDTW
AAORD
USPIT
DLSLC
USPHL
DLDFW
NWMEM
COCLE
COEWR
Inde
x of
Hub
Con
nect
ing
Rev
enue
DL
= 10
0
Excludes IAD, JFK, EWR, LAX, SFO, MIA (International Gateways)
Network Carrier Vulnerability to Growth by the “Big 3 LCCs”Network Carrier Vulnerability to Growth by the “Big 3 LCCs”
100.0
75.4
54.048.1 46.2
41.4
29.0 27.0
Delta Northwest OtherIndustry
American USAirways
United Alaska Continental
Other Industry Comprised of: America West, Spirit, AirTran, Southwest, Midwest, ATA, Frontier, Sun Country and jetBlue.(Listed in Order of Vulnerability)
Index = 100
Is It Time to Begin Rethinking the High Frequency/Small Aircraft Approach In This Pricing Environment?
LCCs v. The Feeder Partners --Growing Battle with Limited Artillery?LCCs v. The Feeder Partners --Growing Battle with Limited Artillery?
Number of City Pairs Where Network Carrier Regional Jet Competes With an LCC Service On At Least 1 Frequency
Nonstop Competition One-stop Competition
Num
ber o
f City
Pai
r Mar
kets
July 2000
Num
ber o
f City
Pai
r Mar
kets
July 2003
0
50
100
150
200
250
300
350
400
American Continental Delta Northwest United US Airways0
200
400
600
800
10001200
1400
1600
1800
American Continental Delta Northwest United US Airways
Sources of Capacity Change in the US Domestic MarketSources of Capacity Change in the US Domestic Market
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 YE3Q03
% Change in Departures %Change in Average Seats %Change in Average Stage Length
Per
cent
Conclusions – If the Network Carriers Are to Minimize/Block Future LCC EncroachmentConclusions – If the Network Carriers Are to Minimize/Block Future LCC Encroachment
For the Network Carriers that Have Restructured at Least Once: It’s Time to Get On With the Next Phase of Restructuring (i.e. rethinking the network architecture)
– The Current Regional Partner - Mainline Carrier Relationship Is Dysfunctional and Changes Will Prove Necessary
• Financial Relationship– Cross subsidy inside a network is one thing, guaranteeing profit while absorbing 100 percent of
the market risk is quite another• Labor Issues
– Expectations at the current regional level are too high– Significant mainline concessions permitting use of 70 seat aircraft are not enough to overcome
the structural disadvantage faced by existing network carriers
For the Network Carriers That Have Not Gotten Through the First Phase of Restructuring: Best of Luck
– Phase 2 Will Prove Much More Difficult Than Just Rate and Productivity Reductions Whether From Labor or Fixed Capital
Conclusions – If the LCC’s Are to Continue Exploiting the Network Carrier’s DomainConclusions – If the LCC’s Are to Continue Exploiting the Network Carrier’s Domain
Do Not Underestimate the Competitive Response– The next phase of US domestic growth will challenge the network
carrier’s strongest hubs
Do Not Falsely Believe That Cost Reductions at the Network Carriers Have Been Fully Realized– The gap is closing and will close further
We Are Entering a New Phase of the Growth Cycle– Markets Are Smaller– Already Have Seen Both Service and Price Stimulation, therefore
• Stimulation Rates Will Be Lower– jetBlue has signaled growth opportunities that are not domestic markets
• As have other LCC’s with announcements into Mexico
Low Cost Carriers in the U.S.:Shifting Strategies Required for the Next Growth Phase
William S SwelbarEclat Consulting
3rd Annual MIT Airline Industry Conference“Winds of Change: The Airline Industry in 2004 April 15, 2004
Top Related