Low cost versus legacy

Delta or AirTran? Southwest or American? Anybody in New York versus jetBlue? What is it that separates the legacy network carriers from the low-fare carriers?

First, let’s clear up some myths. These days, there is no such thing as a “low cost” airline. Southwest has the highest labor costs in the industry among all of their employees, and instead of fretting about it, they are proud of it. JetBlue is by no means a slouch in their pay rates either, and once the AirTran pilots finish their contract negotiations, it is reasonable to expect that their pay, benefits, and work rules will be within shouting distance of their compatriots at other major airlines.

For years, the biggest difference between the then-start ups and the majors from a pilot perspective wasn’t just the pay, it was the generous pension benefits at the majors. Now, by and large, those are gone.

So what makes the difference between the success of new airlines versus more established, and why have the legacy carriers paid such a price for not taking their competition more seriously?

A number of factors are at play. First, when start-ups such as Air Florida and Air South and a few others failed by using older planes, newer carriers began by using newer, cheaper-to-maintain equipment. It wasn’t long after Southwest started flying when they began buying new airplanes from Boeing. Valujet had the MD-95 on order before the Everglades crash, and those planes became the back-bone of the AirTran fleet…which now also consists of new 737-700’s. JetBlue ordered new A-320’s and E-190’s. New planes, like new cars, are simply less expensive to operate, and they can be customized (more on this in a bit).

New airlines are forced to create a culture of us-against-the-world with which to bond their employees and customers. Nobody did this better than Southwest (read Nuts! for the details). Smaller operations mean that everyone knows everyone, and people tend to work harder with and for those they know and trust, especially when their livelihoods depend on it.

Costs are key. Start-ups tend to be run by those with previous experience, and the focus on costs is all consuming. They start by minimizing their debt-load, and they will not lease any more gates than is absolutely necessary, and they get as many flights per day as possible in and out of each gate at each airport they use. If necessary, they will sublet gates from another carrier while they build their name in that market. Everything you can possibly think of gets a second look as to its necessity: extra fuel, extra personnel, advertising campaigns, even the use of colored paper and shared fax machines. Southwest saves hundreds of millions of dollars a year by not contracting with travel agencies or on-line ticketing options like Orbitz or Expedia. Legacy carriers at one point had an average of over 100 employees per airplane; it is now much lower. LCC’s tend to average less than seventy. That’s more than thirty salaries that were saved. While that difference between the carriers is now much lower, it still exists, and it is a competitive advantage that can’t be ignored.

Pricing. Since new carriers don’t offer the network size or the frequent flier programs of the legacy carriers, the only way they can win passengers when they first start flying is to target infrequent fliers or price-sensitive fliers. They have perfected that, while adding to their route structure, which has allowed them to win the more lucrative business traveler. Within the pricing battle, though, is simplicity. Non-legacy carriers simply can’t afford costly pricing wars. While American Airlines mastered the art of charging a range of prices for seats on the same flight, along with a dizzying array of rules and conditions, their crosstown rivals make buying a ticket so pleasant it is hard not to go back. Nowadays, price-sensitive passengers tend to get the ticket that appears on first page or two of options on a website. Guess who that will be?

New ideas. Southwest fell onto the “peanut fare” idea quite by accident, selling cheap tickets on a flight that was actually a maintenance ferry flight. The practice led to the development of peak and off-peak pricing. JetBlue revolutionized air travel with all access TVs (it was so successful that they bought the TV vender) and leather seats in a single class configuration, along with a refusal to oversell any flight. Their latest idea of “all you can jet” is brilliant. AirTran has wifi and in-flight XM radio available. Simpler frequent flier programs, better internet marketing, and the full benefit of modern websites have allowed the LCC’s to shine.

One of the tenets of the old way of doing business was to maintain a market presence by subsidizing under-performing flights in a given market. Newer airlines didn’t have the ability to stay in a market just to prevent a loss of market share. If the flights were losing money, they left, plain and simple. Now, the legacy carriers are doing the same thing, which means that, on paper, the flight schedule fluctuates wildly as the days change. However, that chaos is controlled, and the result is better capacity control and stronger revenue performance. Marginal cities looking for low-fare service are often forced to pay some of the start-up costs and even guarantee a certain amount of revenue for a period of time. The market then lives or dies on its own.

The legacy carriers are really driven these days by their international routes and their alliances with foreign carriers. In time, carriers such as AirTran and Southwest will offer some level of trans-oceant international travel, but the breadth of the legacy networks is far more complex than it seems, and it will not be easy to duplicate it. JetBlue has started a codeshare with Lufthansa, which gets their foot in the door.

As I said, this is a fascinatingly complex subject, and it’s never as easy as it appears. While this is but a glimmer of a comparison, it is a start in understanding the differences between the legacy and the non-legacy carriers.

–Chip Wright

2 Responses to “Low cost versus legacy”

  1. ctr says:

    You have ignored the loss of the American worker of jobs that paid both benefits like health and a decent retirement. Please tell me where that devotion to the greed of the bottom line has helped anyone but the owners of the airlines. One cannot simply dismiss the loss of “legacy” without realizing that it has undermined all future American workers. Today’s workforce also has to contend with outsourcing–both sending the jobs overseas (which the airlines have lone done with their maintenance) and importing skilled workers, along with open borders which have removed all the unskilled jobs which the basic American worker has lost–increasing expontionially the number of street people and homeless, as well as denying teenagers the jobs which in the past taugtht them job skills. Also, the less fortunate used to find parttime work to help them go to college. Those jobs are not taken by non-English speaking immigrants, legal and illegal.
    America’s future has thus been compromised. We have a shrinking middle-class in America. Everyday on the stock reports, downsizing is cheered. But when a major corporation is cheered for cutting out ten thousand American jobs, who really believes that many of those jobs will ever return to America? The handwriting is on the wall!

  2. site says:

    Very nice article, totally what I was looking
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