Is there really a difference between mainstream low cost and network carriers?  The merger between American Airlines and US Airways might answer that.
While on the surface we see two legacy carriers and a similar merger as the United/Continental tie-up, we have for the first time a merger between two large airlines with different business models.
When new CEO Doug Parker led America West in its takeover of bankrupt US Airways in 2005, he changed the re-constituted airline’s stock ticker to LCC.
The not-so-subtle statement was symbolic of the point of differentiation and basis of competition for the new airline.
Contrasting models
The new US Airways has followed through, forgoing in-flight entertainment, wifi, and overseas expansion in order to drive down costs and maintain a profit from O&D and connections through their core cities of Phoenix, Charlotte, Philadelphia, and Washington-Reagan.
Membership in the Star Alliance allowed it to outsource fancy international connectivity and frequent flier benefits to United and non-US partner carriers.
It similarly under-invested in consumer IT, with US Airways’ web site looking like it hasn’t been updated since 1998, and no mobile apps.
To its credit, it might stuck with a first class product and lounge network, but that could have been primarily to hit mandatory Star Alliance requirements, knowing that the alliance feed was critical to the airline’s revenue.
Contrast that with American Airlines, which has pursued a strategy of premium international travel, new plane orders, cabin upgrades, and fare bundling (as a contrast to fare-unbundling, American’s current approach is to up-sell you on additional features, not take away currently “free” features and charge you separately for them).
It continues to invest heavily in the corporate business and major-carrier perks.
While cutting costs in bankruptcy, American has been investing in increasing yield, such as a redesign of their flagship JFK-LAX/SFO service which will retain a three-class layout, breaking even from United, which is ditching a true first-class in its new configuration debuting this spring.
A three-class domestic product might be the antithesis of low cost, and highlights just one obvious gap between service levels at the two carriers.
Technology rumbles
One area the carriers have been consistent is in their combative relationship with the GDSs, especially Sabre.
Both have sued (and been counter-sued) by Sabre over anti-competitive behavior. Whereas American recently settled with Sabre, US Airways has an outstanding lawsuit and Sabre’s countersuit was filed just last month.
Clearly creating more independence and control over distribution is not a strategy limited to one type of carrier, but a broader macro industry trend.
As Southwest‘s growing costs have taken away much of its competitive advantage (accelerated by its acquisition of AirTran), the LCC and network carrier models have blurred.
A US Airways management take-over of American is likely to further gray that line, with a tactical de-costing of American’s model to more resemble US Airways’ profit enhancing policies of the last five years.
But it remains to be seen if Parker can successfully do that while retaining the network carrier flexibility and policies, such as the luxuries frequent business travelers expect from the nation’s largest carrier.
Even accepting American’s recent extension of Sabre’s reservation platform as part of the litigation settlement would be something hard to stomach for Parker, who kicked Sabre to the curb in favor of HP Shares (the low-cost leader, it would seem) in the 2005 merger.
Time will tell if there’s an appropriate marriage here.
History suggests that companies with clearer strategies win. US Airways’ LCC stock symbol alone might have been worth more than meets the eye in making the airline’s post-merger success over the last 8-years.
Parker will now have the challenging of turning in an LCC for an AMR, and somehow still making a profit.
Related posts:
About Evan Konwiser
The huge difference between LLC and Legacy is the operation on the ground. After fuel and Jets, the highest cost is in employees. A point to point system versus hub and spoke requires less real estate on the ground and by far fewer employees; gates are used full time or shared with other carriers, counters are only employed before flights, cleaning, catering, ground operations are used full time instead of just for the hub times with long employee lag between hub times.
By their route maps; Southwest, JetBlue, Spirit, and Allegiant may look like they have hubs but these cities are based on demand of origin or destination rather than a transfer city. This cost savings allows JetBlue and others to add to the on-flight service; free live TV, snacks, leather seats, no luggage fees etc. without compromising the bottom line.
Amazing. American Airlines and US Air have combined to make – well, what? One archaic lumbering outfit has joined with another archaic lumbering object to make an even greater lumbering object. Well done. Bravo.
If I was American Airlines and sought to grow my sphere of influence, the last place I would be looking is within a mature domestic market (even though that domestic market has some long haul routes) There was the failed AA/ BA thing, which was unfortunate for that tie-up would have represented greater opportunities for growth. Even better, AA or US should have gone out shopping around the Far Eastern or even Middle Eastern markets – these are the areas of exponential growth. They should have seen what may be hoovered up to add to the route network and/ or add to global connectivity.
Then we come to this (increasingly boring and silly) matter of how the airlines work and how they distribute their products. Oh! Dear! Thinking back, the removal of commission payments was seen as a panacea – this would mean clients would come direct to airlines and passengers would buy directly from them. Errr…. Nope. That did not work. Agents changed, many went online and airlines, meanwhile had (somethinged) the savings up the wall. The obsession with distribution being the panace, however, did not end. I know! Let’s throw away the 1980′s system (which works) and replace it with our new version (which may work …. we hope). We can differentiate our product. Try over-powerful unions, spanish practices, over-staffing, top heavy management and the sheer inability to recognise that, if you cannot make money flying from A to B, then do not fly from A to B.
Differentiation. Really? Tell me, what is their to differentiate? As far as business class is concerned, you either have a flat bed or you don’t (we may assume, for now, that all airlines are going to have half decent food on board and given that, by definition, passengers long haul are going to be sleeping we can also assume that most will have a film or two and possibly even wi-fi – but as mentioned, how much extra stuff do need for someone who is asleep?) As far as coach, that is the same as well. Cramped seats, treated as self loading freight and lots of ongoing really irritating extra charges. Nope, not a lot to differentiate, there. Ah! But we may include, in our fare, a bag and a seat reservation? Oh! Yes! That cheshnut. You mean, Mr Airline, you have taken out many of the things that one normally can expect in a fare and made people pay extra? Yes, well done. I always go on vacation for week with only a clean pair of keks and a toothbrush…. So, what do I do? Yes, of course, take the fare and add on at least $50 to cover the odds and ends before looking at anyone else. Thing is, if you have to do that anyway, across a number of different airlines…. well, the airline may as well include it in the first place. In fact it’s not a case of airline differentation at all, they are all becoming more of the same – precisiely the opposite of the intention
We are seeing a strange thing – that some airlines are having to(?) advertise that their fare includes all the normal stuff – Swiss, for example, remind people that their fare includes a bag and a seat and you are not going to get asked for $5 every time you want a cup of coffee.
All US Air are doing is hacking people off. “We give people the choice…” No, you don’t. You just irritate the hell out of Jo Public and remind them of how much like cattle they are to be treated when travelling coach.
And then this new distribution thing. Others have written about this elsewhere. I am not surprised that at the the likes of Sabre and Amadeus there are barely concealed sniggers which probably turn into howls of laughter as soon as the rather challenged and naive IATA’s back is turned. If airlines are to progress, they need to start thinking about what their customers want and not how to try and catch their customers out. It is different for low cost carriers. People know what to expect. They are prepared for it. No prisoners taken, no quarter given one foot wrong and it $20 – but one does not expect that from a legacy airline. That’s why people fly with them – ironically, that is how legacy airlines differentiate themselves and yet for some reason, (legacy) airlines wish to blur that line of differentiation. They are throwing away their unique selling point and then trying to get it back by saying “Fly with us, we arrive 3 hours later than you wanted to but Hey! We will give you a free cup of coffee and a peanut cookie” Yeah. Right. Remember, the best airline in the world, is the airline that gets me where I want to be, when I want to be there.
Anyway, the lunatics are taking even greater control of the asylum egged on by techys who have a rather tenuous grasp on the reality of travel and and even lesser one on the reality of retailing.