Trends & Predictions for 2010: Part II

As promised, here is the second part of Airline Bulletin's discussion of trends and predictions to examine in the coming year.

Prediction #1: Industry Consolidation, Especially Abroad
While U.S. carriers have made efforts to reduce their capacity and form strategic partnerships with other carriers, it does not appear likely that we will see a full-fledged merger or buyout in the U.S. in the coming year. This is not to say that such consolidation is impossible, rather that it's simply unlikely. There aren't a lot of perennially weak airlines left to consolidate. Frontier (which has recently showed signs of strength) and Midwest have been combined, Sun Country, to my amazement, seems to be hanging on, and small LCCs like Spirit and Allegiant that have defined business models and solid market niches don't appear to be losing buckets of money either. That being said, anyone is a possible takeover target or buyer. Even Southwest, which has historically avoided growth by acquisition (with a few exceptions), has signaled of late that it is open to potential mergers.

US Airways Deals?
One carrier that still mystifies me is US Airways. The airline has been very aggressive in implementing ancillary revenue-generating programs and cutting costs/capacity. CEO Doug Parker seems to know what he's doing in this regard. But, US Airways may not be very poised for future business travel growth. It operates by far the smallest international route network of any of the 5 legacy carriers in the States, and has actually cut some of its European routes recently due to poor loads. Growth in Asia has taken something of a hiatus, as US Airways let its Philadelphia-Beijing route authority expire after the airline wanted to avoid opening the route due to the recession. And the carrier's position in Star Alliance has been weakened due to Continental's recent entry, and due to the announcement of a strengthening of reciprocity between United and Continental frequent flyer programs. The conventional wisdom has been that American would make a bid for US Airways, since American has avoided much of the consolidation activity within the past 7-8 years, and as a result, has watched its market share decline, while US Airways needs an available suitor. But American and US Airways have almost no fleet compatibility--American is mostly Boeing, US Airways is mostly Airbus. And another merger would only further complicate the labor troubles that have hampered US Airways recently, particularly with its pilots union having trouble integrating seniority between old US Airways pilots and former America West pilots. On the plus side, the route networks of American and US Airways would align somewhat, with US Airways having hubs in the Southwest, Southeast, and Northeast, all regions where American lacks hubs (American's Miami hub, mostly geared towards traffic to/from Florida or Latin America notwithstanding). However, both carriers are relatively weak in Asia and the Middle East, areas where they will need to ramp up capacity if they hope to compete in these increasingly important business markets.

What seems to be a more plausible idea, actually, is a buyout of Spirit by US Airways. US Airways as noted above has been very aggressive, perhaps the most aggressive of any legacy carrier in seeking out new ancillary revenue opportunities, and transforming itself into an LCC which can effectively compete against the likes of Southwest, JetBlue, and AirTran on the ultra-competitive routes along the eastern seaboard. A buyout of Spirit would have very strong fleet complementarities--both carriers fly A319 and A321 aircraft, as well as strong route network complementarities. US Airways tried a few years ago to open a mini-hub in Fort Lauderdale--Spirit's biggest base, with routes to Caribbean destinations, but was fended off in part due to Spirit's competition. There is clearly money to be made on these routes, but US Airways lacked the cost structure several years back to adequately compete. Now the carrier has realigned its costs, and a buyout of Spirit would make accessing such routes much easier.

It would also do something else which is pretty important. The two slot swap deals announced earlier this year, which (if approved) will strengthen legacy carriers at slot congested airports while helping to keep out low-cost competitors. US Airways, even though they are starting to act like a low-cost carrier, is not a low-fare carrier, unless it is forced to be through competition. US Airways would rather stifle demand with higher fares (and higher profits) than lower fares which stimulates demand but reduces yields, which is what Southwest tends to do. Keeping slots in the legacy carrier "family" prevents potential low-cost competition at slot-congested airports (see also Prediction #2). Spirit is one of the few LCCs to have slots at both LaGuardia and Washington National (even though it has relatively few slots in both). A buyout of Spirit would help diminish low-fare competition at these airports, and allow legacies to charge higher fares to business customers. However, I still think that this deal is somewhat improbable, only because Spirit is presumably a money-making carrier with a good market niche, while US Airways is a money-losing carrier with lots of problems that could make a merger tricky. It could be an easy buyout, or it could just be an obstacle to US Airways doing what it needs to do to revamp itself to compete against LCCs while expanding its international network.

European Consolidation
In Europe, the picture is much simpler. I don't anticipate many state carriers to go out of business, however I do imagine that governments will work even harder in the next year to privatize or revamp the following state carriers, named yesterday in Part I:
CSA Czech Airlines
Croatia Airlines
LOT Polish Airways
MALEV Hungarian Airlines
TAROM Romanian Airlines

After additional research, I also want to add the following carriers' names to this watch list:
Aer Lingus¹
Air Malta²
Bulgaria Air

Given the obligation of these governments to maintain positive images, it appears extremely unlikely that they will suddenly pull the plug on these carriers' operations, stranding passengers (voters) and angering the public, a la the recent FlyGlobespan fiasco. However, such airlines are definitely at risk of being purchased by larger airline conglomerates or of being privatized. 

Notes:
1. Aer Lingus may be at risk for another Ryanair takeover attempt in the new year. The carrier has struggled to compete against Ryanair, and has gotten push-back from its unions as management tries to contain costs. Efforts have been made to diversify the carrier away from Ireland, opening new routes from London Gatwick. While the carrier may avoid a Ryanair takeover, serious reforms are needed to make the company profitable once again, and these do not appear forthcoming.
2. Air Malta may also be in need of further reform due to the recent arrival of LCCs in Malta after the airport lowered passenger charges. Air Malta had effectively been protected from LCC competition due to these high charges, but this is no longer the case. As a result, the carrier must find ways to diversify and compete. But since the vast majority of Malta traffic is holiday-oriented, and thus, price-sensitive, it appears unlikely that unless Air Malta can turn itself into a bare-bones LCC, the carrier could face extinction. Another possibility would be a buyout, perhaps by another LCC like easyJet, which would reform the carrier, much as it did with GB Airways, while maintaining most of the its routes.

In terms of LCCs, there are simply too many out there, and too few of them have such well-defended market niches that they can't be attacked by market leaders easyJet, Ryanair, Wizz Air, and Norwegian. I believe that the following carriers are in trouble, and are at risk of potential sudden shutdown. As a traveler, I would do some research before booking with them, and then only with a credit card:
bmiBaby_³
Cimber Sterling⁴
Niki
SmartWings
Vueling⁵
Windjet⁶

3. bmiBaby is unlikely to engage in a sudden shutdown, now that the carrier is owned by Lufthansa. If bmiBaby is closed, it will likely be in a controlled fashion, or if it is sudden, passengers should anticipate far fewer inconveniences than when FlyGlobespan shut down (ie. Lufthansa will likely offer alternate flights, etc.). However, bmiBaby is under heavy competition from easyJet and Ryanair. And while the carrier is growing--it recently expanded at East Midlands which easyJet vacated due to poor yields--it is unclear whether the airline, with relatively old, inefficient planes and infrequent service on many of its international routes, will thrive in the coming years. Lufthansa may use its recent acquisition of British Midland mostly for its aircraft and slots at Heathrow, taking the airline's good routes and using British Midland to help feed into Lufthansa's long-haul routes, while scrapping much of the rest of the company. As British Midland's low-cost subsidiary, bmiBaby doesn't have very much to offer Lufthansa, and a sale or suspension of services appears likely.
4. Who knows what's going on with Cimber Sterling? The carrier seems bereft of a coherent strategy, flying both business and leisure routes with a bizarre mixture of aircraft. Most of Sterling's core routes were taken over by Norwegian and Transavia immediately after that carrier's demise, and Sterling's new namesake has been left with relatively thin routes and little room to grow. I see Cimber as extremely vulnerable to shutdown.
5. Vueling is probably not going to shut down immediately, but will be increasingly vulnerable to competition from easyJet and Ryanair in Barcelona and Madrid. It is unclear whether the combination of Vueling and Clickair has really made the company more financially stable, and due to this lack of information, I am concerned about the carrier's future. However, Vueling has potential to thrive and grow within the coming years. It has a large fleet, a relatively low cost structure, and by operating from primary airports, including Heathrow, can attract higher-yielding business travelers. Thus, it is less vulnerable than most of the other carriers named on this list, but is vulnerable nevertheless.
6. Same issue as with Cimber. It's hard to know what's going on with this carrier. It's privately owned, not discussed much in the press, and it seems hard to believe that they have a real competitive advantage in the marketplace. Now maybe they're like Spirit Air in the U.S., and have a relatively undisturbed market niche on thin routes to/from Sicily. And given Ryanair's recent announcement that it may close domestic routes within Italy, WindJet may benefit through expansion of services. But without clear evidence that WindJet is a profitable LCC with competent management, I have to place them in the same category as Cimber--extremely vulnerable to shutdown.

Prediction #2: Continued LCC Growth
As the economy continues to suffer, expect more businesses to shop around for travel, and send employees on LCCs when necessary. LCCs will try to respond to this growing demand. In the U.S. in particular, LCCs will likely make more efforts to enter or expand services at airports that are dominated by legacy carriers and which are the few remaining bastions of high fares in the U.S. While virtually every large metro area in the U.S. has low-fare airline service, many large, primary airports in these metro areas lack much low-fare service. Examples include Dallas Fort-Worth, Miami, Chicago O'Hare, Newark, Washington National, Cincinnati, Charlotte, Houston Intercontinental, and Atlanta (obviously, AirTran has a large hub here, which keeps fares lower than they otherwise would be, nevertheless, the lack of Southwest, JetBlue, or other LCCs in the Atlanta area at all is problematic and allows a Delta/AirTran duopoly to set prices). Although some of these airports are more congested and delay-prone, they are often preferable for business travelers, as they are easier to access, are located closer to where companies are situated, have better facilities and connections to other airlines, etc. In the coming year, expect expanded service from AirTran, Southwest, and JetBlue to the airports above. While new leisure-focused service will be added, particularly to/from the Caribbean, don't count out future expansions at these key airports for business travelers. Leisure demand has actually held up better than business demand, and so while LCCs will do well in leisure markets, because they are already strong in California, Florida, and the Caribbean, less of the growth in their operations is likely to be concentrated in those regions, since little added LCC capacity is needed to handle this traffic.

In Europe, while it may seem like business routes would also see expansions in service, this does not seem to be the case. Ryanair has announced minimal service of late that will be attractive to business travelers, mostly because it is concentrated in very distant and inconvenient airports. EasyJet, which has aimed to take business customers away from BA and other full-service carriers, has instead recently announced that it will add new service to a host of leisure destinations next summer, mostly in Turkey. Such moves seem to place easyJet and Ryanair in closer competition with European charter carriers such as Monarch than legacy carriers like BA. It will be interesting to see whether carriers like Wizz Air, Norwegian, and Air Berlin follow suit and concentrate growth mostly on leisure routes, but that would be somewhat counterintuitive, given the growing demand of businesses to trim travel costs.

Prediction #3: Increasing Focus on the Environment
While there are other interesting predictions to be discussed, it's getting a bit late and I need to get this out. So I'll conclude with my third prediction, which is something that will be of increasing importance not just in 2010 but in the coming decade. Expect more airlines to highlight their "green" credentials whenever possible, through marketing campaigns, press releases highlighting environmental initiatives (such as this recent announcement highlighting airline participation in a jet biofuel scheme), and programs to offset emissions. Such efforts will be reinforced as Boeing delivers the fuel-efficient 787 Dreamliner to its first customers next year, and as the U.S. Senate debates a cap-and-trade bill to combat climate change. Although we're in a recession and customers are price-sensitive, more and more consumers are going to make what they perceive to be environmentally-friendly choices, given growing awareness of environmental concerns. While airline efforts to address the issue are mostly greenwashing, since the benefits of getting customers to recycle soda cans on the plane or powering one engine with 50% biofuels aren't diddly squat compared to the effects of contrails fully-loaded commercial jets spew out at high altitudes, such efforts will likely succeed at winning customers over since most people don't know any better. What we won't see, however, are serious efforts to make the industry more environmentally-friendly through new technologies. V-shaped aircraft ("flying wings") or better yet, high-altitude airships would radically alter the airline industry as we know it, but they would also make a substantial dent in the industry's pollution levels. But because such technologies aren't compatible with current air transport infrastructure, are not seen by consumers or regulators as safe, and in some cases are slower than conventional aircraft, don't expect Boeing to announce production of such aircraft anytime in the near future. This is not to say that such technology won't be commercialized, but significant steps aren't likely to be taken within the next year due to the recent air travel slowdown and manufacturers' focus on the latest generation of fuel-efficient planes.

In 2010, as the airline industry globally continues to struggle, it will likely once again continue to make headlines as it tends to do, and Airline Bulletin will be here, whenever possible, to offer commentary on these events. Until then, have a wonderful new year!

Trends & Predictions for 2010: Part I

After the recent hiatus which was a bit longer than anticipated, Airline Bulletin is back, albeit briefly. Believe it or not, I have a life outside of Airline Bulletin, and it has prevented me from doing much on the blog of late. I will be doing some traveling over the next few months to Africa, and so once again, posting may be a bit spotty. My apologies in advance. I am using this post and the following one to highlight some trends and make predictions regarding air travel in the coming year. Part I focuses on some of the trends shaping the industry, and discusses some of the potential problems facing airlines in the coming year. Part II will make more specific predictions regarding industry consolidation, expansion, and other significant changes.

Trend #1: Continued Economic Weakness
The economy is not poised to make a significant rebound next year, and the unemployment rate may not fall below 7-8% for several years. This means that air travel demand will be commensurately affected, perhaps even more so since travel is one of the first things businesses have cut back on during this recession. However, airlines are aware of this, and have taken proactive steps to cut capacity. U.S. carriers appear to be doing better now that they've taken these steps, and are likely to fare better in the coming year. That being said, expect profits to remain relatively low, and if oil creeps up (see Trend #3), then airlines could once again wind up with buckets of red ink.

It should be noted that this crisis is hitting the traditional developed economies hardest. Europe in general is facing a severe economic situation, and the continent's demographics do not bode well for future economic recovery. The U.S. and Japan will also continue to suffer, but possibly to a lesser degree than Europe. But carriers who serve China and the Middle East are still finding relatively robust air travel demand, especially from business travelers (Dubai's debt crisis notwithstanding). These new developing markets will be increasingly important for the airline industry globally, including for U.S. carriers, and airlines like Emirates stand to benefit from relatively strong economic growth in many newly industrializing countries. Carriers that concentrate service in these markets may be a bright spot during another difficult year.

Trend #2: Capacity Cuts, Especially in Small Markets
To go along with Trend #1, airlines will continue to make capacity reductions where they appear appropriate. These reductions are likely to hit small communities in the United States the hardest, because they rely on high ASM-cost regional aircraft, which are not very attractive for carriers at $80 oil. Airlines, particularly in the U.S. will continue to press for reductions in their regional jet capacity, and especially with 50 or fewer seat planes. In Europe, small airports that rely on the business of low-cost carriers such as Ryanair will be increasingly pressured for subsidies. While these airports face a different dilemma than their counterparts in the U.S., because they can be served with mainline jets, they will be increasingly played off each other, as Ryanair and other LCCs vie for lower landing fees. 

Another concern for small airports in the U.S. is how they will address the increasing penetration of low-cost carriers into small markets, a la Ryanair. Allegiant has successfully entered many small cities and siphoned off many leisure passengers who formerly flew regional jets on legacy carriers or drove to larger cities for low-fare service, in addition to creating new demand for vacation travel. While Allegiant has been a boon for many small communities, the airline's ability to offer much lower fares than legacy carriers has put pressure on legacies that use regional jets to serve these airports. Small airports will need to work hard to keep both kinds of service, because both offer travelers in their communities a range of travel options. However, make no mistake that Allegiant is hurting legacy carriers, and by siphoning off passengers, it reduces load factors on the very 50-seat jets that need to be kept full if airlines want to avoid junking that capacity.

But there is another issue to consider here. How does the introduction of low-fare carrier service into one small regional airport affect legacy service to others? One case to examine next year: Southwest's recent announcement that it will serve the Northwest Florida International Airport starting next May, albeit with subsidies from the St. Joe Company. Such service is likely to bring lower fares to one of the nation's most expensive air travel regions. How will the airlines and airports serving Pensacola, Tallahassee, Fort Walton Beach, and Dothan respond? This remains to be seen. New low-fare service in one airport has the potential to drive away traffic in others, or it could stimulate traffic, by forcing legacy carriers to reduce fares. As U.S. low-cost carriers look for room to expand domestically, entering small markets may become increasingly attractive, but this likely means picking and choosing certain small airports in a given region to stage their operations, since LCCs need larger catchment areas to fill mainline planes as compared to legacies that need smaller catchment areas to fill 50-seat regional jets. However, if regional jets are increasingly cost-ineffective for some small markets against larger LCC aircraft, legacies could be forced to offer fewer frequencies on larger planes, or to exit these markets, which is not a desirable outcome, given that a key competitive advantage of legacies over LCCs is their wide range of destinations. LCCs have the potential to spur competition, or to squelch it, and I worry it could be the latter.

Trend #3: Problematic, But Not Devastating Oil Prices
For airlines which are relatively unhedged, the challenge of high, volatile oil prices could be a challenge in 2010. However, (and I knock on wood when I say this), I doubt that there will be major oil price spikes or falls within the next year (however, such events are quite likely to occur in future years). Here is why: oil prices are tightly connected to overall economic strength since our economy runs on oil. We are currently dependent on it for most economic activities. As the economy grows, so does demand for petroleum products. But supply is being constrained, mainly because we're running out of oil (or at least the stuff that's easy and inexpensive to access). Thus, when the economy is doing poorly, we don't use as much oil, and it isn't as expensive. But as soon as the economy starts to show signs of life, then the oil price could go much higher, because the lack of new supply is likely to result in little new oil in the market, but lots of new demand. But if there isn't oil to supply this demand, then the demand goes away and economic contraction results. Since the economy isn't showing many signs of life right now, this won't be a concern. But in the future, when the economy does rebound, then all industries, including the airline industry, will have to learn to live with less oil if economic growth will occur. And airlines will have to contend with price spikes that affect how they do business because the economy is likely to go through fits and starts. Oil prices will be something to keep an eye on, but given weak demand, it won't be as significant problem for 2010 as it was in 2008.

Trend #4: In Europe, Serious Short-haul Weakness
European LCCs are kicking butt. They are rapidly taking market share away from legacy carriers. This has resulted in a hyper-competitive intra-EU market where legacies are at a distinct disadvantage. While European carriers are looking to mergers and consolidation in order to adapt, they will nevertheless encounter resistance to doing so (see for instance, British Airways' recent difficulties with their cabin crew who nearly went on strike over Christmas due to proposed wage and personnel reductions). But unlike Ryanair and easyJet, British Airways has a long-haul operation, and when the economy picks up, this is likely to make them lots of money, since there is less competition, and such routes can command high yields in premium classes. But not all European legacy carriers have such operations--a point missed by many analysts of this market. Legacy carriers without significant long-haul operations will be strained by more efficient, cheaper, and oftentimes, more comfortable LCCs. While some of these carriers are still owned by state governments, as these companies lose money, there will be increasing pressure to privatize and get taxpayers out of this loss-making business. Whether such privatizations will be successful or not, given the competitive disadvantage of these carriers, remains to be seen. Some of these carriers could get bought out by bigger legacy carriers, and become part of European Airline conglomerates, such as Austrian Airways, which got bought out by Lufthansa. However, without such deals, carriers such as LOT, CSA Czech Airlines, Croatia Airlines, Malev, and TAROM, are likely to suffer from the likes of Wizz Air and Ryanair, the latter of which has recently signaled its intent to open new bases in Eastern Europe. All legacy European carriers will encounter problems as they battle LCCs, but those without long-haul operations that bring less competition, higher yields, and opportunities to support feeder flights to other cities will be in serious trouble.

Trend #5: Pressure for Foreign Integration
As the recent battle between American and Delta for a partnership with struggling Japanese carrier JAL illustrates, U.S. carriers will increasingly look abroad to find ways to boost their route networks. While U.S. carriers are unlikely to become owners of many carriers abroad, they may continue to deepen their partnerships with alliance partners. As business travel increasingly entails international flights to countries poorly served by American carriers, such as China, India, or Gulf states, U.S. carriers can capitalize on the route networks of their partners. Additional deals such as the loans proposed to JAL from potential U.S. suitors are likely to occur as foreign carriers, especially those in Europe and Japan, struggle with weak economies and strong competition from LCCs.

But integration will also come in other forms. U.S. carriers already have the privilege of serving intra-EU routes, and come 2010, Open Skies II should take effect, such that EU carriers can serve intra-U.S. routes. While it remains to be seen whether this provision of the treaty will be enacted by U.S. authorities (failure to do so could result in the initial phase of the deal being nullified), it will be a boon to European carriers who could enter and cooperate with their alliance partners on U.S. routes, siphoning business travelers off from carriers like JetBlue and Virgin America with the perks many foreign carriers offer, and which U.S. carriers have removed.

Finally, integration could take place through foreign carriers purchasing controlling stakes in U.S. carriers. Right now, foreign entities are prohibited from owning more than 25% of U.S. carriers. Some, such as airline consultant Mike Boyd seem to think this is a grand idea and that such restrictions ought to be maintained. As he notes in his Dec 21 "Hot Flash", "Regardless of what the deals may represent to shareholders, foreign control of US airlines means foreign strategic planning." He then proceeds to spew out some jingoistic nonsense about how such foreign ownership is anti-constitutional, and how Democrats don't give a damn about U.S. independence from dangerous dictators. Please. Foreign ownership is not necessarily a bad thing (the key word here being necessarily). It's one thing to have Richard Branson's Virgin Group take a controlling stake in Virgin America, or for Lufthansa to increase its stake in JetBlue to 51%. These companies run profitable, world-class airlines, and would bring new capital and new insights into one of the world's most dynamic aviation markets. Such connections would also help support the expansion of carriers like Lufthansa, which with its evil, anti-American strategic planning, could better time JetBlue flights at JFK to coincide with arrivals from Europe, offering Lufthansa's European passengers a convenient option when they travel to the States. A controlling stake would lead to more complete integration, and likely provide customers with a more seamless travel experience, while preventing the conflicts that sometimes occur between alliance partners. While many of the benefits of ownership can be obtained in alliances, the different interests of shareholders and managers of the partners can result in conflicts between the companies and hassles for passengers if flights aren't adequately timed and ticketing/baggage systems properly integrated. Common ownership is likely to over time alleviate such problems, increasing efficiencies and minimizing the conflicts passengers encounter when they travel between carriers.

What Boyd worries about, and rightly so, is a scenario where a Chinese conglomerate turns Delta Air Lines into The Pearl River Delta Air Line, which would not only result in minimal alliance benefits for customers (since Delta's most Western hub is in Salt Lake City which isn't really convenient for many trans-Pacific connections), but would place America's largest carrier in the hands of a country we don't really trust. Ownership rules are ostensibly in place to provide aircraft for the military in the event of a national emergency. It's implausible to me that Richard Branson would suddenly divert Virgin America's planes to help Hugo Chavez, but Chinese control of hundreds of U.S. commercial planes could leave the U.S. in a difficult situation if there ever were such a crisis. The days of restrictions on foreign ownership of U.S. carriers should not end. But their days may be numbered. Such policies need to be changed not with a bang but a whimper. Steps should be implemented to allow investors from nations trusted by the U.S. (eg. the EU, Canada, Japan, Australia, etc) to control U.S. carriers. This may require changes to bilateral or regional trade agreements that have restrictions on foreign investment, but the process should be started. Integration will result in some "foreign strategic planning", but in a world where business is increasingly global, one where airlines need to be able to transport passengers seamlessly between distant markets, big and small, such common ownership may be increasingly important to building strong, dependable transport networks.

2010 will most certainly be an interesting year for the industry, and I'll offer some more specific predictions of all the interesting things we'll see in my follow-up post.

SkyEurope Folds...Finally

SkyEurope, an LCC with hubs in Prague and Vienna, filed for bankruptcy late Monday and officially suspended services today (Tuesday). As has been noted here previously, SkyEurope did not compete effectively against larger LCC rivals, including Ryanair, easyJet, and Wizz Air. The move, which strands thousands of passengers all over Europe, will sadly not be the last failure of an airline in Europe in the coming year. Not only are there too many airlines for each nation to have their own state carrier, but so many LCCs have sprang up that the market has been saturated. Whoever thought that starting an LCC in Europe was a good way to make money must have been quite short on business ideas, for European low-cost airlines seem to be the the best way of destroying financial capital known to mankind, second only to subprime mortgages.

As for the future of the European aviation market, pay close attention to whether BA and Iberia are able to merge, as this would allow those carriers to more effectively compete against KLM/Air France and Lufthansa. But an even more crucial development appears to lie in flag carriers, particularly in Central and Eastern Europe. Many of these carriers, particularly ones which offer little or no intercontinental service, such as CSA Czech Airlines, MALEV Hungarian Airlines, LOT Polish Airlines, and Olympic Airways, are extremely vulnerable to low-cost competition. Some are so vulnerable that they have already been taken over, such as Austrian Airlines by Lufthansa. Because these carriers operate few long-haul services, most of their business comes in the form of short-haul travel, which is trending increasingly towards LCCs, particularly in this economy. And carriers such as easyJet are fighting aggressively in the hub airports of these carriers. While these carriers continue to offer amenities to upmarket travelers, the recession is tamping down their travel spending.

What will be interesting is to see whether alliance partners make acquisitions in order to protect their feeds in different regions. For instance, Austrian Airlines is part of Lufthansa's alliance, Star Alliance, and without a takeover by Lufthansa, that carrier risked Austrian failing due to low-cost competition and then not having sufficient feed from the Austrian market to flow to long-haul flights. Lufthansa's buyout not only helps give Austrian the resources it needs to market itself and streamline its operations, but it also preserves this precious feed for long-haul flights.

Aside from buyouts of smaller state carriers, the other major development in the market will simply be the falloff of LCCs. I don't want to sound like a cheerleader for Ryanair or easyJet, but unfortunately, many of Europe's smaller LCCs simply lack the management expertise, the low cost base, and the extensive route networks to succeed. Airlines such as bmiBaby, WindJet, and even Jet2 may be vulnerable to shutting down (or in the case of bmiBaby, having some of its operations absorbed into its parent British Midland). I foresee a market with only a half dozen or so sizable LCCs, Ryanair, easyJet, Air Berlin, Wizz, Norwegian, Transavia, and Clickair/Vueling. There are still some smaller carriers that appear to be thriving, Smartwings comes to mind as one, but it simply does not seem like their business models can work unless they grow extremely rapidly and choose whether to try and compete on price with Ryanair, or aim for higher yields while still minimizing costs (such as easyJet's model). There are still too many carriers with too many seats chasing a dwindling market. Fortunately, a free market has the power to reach equilibrium one way or another. Let us hope that the next airline failures are at least a bit more civil than SkyEurope's was.

Republic Airways Wins Frontier Auction

In a surprising turn of events, Republic Airways, which submitted a significantly lower bid for Frontier, won the Bankruptcy Court auction today for the carrier. Republic, which submitted a bid of $108.75 million, far less than Southwest's $170 million, appeared to win the auction because of Southwest's refusal to remove a clause in its bid requiring its Pilot Union to come to agreement with Frontier's Pilot Union regarding seniority list integration. Without such integration, Frontier's pilots would have likely been at the bottom of the pecking order, should they have been kept on by Southwest, getting the lowest pay and least desirable routes. This could have resulted in labor tensions at the worker-friendly Southwest, and the carrier didn't want to risk labor strife over the issue, even at the cost of being able to purchase Frontier.

In the short term, this changes nothing. While Southwest may try and lure Frontier's pilots union back to the bargaining table (and lure Frontier's creditors into rejecting an agreement which gives them far less than what Southwest is offering), this is rather unlikely. Southwest will probably continue to expand methodically in Denver and do its best to compete with Frontier.

And Republic's purchase of Frontier gives the carrier a reprieve. Although Frontier has suffered since Southwest's entry into Denver, the carrier has responded well, reporting many months of consecutive profits. Even as Southwest expands further into Denver, if Frontier plays up its hometown roots and amenities such as LiveTV, it should have a chance. Remember, Frontier serves many routes to a variety of airports (eg. LaGuardia, Washington National, Anchorage, Mexico, and Lynx regional cities) that Southwest does not serve from Denver. These give the airline pricing power, and they make the airline more attractive to flyers who need to go to a variety of destinations.

Then again, Southwest operates dozens of nonstop routes from Denver, plenty for many travelers, and has lots of cash, which it could use to reduce fares and hurt Frontier's (and United's) competitiveness. Southwest will develop its own loyal following in Denve over time, and both Frontier and United could suffer as a result. The future of Frontier and Southwest in Denver will depend in part on the economy, as well as how aggressive Southwest chooses to be in terms of adding frequencies, offering frequent flyer promotions, and most importantly, lowering fares. If Southwest chooses to focus its competitive energies (for lack of a better term) on other markets, such as Milwaukee, Minneapolis, and LaGuardia, Frontier could benefit. But if Southwest chooses to come down hard in Denver, the carrier has the potential to weaken Frontier and United, and that could make for a messy situation a year from now.

Slot Swap Deals Sweep The East Coast

Two slot-swap deals were announced recently with significant consequences for routes on the east coast, pending their likely approval by the DOT. The larger of the two deals will allow US Airways to obtain 42 slot pairs at Reagan National Airport and two international route authorities from Delta (Sao Paulo and Tokyo) in exchange for giving up 125 slots at New York LaGuardia. The deal is good for both carriers, it will allow them to concentrate on their strengths and improve yields, and perhaps most significantly, it will prevent slots at these valuable airports from getting into the hands of low-cost competitors. This latter point should not be taken lightly. Given that Southwest and JetBlue are chomping at the bit to enter DCA and to get more slots at LaGuardia, this deal will enhance the utilization of slots at the airport, giving the legacy carriers involved less reason to sell to an LCC who would erode yields.

While the deal means a draw-down of many US Airways operations at LaGuardia, particularly its prolific (and often money-losing) regional flights to small and medium-size communities in the east, the airlines are saying that most communities won't lose service (although US Airways will end LaGuardia service from 26 cities). Instead, Delta will "add new flights to more than a dozen cities not currently served by US Airways [though these may very well be served by other carriers]. In every slot where US Airways operates small turboprops today, Delta will operate larger jets." But the thing is, many US Airways markets from LaGuardia, especially the ones with low load factors and revenue per available seat mile, are flown by 50-seat regional jets due to distance. Turboprops only operate routes within a few hundred miles of NYC, but this still leaves many cities, such as Bangor, Charleston, Dayton, or Roanoke, that could lose nonstop service from LaGuardia entirely. This is something the regulators may consider when discussing whether to accept this deal or not.

The deal will help US Airways consolidate its market power at Reagan National, where it is already the leading carrier. US Airways will add flights to fifteen cities, including eight which currently lack nonstop service from DCA. Similarly, Delta will expand to a number of new markets from LaGuarda, vaulting the carrier into the top spot in terms of market share at the airport.

Although Delta promotes the transaction as allowing it to create a "hub" at LaGuardia, it will have very limited east-west connectivity, instead focusing mostly on point-to-point traffic as well as New England-Florida traffic. But the problem here is that having large operations at two New York City airports could create problems for Delta. Only one of those airports, JFK, has high-yielding international service, and Delta needs to connect its regional markets to JFK in order to help fill international flights. Adding flights to LaGuardia may be able to help the carrier win over some business traffic, but it really won't help much with connectivity and could cannibalize some point-to-point traffic to JFK. Instead, service from cities such as Syracuse could be split between LaGuardia and JFK, providing the same (or even slightly more) capacity to New York City, but with less overall connectivity. However, while there may be some problems, and some frequencies could go underutilized due to split traffic, Delta will likely find a way to make it work.

Both carriers will stand to benefit tremendously from this deal if departure perimeter restrictions are loosened, allowing these carriers to start lucrative business routes between these airports and the west coast. Yields on a nonstop San Francisco-LaGuardia flight could be astronomical, and additional slots puts Delta in a great position to commence those flights if such perimeter restrictions were lifted.

The other, smaller deal announced yesterday involves AirTran relinquishing all its slots at Newark Liberty Airport and giving them to Continental in exchange for additional slots at LaGuardia and Reagan National. This deal won't hurt AirTran too much, the company only had service from Newark to Atlanta, and the carrier continues to serve the market in the region well, with flights to Allentown, LaGuardia, and White Plains. Continental will gain valuable slots at the airports that will allow it to expand further, while AirTran will gain slots at airports which it already has existing service (and a loyal customer base) upon which it can build.

While both deals may elicit some controversy, especially from Southwest and JetBlue, it is unlikely that the DOT will revoke them. Even with the completion of the deals, neither Delta nor US Airways would have much more than a third of the market at LaGuardia or Reagan National respectively, and Continental's dominant position at Newark would grow only slightly. Moreover, two other airports serve both regions which have a different balance of carriers. Given the trouble the industry has been having, these deals will help consolidate market share and hopefully increase yields on flights catering primarily to business travelers. But they should also (ideally) do something which may be even more valuable from the regulators' perspective. These deals, particularly the Delta/US Airways deal, will increase the number of passengers who will travel through these congested airports without increasing the number of aircraft since the slots are presumably being more efficiently allocated for flights that will attract more passengers (and maybe even larger planes). This is very good, considering how popular these airports are, and how slow the FAA has been in upgrading our ATC infrastructure to accommodate more planes. More passengers will get to use these airports, which are arguably the most convenient in their respective regions.

The competitive response to these deals will be interesting. For instance, Southwest may get into Reagan National through its potential purchase of Frontier, and this might give the carrier greater leverage when negotiating with other carriers for slots to compete with US Airways. One will have to watch closely, but Southwest and/or JetBlue may try and obtain slots from Republic (now the proud owner of Midwest Airlines and its slots) or Spirit, since it's unlikely that any of the legacies will relinquish theirs anytime soon.

Southwest Makes a Bid for Frontier

In an unexpected bit of news today, Southwest announced that it would make a bid for the assets of Frontier Airlines. Frontier, which is in the midst of exiting Chapter 11, received a bid from Republic Airways several weeks ago. It was not expected by many at the time that Republic would face much competition for Frontier, given that investors are hard to come by in this recession, particularly in the hard-hit airline industry. But Southwest announced that it would bid today, saying that, if it were to buy Frontier, it would initially operate the carrier as a Southwest subsidiary. Eventually, Frontier's Airbus planes would be ditched as Southwest received more 737s that it could integrate into the carrier's old routes. Some Frontier employees would likely be hired on by Southwest, but Southwest made no guarantees today as to how many Frontier employees would keep their jobs if its bid were accepted.

Southwest, has pushed aggressively in Denver, although Frontier has withstood most of the punches Southwest pulled, with United being the big loser in market share. Given that a Southwest purchase of Frontier would make Southwest the leading carrier in Denver, an unthinkable idea just a few years ago, United should be really scared. Southwest continues to run an efficient operation, and would present very tough competition to a weakened United. United is very popular with business customers, which Southwest is aggressively targeting. United's frequent flyer program, premium class service, and extensive route network are about the only things the carrier has to offer, but given the current weakness in the business travel market, those might not be enough to keep customers flying with United. This is especially the case if Southwest continues to lead the industry by offering no change fees, free checked baggage, and added amenities (such as Group A boarding and a free cocktail) to business travelers who book at the last minute.

As a result of this, don't be surprised if United makes a bid for Frontier, and this becomes a three-way bidding war. United has been a leader in Denver for years; it's only recently that the carrier has lost so much market share, and Southwest ownership of Frontier would create a huge headache for United. Unless United is willing to relinquish more market share, the carrier will either need to buy Frontier, or make aggressive changes in its scheduling, amenities, and pricing to compete.

But this deal is not a panacea for Southwest. Frontier has a different fleet of aircraft which it would dump, aircraft which are equipped with extremely popular (and revenue-generating) entertainment systems. Although Southwest is planning for in-flight Wi-Fi, the carrier lacks any electronic in-flight entertainment, and it may be hard to win over some Frontier loyalists who miss that, particularly on longer flights to the East Coast. But the flip side of this is that Southwest is more consumer-friendly when it comes to its baggage policies (Frontier currently charges for checked luggage), policies which would presumably be expanded to Frontier routes if Southwest's bid is accepted.

Another complication is that Frontier also has routes to a number of cities Southwest doesn't serve, and which don't make much sense in Southwest's current model. These cities are mostly distant, lower-frequency routes, some of which (eg. those to Mexico and Costa Rica) require additional turnaround time, hampering an efficient operation. Some of those routes generate very strong yields, but they might be ditched because of their incompatibility to Southwest's historic business model. Then again, given that Southwest has been making some unconventional moves of late, moving into busy airports they formerly shunned, it's certainly possible that Southwest would choose to keep these routes, even if they're to cities which would receive one daily, or a few weekly Southwest flights.

Southwest also has to deal with the issue of Lynx, Frontier's regional subsidiary. Lynx is Frontier's way of competing with United on short, regional routes from Denver, particularly to high-yielding destinations such as Aspen. Southwest has eschewed regional service throughout its history, and such service would of course generate added complications into Southwest's business. Like regional carriers at major airlines, it could also be the source of some labor tensions, since employees at regional carriers typically make less than their mainline counterparts. Southwest, known for being an employee-friendly company, might find it difficult to offer a different salary scale to its regional employees, which could potentially hurt the profitability of such a regional carrier. And unless Southwest were to scale up Lynx's regional operations to other cities, which seems unlikely during this recession, Lynx would be an anomaly in an otherwise efficient and simple airline.

And Republic, the regional jet contractor which allegedly bid for Frontier in an attempt to "diversify" its business model, may feel compelled to raise its bid. After all, it sees a lot of value in Frontier, and it's quite possible that if Southwest or United purchases the carrier, its opportunities to diversify and operate a mainline carrier will be limited. There are simply just few, if any, other small carriers which are available on the market right now, and Republic would have an extremely difficult time starting its own carrier given the checkered history of airline start-ups in this country. But then again, Republic doesn't have as much invested in the outcome of this saga as Southwest or United, they have profitable, albeit dwindling, contracts with major carriers, and they stand to lose relatively little in the short-term if they are unable to purchase Frontier. Therefore, I suspect that at the end of the day, they will not be interested enough in Frontier to win a potential bidding war with Southwest and United. However, they could still put in a revised offer or two, but I imagine that Southwest will follow suit.

U.S. Airlines Release Earnings: The Good, the Bad, and the Ugly

Airlines reported second quarter earnings results this past week, and as expected, many airlines struggled. But first the good news. Southwest, JetBlue, AirTran, and Allegiant all reported profits, with AirTran reporting excellent numbers (making more money than Southwest in the quarter). Allegiant increased its profit nine-fold from Q2 2008 (though much of this is due to the fact that oil doesn't cost $140 a barrel right now, which hit Allegiant and its fleet of older, inefficient aircraft especially hard. But although these carriers reported profits, don't expect much capacity growth to follow. AirTran is cutting ASMs 4% this year, and Southwest has already cut hundreds of flights from its timetables (though the carrier has added a few as well in New York and Minneapolis). Allegiant will be the only carrier which will do much growing, and they have been very careful about not flying money-losing routes. The company has announced numerous cities in the past only to see lackluster initial bookings, and pull out even before service starts. Although this is frustrating at times for customers, it helps the company ensure that it is expanding into markets only where it is wanted, and where it will be profitable.

The legacies all reported losses (with the exception of United and US Airways, which made money on paper due to gains from fuel hedge contracts, but lost money when those were excluded), but they weren't terrible, horrible losses. Nevertheless, if airlines are losing money in the early summer months, which are typically quite profitable, then it doesn't bode well for the slower fall and winter months which lie ahead. If the economy, and business travel, fail to pick up soon, more layoffs and capacity cuts could be announced. Already, Continental announced job cuts along with its Q2 earnings, and United announced a further capacity cut with its earnings. Legacy carriers are continuing to suffer, and although planes got fuller, yields had to come down in order to get passengers onboard.

But these earnings announcements from the legacies should not be a sign of gloom and doom, which is how many media and analysts often view them. I recently saw an intelligent comment (see July 13) from airline consultant Mike Boyd, in between his tirades that the passage of the economic stimulus bill was the worst travesty this nation has had to endure since the invention of the Great Global Warming Hoax by some eco-fascist desperately seeking attention. He noted that consolidation is unlikely to occur, and that the legacies we have should all remain intact through this difficult period. Unlike in Europe, where the market is oversaturated with too many airlines, as I noted yesterday, in the U.S., there really aren't that many carriers, and consolidation or bankruptcies which may look good on paper are unlikely to happen anytime soon. But Boyd also noted that the capacity cuts which are occurring now will help make airlines much stronger in the future. Airlines will be quick to cut, but may be a bit more cautious when re-entering. And this could make for airlines which will be very strong, and very profitable when the economy recovers.

I think Boyd is right on this front, but given the very fragile state of the economy, airlines may still face continued pressure on yields, which could, along with the roulette wheel of oil prices, dampen any profitability streak. And to the detriment of airlines, businesses will be increasingly careful with their travel budgets in an environment of enhanced public scrutiny. Travelers who used to buy full-fare tickets may take fewer trips, and book those tickets farther in advance.

But, while Boyd acknowledges the possibility of bankruptcies, I would go one step further and say that, while most airlines are not likely to be headed into Chapter 11 anytime soon, some sort of significant reorganization, possibly bankruptcy, may be needed at US Airways. The company is doing what it can to pull capacity out of lower-yielding markets, particularly Las Vegas. But although the airline reported relatively good Q2 numbers, its low cash position and its dependence on higher cost 50-seat regional jets worries me. The company's labor issues, particularly with its contentious pilots unions, as well as the risk of losing close ties to United when Continental joins Star Alliance don't help matters either. Moreover, the airline is heavily exposed to certain business routes, and markets, which are likely suffering in this downturn. US Airways has already had to trim some capacity on its formerly lucrative east coast shuttle service, and the company's one hub which is relatively unpenetrated by LCCs, Charlotte, is suffering due to a downturn in that region's largest sector—banking. Plus, although some international routes have been hit hard by the banking crisis, they still offer airlines the opportunity to generate higher yields. Yet US Airways only flies a smattering of international routes in Latin America, Canada, and Europe, most of which face significant indirect competition from other American legacy carriers. The company has no flights to Asia, Australia, or Africa, which may be advantageous now, but will hurt the company tremendously when international travel picks up after this recession. Is this to say that US Airways will immediately run into trouble? No, but the company continues to be exposed to some of the worst competitive pressures of any airline, while experiencing less brand loyalty and pricing power due to its lower-than-average service standards, and the company has failed to demonstrate that it has found a sustainable, profitable niche in the market.

Myair Bites the Dust

Myair, an Italian-based low-cost carrier, ceased operations today after Italian authorities revoked its operating certificate, citing ongoing financial difficulties at the company which inhibited the airline from running a smooth operation. The airline, which operated A320 and CRJ900 jets, was suffering under the burden of rapidly falling demand and a stagnation in yields. It is unclear whether any of Europe's other LCCs will replace any of Myair's routes, and in this environment, it's all the less likely.

But I wouldn't post about the demise of a small, relatively unimportant low-cost carrier if it didn't illustrate something else about the industry. Throughout the world, airlines will need to reduce their capacity in order to cope with the repercussions of the financial crisis. But in the United States, this is unlikely to lead to any airline bankruptcies (with one or two possible exceptions, which I will get to in another post). In the U.S., most of the marginal LCCs have either been bought out (Frontier, Midwest), or they have profitable business models (Spirit, Allegiant), and will continue to thrive in their niches. There are simply fewer airlines to consolidate, and the leading LCCs (Southwest, JetBlue, AirTran) would have challenges integrating with another company.

However, in Europe there is a far greater potential for capacity to be taken out through consolidation or through airline failures. And Myair is only one of many rather weak European LCCs which I expect will soon run into trouble. The European LCC industry is rapidly consolidating, and while the largest players are finding their niches, the smaller ones are suffering. Of course, Ryanair is a ruthless competitor, and nobody is going to beat Ryanair on price. Nobody. But Wizz is certainly trying, and has carved out a nice niche for itself in Eastern Europe, especially on routes to countries which Ryanair has yet to commence service to. Easyjet has been successful at courting business travelers, and has cornered leisure traffic from the UK to certain leisure destinations in the Mediterranean. But there are myriad smaller LCCs in trouble, including bmiBaby, WindJet, Blue Air, Spanair, and of course, SkyEurope, which seems to be dying a slow, painful death. Weaker LCCs will continue to be forced to consolidate, because the market can't support their capacity, and they lack the scale which gives Ryanair and easyJet tremendous efficiencies (as well as brand recognition throughout Europe). There are some carriers which are a bit smaller than the leaders, and should continue to survive (a combined Clickair/Vueling, Air Berlin, and Jet2), but many of the industry's smaller players will continue to be marginalized.

Really, there are two more interesting questions that the airline business in Europe raises versus that in the U.S. The first has to do with the role of mid-sized carriers—carriers which are strong in one or two medium-to-large cities, but relatively weak elsewhere. The only airline like that in the U.S. which comes to mind is Alaska, and they've been careful not to overexpand and to focus on their core strengths in the Pacific Northwest. But in Europe, the end of the dominance of national carriers due to the advent of more efficient LCCs, as well as the capacity crunch, begs important questions. Certain mid-size legacy carriers, including Austrian Airlines, CSA Czech Airlines, and LOT Polish Airways are all vulnerable to takeover or liquidation. These carriers lack the cash to survive downturns that the larger carriers have, and they have higher cost structures. Many of these carriers could operate more efficiently if they were part of a European airline conglomerate, such as Lufthansa, Air France/KLM, or British Airways. While the carriers themselves may not be entirely dissolved (but instead run as a subsidiary of the parent), integration with a larger carrier allows capacity to be optimized (read: reduced to sustainable levels). Although such deals may be a blow to national pride, transnational airlines are likely to be more efficient, and are less likely to fly routes for reasons of prestige. This means that passengers from Vienna may have to connect in Frankfurt before heading to Delhi, but it allows airlines to run more efficient operations which facilitate stability, if not necessarily lower fares, due to less competition in a consolidated marketplace.

The second question is one I'd like to examine in more depth later on, so I won't go into it now. But it is this: Why is it, that airlines within airlines, such as Air France/KLM's Transavia, or Lufthansa's Gerrmanwings have been successful even when airlines within airlines in the States have been rather unsuccessful? These are really marginal players in the industry, and at a time of capacity and cost cutting, I wonder how much these carriers are contributing to their parents' bottom lines, and whether they're really more successful than their American counterparts were. I'll offer what answers I can in an upcoming post. Also, I hope to have a post tomorrow about U.S. airlines' financial results and what they may mean for the industry in the States. 

JetAmerica Cancels Flights Indefinitely

JetAmerica, the air carrier planning to use aircraft operated by a third-party for their own flights, has announced that it will cancel all future flights indefinitely. This announcement comes after the carrier has made nearly a million dollars in bookings and conducted exactly 0 revenue flights. JetAmerica announced a delay for the start of flights two weeks ago, citing the difficulty in obtaining affordable slots at Newark. It appears that those problems could not be resolved, and were one of a number of factors which led to the carrier's demise. But ultimately, even if JetAmerica had obtained the slots, the carrier would still have faced numerous challenges in this environment. Airlines are cutting capacity left and right, and doing their best to raise fares. JetAmerica's business model, low fares combined with new capacity in small markets where getting sufficient traffic is a dubious proposition, was not a recipe for success. Although some suggestion has been made that the carrier could come back in a new form, don't expect its successor to be any more profitable. The people running JetAmerica don't have a clear idea what they're doing, and I imagine that without a significant change in leadership and business model, JetAmerica II will die quickly as well.

Well, That was Fast...

Just a day after announcing that it planned to buy out Frontier, opening the door for a possible exit from bankruptcy, Republic Airways decided to purchase a second carrier, Midwest, from TPG Group for the princely sum of $31 million. This was down just slightly from the roughly $450 million TPG and its partners (including Northwest) paid for Midwest less than two years ago. And then today, Frontier announced that it will make schedule changes, adding mainline frequencies to several mostly leisure markets, as well as frequencies on Lynx to Salt Lake City, Omaha, and Albuquerque. Service to El Paso and Grand Junction, however, will be discontinued in September. This latter move is welcome, and a possible sign that the market may have bottomed or is coming close to bottoming. For an airline to add new flights during the fall months, let alone in the midst of a recession, is impressive. Obviously, it's anyone's best guess as to whether the new flights will be successful, and the stiff competition they will certainly face from Southwest can't help.

But let's examine the first move more closely. Republic essentially bought what has quickly become an airline in name only. Midwest is rapidly retiring its 717s, and plans to continue to do so even after yesterday's announcement. Instead, Midwest will use E-170s and E-190s operated by a little-known carrier called Republic, an arrangement in place well before yesterday's buyout. So why bother buying Midwest? Aside from being able to exert greater control over their lift, and being able to purchase a well-respected brand for a bargain price, there doesn't seem to be as much point to this move as there did with Frontier. At least Frontier is a well-regarded carrier which has managed to hold its own, if not expand (the announcement above notwithstanding), in the face of Southwest. Although it has adopted a more proactive attitude towards charging for services, Frontier hasn't taken away seat pitch, assigned seating, or onboard television, which are its signature amenities. But Midwest, although it has a well-respected brand, has significantly cut back on its amenities and service as a way to compete, adding more seats to its planes and drastically reducing its onboard food service.

At the end of the day, unfortunately, Midwest simply can't cut it against a strong Delta/Northwest and a nimble carrier with extremely low costs, AirTran. Midwest is bleeding money, unlike Frontier which has reported some small, but significant, profits. Republic's purchasing of Midwest will do little to change the situation at that carrier. Republic has not announced any major operational or strategy changes, and I fear that the end could be near as a result. Service will continue to suffer in the wake of cost cuts, and smaller jets will become uncompetitive in the marketplace since they have higher ASM costs than the larger 717s and 737s which AirTran operates. Many of the routes Midwest services have competing AirTran service, which is cheaper for customers and actually makes money. Midwest should have died long ago, absorbed as part of AirTran. But that opportunity has come and gone, and now it's time to recognize that Midwest, no longer what it once was, will end its days as a small, regional operator before eventually being shut down, with the jets likely going to other airlines Republic contracts with.