Potential 2008 Merger: United and JetBlue

First of all, let's start out with a reality check. This merger is not very likely. It's possible, but less likely than other merger scenarios, such as a potential United/Continental merger. However, this may be the most likely merger scenario involving a legacy carrier and a low-cost carrier. A United/JetBlue merger would deliver high levels of service to business and leisure travelers across the country, and create a company focused on higher-yield passengers.

The combined company would have tremendous synergies at several key airports. United has a substantial operation at JFK, and a combined JetBlue/United could use its synergies to create a more efficient and more comprehensive operation at the airport. A combined United/JetBlue could offer a third clear alternative in the New York market to Delta and Continental, by allowing customers to connect from JetBlue domestic flights to United international flights. Currently, both Delta and Continental have sizable hub operations, that connect traffic flows from routes all across the US to European flights, and United and JetBlue, both of which have very high customer service standards and huge legions of loyal passengers, could sift business away from Delta and Continental. Moreover, JetBlue has operations at four of United's five hubs (San Francisco, Denver, Chicago O'Hare, and Washington Dulles), albeit much smaller ones than at JFK. These could be easily absorbed into United's operations, reducing cost and increasing synergies by allowing customers to more easily connect flights and allowing JetBlue to trim its airport staff at these airports. The biggest loser in this case could be Frontier, because JetBlue, which offers a superior product to Frontier's, could add additional flights in Denver post-merger, squeezing Frontier even more as it tries to stay afloat in an increasingly saturated market.

The merger would offer tremendous benefits to JetBlue passengers, who love the carrier for domestic flights, but are unable to use it to easily connect to international flights. By teaming with United, passengers from upstate New York and elsewhere could easily fly JetBlue to New York city, and then connect to a United flight to take them to Europe and elsewhere. Moreover, now that Lufthansa, one of United's close Star Alliance partners, owns 19% of JetBlue, this could facilitate additional alliance-building on routes to Europe, and also make the potential merger easier to execute, if it ever were to occur.

Fleetwise, JetBlue only operates two aircraft types, the A320 and the Embraer E-190. United already has a large fleet of A320s, and the combined carrier could see reduced training and maintenance costs from having a larger fleet. The E-190 would be a new aircraft type to United, but one that would likely be well-received, as United needs an aircraft that is able to serve smaller and medium-size cities once or twice a day. JetBlue plans on receiving dozens more E-190s, and many of these could be put to work supplementing United's regional service in Chicago and Denver. However, with an increasing fleet of narrowbody aircraft, United may try to reduce some of its older 737 variants, though it may be challenging for the carrier to eliminate these entirely for several years.

A big question would be the issue of branding and this may be resolved in part by how the two carriers are structured post-merger. If JetBlue essentially remains a separate entity, but under the United umbrella, then United will feel less pressure to integrate JetBlue's amenities onto their mainline aircraft. But if the carriers completely interchange aircraft between the two fleets, then business customers may be put off by the differential in service standards between JetBlue and United planes. United's aircraft lack many of JetBlue's amenities (such as leather seats, televisions at every seat, hip snacks) but offers some amenities that JetBlue lacks (such as three-class seating on many domestic flights, with first, Economy Plus, and economy seats). One idea is to keep JetBlue as essentially a separate entity under the United umbrella, with a merger allowing the merged company to combine maintenance, training, and management activities. They would be two separate brands under one roof. There would be some problems with this, as it would make it more difficult for the combined company to interchange aircraft between the two fleets, and it would run the risk of alienating some premium travelers, who, for instance, may book on first class on a United aircraft, but then could be forced into coach on a JetBlue plane if a United plane is unavailable due to scheduling constraints.

Therefore, the best solution seems to be to already use the separate "airline-within-an-airline" that United already operates, Ted, and integrate that into JetBlue, by adopting the JetBlue brand and amenities. United's Ted, which is flies primarily leisure routes, and which operates A320 aircraft in a configuration very similar to JetBlue's, could be the best way to integrate JetBlue into United. JetBlue would adopt Ted's aircraft and operate the routes that Ted currently operates. When JetBlue received delivery of new planes, those planes would likely be used for shorter leisure routes and augment or even replace United mainline service. This would bring some sense of continuity to United's operations by maintaining a separate brand for leisure-oriented, lower-yield routes, one that would not offer premium class service, but one that would offer superior service to competitors.

However, while Ted would adopt JetBlue's product and amenities, JetBlue would likely adopt United's frequent flyer program, Mileage Plus. This program, which has many millions more members than JetBlue's TrueBlue, is also more consumer-friendly and better for business travelers, since it offers elite status and other incentives for very frequent flyers. In this sense, JetBlue would become part of the United family.

While employees at both companies could face staffing cuts, the effects of such a merger are likely less toxic than at other carriers. Because JetBlue is an expanding company, many redundancies (with some airport staffing and management exceptions) could be alleviated when JetBlue receives delivery of new planes. Flight crews, pilots, and maintenance staff will all be needed to operate these planes, and so their jobs are relatively safe, with some possible sporadic cuts depending on how capacity is realigned at the two carriers. Therefore, the layoffs from such a deal would likely be rather minimal, at least in comparison to most legacy carrier mergers. While a United/JetBlue is unlikely, it is possible, and would create long-term benefits for customers and shareholders.

Virgin America-An Innovative Role-Model for the Industry: Part II

This post is continued from yesterday's Part I.

VA has also taken a different approach with its frequent flyer program, eleVAte, which will make the airline very attractive for certain types of customers, and not very attractive for others. VA will award points based on how much you spend with the airline. The more you spend, the more you're rewarded, which makes sense since airlines want to reward their best customers, and their best customers are those who spend the most. Leisure travelers, who are lured by the promise of $39 fares, will be rewarded less, and that may hurt VA's competitiveness over Southwest and JetBlue, both of which offer the same number of frequent flyer credits to customers regardless of ticket purchased (with some new exceptions for customers who purchase Business Select tickets on Southwest).

However, eleVAte's other big shtick will be with redemption. Unlike any other frequent flyer program in the US, there will be no blackout dates for all award tickets, and customers can redeem credits for any unsold seats on a flight. Since the number one complaint of business travelers about frequent flyer programs is the inability to redeem miles, this will provide a significant advantage to VA. But, VA won't have any complicated mileage redemption charts either. Instead, the company will customize the amount of points needed for a ticket based on demand. The amount of miles needed to redeem a seat will be aligned with the price of the ticket. In other words, to prevent many travelers from redeeming miles for flights at the last minute, thereby displacing potential passengers who pay pricey last-minute fares, VA will make redemption of points for higher-demand flights prohibitively expensive for many passengers. A very clever idea, and one I'm surprised legacy carriers haven't adopted yet.

However, part of the reason this idea may not have been adopted is because award tickets are the only seats on the plane where all the customers who are traveling on them pay the same rate (or one of two rates on legacy carriers, depending on ticket flexibility). Business travelers hate knowing that they paid five times as much as the person sitting next to them for their seat, and so since business travelers redeem the majority of award tickets, this is one area in which airlines can show business travelers that they are valued, by charging them what they charge everyone else. Often, business travelers will earn miles on business, and then redeem them for vacations. This tactic will benefit those customers who are able to schedule vacations around less busy times of the year. If you're an employee who receives time off during the holidays, or over busy Spring and Summer travel periods, eleVAte may very well not offer a good value. As a result, VA should consider customizing the number of points necessary for redemption to customers with different travel patterns. Customers who have a history with the airline of purchasing expensive flights should be able to redeem the same seat for less than a customer who purchases discount flights. This customized pricing could help offer benefits to business travelers, especially since eleVAte will not offer an elite system to reward their most frequent travelers.

VA also plans to innovate with its culinary options. VA will offer complementary meals to customers in first class, and meals in coach will be sold for a nominal fee. In early November, the airline quadrupled its menu offerings, offering coach customers a range of pricey (over $10 per item in some cases), but high-quality offerings, including such delicacies as a caprese sandwich with canellini bean and herb salad as well as a steak sandwich. While I can confirm the pricey part, I can't confirm the high-quality part, as I haven't tasted it yet, but it sounds quite delicious, and these offerings could be a big selling point for the carrier. Most business travelers can expense meals, but they can't expense what's not there, and a lack of offerings is increasingly becoming the norm on legacy carriers.

While VA has a great brand and wonderful means of attracting customers, the carrier may face increasing pressure on its yields. With consolidation rumors buzzing in the industry, smaller carriers like VA may get swallowed up, or, what is more likely, the airline will just have difficulty making money. Consolidation will help lower rising costs for those carriers that can participate, and since it's unlikely that VA will be part of that, the company needs to find other ways to cut costs. So far, the company seems to have a cost structure very similar to other large LCCs, like Southwest and JetBlue, and unfortunately, the company's costs will only rise in the future, as workers gain seniority (and the higher wages that come with it) and its planes get older (leading to higher maintenance costs).

As ticket prices rise, demand will still exist, especially on the important business routes that VA services. However, travelers and their companies may be more inclined to book on price, and not on value, given rising ticket costs. VA may be unable to maintain a price premium in the market, which may make it difficult for the company to maintain its extra features and amenities, as well as make a profit. I wish VA all the best in expanding their offerings to make travel more comfortable, just as JetBlue did 7 years ago when that carrier pledged to "bring humanity back to air travel". However, given the current market environment, VA will have to tread carefully with its expansion plans, and ensure that their product is garnering the right price. Without that, VA could be simply another failed startup.

David Neeleman Ousted as JetBlue CEO

David Neeleman was ousted as JetBlue's CEO in a surprise announcement today. He will be replaced with the company's longtime COO, Dave Barger. To put it simply, this is a major mistake for the company. Even though Neeleman blew it when it came to the Valentine's Day debacle, he is still the best person to run the company. The popular rationale for this announcement, which is probably true to an extent, is that JetBlue's board believes that now that the company has reached a certain size, it needs a person at the top who is more operations-oriented instead of vision-oriented. It was Neeleman's vision that many believe caused the mess on Valentine's Day, because the company grew too quickly without the proper emergency support systems, and it didn't cancel flights because of Neeleman's creed that customers prefer a heavily-delayed flight to a canceled one.

But while this departure may satisfy the board in the short-term, I suspect that in the long run, the board will regret its decision. The airline industry in the United States is very, very competitive right now (as if there were a time in recent memory when it wasn't), and operating a good airline is very important in order to retain customers. Unless the operation is run well, customers will have no reason to return. Given all the hassles flying entails these days, with weather delays and security hassles, any problems being caused by the airlines themselves are looked at with closer scrutiny by customers. Operations will destroy an airline if they aren't dealt with well (Ryanair may be the lone exception to this rule), and it's why Southwest Airlines has been so successful over the years. Southwest has a very simple business model, and has executed it very well with high on-time arrival rates and few mishandled bags.

If David Neeleman didn't run a good operation, then JetBlue would not have succeeded as well as it has. For example, Neeleman instituted a policy at JetBlue that required notification of headquarters if baggage delivery took more than 20 minutes. He also has been very generous with vouchers for free travel, even before the Valentine's Day incident. Passengers routinely receive vouchers if their in-flight entertainment doesn't work, a gesture passengers rarely see at other carriers. And he has created a company that provides some of the best customer service in the industry. There is little doubt in my mind that Neeleman has run a fantastic operation up until the Valentine's Day meltdown. That's not to suggest operations at JetBlue have been perfect; the airline has one of the lowest on-time performance ratings in the industry (partly due to JetBlue's concentration of flights in the Northeast, which is frequently hit with storms), although Neeleman has been working to correct that by scheduling flights with longer turnaround times to compensate for delays. Neeleman has learned from his mistakes during the Valentine's Day incident, and he deserves a second chance. Removing Neeleman won't help solve JetBlue's problems and it's unlikely to boost JetBlue's brand in the eyes of most customers. Even though he hurt the company tremendously because of the enormity of his errors that weekend, he is uniquely qualified to lead JetBlue forward, and the Board of Directors failed to recognize that.

What is needed in this industry right now, because of the intense competition within, is vision. JetBlue went on a mission over seven years ago to "bring humanity back to air travel". They did a very nice job of that, and they need to do that again. Flying has become much more difficult in the years after 9/11 due to longer lines at airports, more planes flying with an insufficient number of air traffic controllers to handle them, and hassles associated with more time-consuming (though not necessarily more rigorous) airport security. JetBlue needs to innovate once again, and only Neeleman is capable of doing that. The transition from Neeleman to Barger is symbolic in JetBlue's development as a company. This transition will help mark the moment JetBlue stopped being a start-up airline focused on innovation and instead becoming a mainstream airline focused on survival.

Innovation is what enabled JetBlue to develop such an enormous following from customers, and it's what enabled the airline to survive in the face of massive competition on the East Coast. Granted, JetBlue may not be able to make nearly as many innovations in the next seven years as in the previous seven, but it's essential to JetBlue's survival that the airline finds new ways to keep customers happy. Legacies have been able to gain and retain customers, particularly business travelers, with more amenities (such as premium classes), more extensive schedules and route networks, and attractive frequent flyer programs. Southwest, Frontier, AirTran, and Spirit have been able to gain and retain customers mainly due to low prices and simplicity of service. JetBlue is able to attract customers because it can find a happy medium between the two extremes. JetBlue offers low fares and plenty of amenities. But JetBlue's fares are typically higher than those of other LCCs, and if JetBlue fails to innovate, then the airline will be unable to maintain its price premium of $10-20 on a round-trip ticket. Other LCCs are adding amenities in a bid to compete, look at Virgin America (with first class seating and a fancy entertainment system) or AirTran (with business class seating and XM Satellite Radio). An innovation price premium is how JetBlue is making its money right now, and unless JetBlue tries to remodel itself and lower its costs substantially, the airline needs that premium to survive. Operations are important for retaining customers with any airline, but in JetBlue's case, innovation is just as important. I wish the best of luck to JetBlue, because I see trouble ahead if competitors can innovate more quickly. Neeleman can innovate; he has a track record of doing it. Barger may be able to, but in my mind, he's a much bigger wild card for the company than Neeleman is. Given the level of competition in the industry right now, the transition isn't worth the risk.

More About Intra-California Competition

Why are so many airlines entering the intra-California market?

There are a few reasons, but the first is that the intra-California market is growing. California is one of the nation's fastest growing states, and the population is expected to balloon in the next several decades. While this population increase may be unsustainable and incredibly damaging for the long-term health of Californian society, it means big bucks for airlines. As the population increases, the demand for intra-state air travel will increase, and it's much easier for an airline that is established with significant market share on a route to expand to meet increasing demand than for an airline with little or no market share to meet that demand. Also, with the improvements made to San Francisco International to make it more cost-competitive with other area facilities, and along with the new competition being brought by Virgin America, other low-cost airlines are taking more of an interest in intra-state air travel. Also, LCCs that have to find places for new planes would rather expand on the West Coast where fares are higher than on the East Coast, where competition is even fiercer and yields are lower. But the final reason intra-state air travel is becoming increasingly attractive for airlines is because their revenues have suffered recently. Airlines can make more money on short hops than on transcon flights, since the airline can charge higher rates per mile flown for a short flight than for a long one (due to fixed costs airlines incur regardless of the length of the flight, such as landing fees, baggage handling costs, and the cost of using gate and check-in agents.) But, airlines can fly more short-haul flights with a single aircraft than long-haul flights, and efficient aircraft utilization is an easy way to increase revenues. Even though airlines have fixed costs, when many of those costs have been trimmed, then airlines are fighting for revenue, and the revenue equation is better for shorter flights where airlines can fly more flights in a given amount of time with the same plane.

How will airlines compete in this market?

What airlines will be competing on in the intra-California market are three things. The first is price. Flying up and down the state, even on a low-fare carrier, can get expensive, and customers want to minimize the cost of their travel. That will mean that a fare war of epic proportions may occur if or when JetBlue and Virgin America expand services. I wouldn't be surprised to routinely see $29 fares to the other end of the state during this fare war. It's also likely to be a prolonged fare war since there aren't any weak competitors in this market. This means that a fare war will give Californians some great bargains for many months, but it will also hurt the financial health of the airlines.

The second is convenience. This is both in terms of flight schedule as well as airport location. Low-cost airlines need to ensure that they offer enough flights to accommodate business travelers, who typically want flights very early or very late so they can work a full day. As a result, airlines like Alaska and Southwest, which are already established in many intra-California markets and offer a convenient menu of flight times, will have an advantage over other LCCs like JetBlue or Virgin America, which may only offer one or two flights at a time a business traveler would find suitable instead of four or five. Airlines will also have to win the convenience war with the airports they serve. Now that San Francisco is becoming more popular with LCCs, low-cost carriers will be a more viable alternative for business travelers to the legacies American and United from the San Francisco area. It will be the job of LCCs to ensure that they offer flights to a sufficient number of destinations on either end of the state. This is true especially in Southern California. Right now, the Ontario Airport is most ripe for expansion of service, though it's likely that LCCs will increase service at all the commercial airports in the region (excluding Palmdale, which will need a little more time before it can be attractive to LCCs.) Travelers heading to or from the LA Basin want to avoid driving as much as possible given the horrific state of traffic in the region. As a result, many travelers, leisure and business alike, will be willing to pay a bit more for service to a more convenient airport. That doesn't always mean LAX; Burbank, Orange County, Long Beach, and Ontario all offer convenience to a segment of intra-state travelers, and LCCs will need to cater to all of them if they want to win the revenue and market share battles.

Finally, as passengers expect more from LCCs, onboard amenities won't be the battleground, but frequent flyer amenities will. Airlines will try to fill seats, and especially try to lure business travelers, by offering bonus miles (or credits) for frequent travelers. Southwest requires eight round-trips for a free ticket. I suspect that if competition gets heated, Southwest will give customers 1.5 or 2 times the normal credits, giving them a free flight after six or even four round trips. JetBlue will need to improve its frequent flyer program the most. Right now, customers have to fly 12.5 round-trips within California to be eligible for a free ticket. That must change if JetBlue wants to lure business travelers. TV is a nice thing to have, but it's much better to have more free flights. Similarly, Virgin America will need to ensure that its frequent flyer program is competitive with its in-state rivals. American and United will certainly retaliate against LCCs, offering similar promotions to retain their hold on business travelers, and if they seriously retaliate, a frequent flyer promotion could be very effective. Business travelers would rather stay loyal to their current carrier than move to another, and if American and United offer the right promotions, those business travelers won't be going anywhere. If the competition gets really heated, then frequent flyer miles will be another major battleground (in addition to fares and convenience) on which airlines fight for customers.

As competition increases on California intra-state routes, airlines will fight harder than ever for passengers, and in six months to a year is when the results will finally start to show. When they do, there will likely be clear winners and losers. Southwest and United are the two airlines best positioned to succeed, and JetBlue, Delta, and Virgin America, are taking the most risks. But given that this is California, anything can happen, and after the first stage of this battle is over, Southwest and United may be in much worse competitive shape than when it began.

See the post JetBlue Considers Bolstering Intra-California Service for more information on the topic.

JetBlue Considers Bolstering Intra-California Service

In light of recent announcements that competition may be heating up on intra-California routes, JetBlue CEO David Neeleman announced at the company's annual shareholder meeting today that JetBlue is considering adding additional flights on routes within California. While Frontier has announced its intention to withdraw from the San Francisco-Los Angeles market, Delta announced additional flights from its Los Angeles focus city today to Oakland, Sacramento, San Francisco, and San Jose. The new Delta flights will be operated with regional jets by a feeder carrier, ExpressJet. Moreover, Virgin America is also set to enter the intra-state market within a few months with new flights between San Francisco and Los Angeles as well as San Diego. Southwest, Alaska, American, and United are also major players in the intra-California market.

As the competition in California heats up, JetBlue is making a choice whether to size up its operations or whether to withdraw from the intra-state market. In a competitive environment like this, customers must know which airlines carry passengers within the state. Even though JetBlue is a well-known brand, many Californians don't know that JetBlue currently offers intra-state service. With increasing numbers of flights on more and more airlines, passengers are increasingly less likely to choose JetBlue unless the airline offers more flights and attempts to grab a larger slice of the market. JetBlue currently flies between Long Beach and Oakland as well as Sacramento. JetBlue is considering starting intra-California flights between other airports, and will need to do so in order to survive in the competitive market. JetBlue has an advantage over some of its competitors, since its Embraer 190s, which might be used if the airline expands in California, enable the carrier to offer greater frequencies on many routes, making JetBlue more attractive to time-sensitive travelers. But if JetBlue can't expand on routes within California, it needs to withdraw from the intra-state market entirely, because otherwise JetBlue will end up like Frontier, with a solid brand, but with little awareness among customers that it flies intra-state.

But this convenience must be carefully thought out. JetBlue is also entertaining the possibility of starting intra-state flights at Los Angeles International. While this would help JetBlue attract some business travelers, it would also put JetBlue into direct competition with Southwest, which is something JetBlue has tried to avoid during its expansion. Southwest already has a very large operation at LAX, and it might be difficult for JetBlue to gain a foothold at the airport. Competition, combined with the difficulties some airlines have had with the airport authority about significantly higher terminal rental costs, may keep JetBlue away from LAX, at least for now.

However, if JetBlue does expand intra-California service, the airline will inevitably face competition from Southwest, due to Southwest's massive presence in the state. JetBlue can compete with Southwest, since JetBlue offers more amenities and comparable fares, but given the convenience Southwest offers customers (flights on many intra-California routes are often every hour), and the fact that on a one hour flight, amenities aren't too important, customers may stick with the established carrier. It's not just JetBlue that will have trouble breaking into the intra-California market, Virgin America, even with its amenities and flashy brand, will have difficulty attracting customers.

As a result, JetBlue will have its hands full if it decides to expand into more intra-California routes. However, the rewards for success will be lasting, since the market has a lot of long-term potential. JetBlue needs to be careful if it expands in California, but the airline has the potential for success if it exploits its strengths (like its Embraer 190s), and minimizes its weaknesses (like its frequent flyer program, which needs to be improved to be made more attractive to business travelers). There is no reason why Southwest should dominate the low-fare market in California, and JetBlue may exploit the opportunity it has to change that.

See the post More About Intra-California Competition for more information about this topic.

AirTran Struggles to Deploy New Planes as the Airline is Surrounded by Competitors on All Sides

Although AirTran has slowed the pace of their new aircraft deliveries, new planes are still headed AirTran's way. And AirTran is having difficulty figuring out what to do with them all. While the airline hopes that a merger with Midwest Airlines will give the company more leverage in two key markets, Milwaukee and Kansas City, enabling the airline to expand, that deal seems to be unlikely in the short term. AirTran is trying other expansion tactics, but its strategies have had mixed results, and given the intense competition on the East Coast, AirTran is finding it difficult to expand with the presence of so many competitors in the region. Some examples of AirTran's expansion difficulties follow.

AirTran recently announced new routes between small markets in the Midwest and New York State to Las Vegas, mirroring the tactics of Allegiant Air. Even though AirTran has tried this once before without success, the airline feels it's worth another shot, given the pressing need to deploy additional aircraft, and the recent success Allegiant has mustered. I see this strategy as having mixed results depending on the origin city. If AirTran can tap into a viable market, it will be successful, but time and time again, AirTran has expanded to markets too small to accommodate AirTran's flights.

But AirTran is also trying other tactics its competitor Southwest Airlines has tried. For example, AirTran plans on launching two transcon routes soon, one between Baltimore and Seattle and the other between Orlando and San Diego. AirTran is serving these two routes in part because Southwest doesn't serve them. AirTran has avoided serving some transcon routes already operated by Southwest, such as Baltimore or Philadelphia to Oakland or Los Angeles, but this has left AirTran with routes that may have too little traffic to accommodate its presence. If AirTran's two attempts at point-to-point transcons succeed this summer, it could lead to further transcon flights from markets other than Baltimore or Orlando in the future. Even though AirTran has the capability to launch more routes, and needs transcons to increase aircraft utilization, these routes are risky. Given that AirTran is virtually unknown on the West Coast, new transcon routes have a high probability of failure. If AirTran wants to succeed with transcons, it needs to expand its services from a couple East Coast focus cities and focus on attracting customers in these markets. If AirTran offers every transcon that Southwest doesn't, then AirTran will easily lose money; instead the airline needs to focus on building a couple focus cities such as Boston, Philadelphia, Charlotte, Baltimore, or Orlando, for transcon markets even if it means competing directly with Southwest.

However, in its expansion, AirTran has ignored Caribbean routes even more than transcon routes. This is in part due to Spirit Airlines, which has adopted an ultra-low cost carrier model on flights between the US and the Caribbean. As a consequence, AirTran has avoided many Spirit routes, since AirTran simply cannot compete on price with Spirit. AirTran's only Caribbean route is to Grand Bahama Island, which works well for AirTran, since the aircraft that operates that route can turn around quickly and return to Atlanta; the aircraft can still operate several other flights during the day. AirTran is hesitant about further expansion in the Caribbean, which may hurt the airline, since the Caribbean offers many opportunities for expansion, even with Spirit's competition. AirTran has so much excess capacity, it could strike lucrative deals with tour operators for flights to big tourist destinations in places such as Puerto Rico or the Dominican Republic that would give tour operators a cheap means of transporting vacationers to paradise, and AirTran a steady source of income. AirTran's Atlanta hub is advantageous for Caribbean expansion, and AirTran should take advantage of it.

So AirTran has a dilemma. It has to find a way to grow and attract new customers in a very competitive market. Airlines that struggle sometimes try to shrink to survive, although that's a tactic that gets, at best, mixed results. AirTran is in an industry that is right now grappling with overcapacity concerns. Even though many legacy carriers have removed capacity from domestic services, the industry as a whole is concerned about adding too much new capacity, even with the upswing in the economy. As a result, AirTran is in a difficult position, especially since it has a weaker brand and less customer loyalty than its two principal low-cost competitors, Southwest and JetBlue. AirTran attracts flyers primarily on price, and if AirTran cannot fill planes, it cannot offer low fares. So this begs the question: How does AirTran combat this phenomenon?

My answer would be that AirTran should target its focus city markets for expansion. All of AirTran's focus cities could use more flights, and if AirTran markets itself well and commits to a buildup in service, it could increase customer loyalty, especially among business travelers, in certain focus city markets such as Boston, Baltimore, Orlando, Philadelphia, and Chicago. Focus city markets can serve as real catalysts for growth because AirTran still has relatively little service in all these cities compared to its Atlanta hub, and AirTran has an opportunity to link these markets to major business and leisure destinations across the country that AirTran currently doesn't serve nonstop from that focus city. But not only are focus cities great places for expanding the number of routes AirTran serves; they are great locations for AirTran dumping capacity on certain routes the airline already serves. AirTran already has lower load factors, on average, than most other low-cost carriers, and part of the reason for this is that AirTran has excess capacity on some routes in order to provide convenient service for business travelers. For example, AirTran has up to nine flights a day between Baltimore and Boston, and up to six flights a day between Chicago and Minneapolis/St. Paul, even though these flights are routinely half-empty. With flights spaced throughout the day, AirTran provides convenient service for business travelers, and can attract many customers who travel at the last minute and pay the highest fares. By dumping capacity on these routes, AirTran can lower fares for most customers, and still charge last-minute travelers pricey walkup fares. It's a strategy that has worked well on some routes, and not so well on others. If AirTran can target the right routes for capacity dumping, the airline can make a lot of money, even with half-empty planes. This seems to be the best way for AirTran to use its planes; to add new capacity to existing routes. AirTran needs to expand this model on more routes from more focus cities; it will enable AirTran to increase aircraft utilization and target valuable customer groups at the same time.

But even as AirTran has been making some of these changes, the airline has done it in too much of a vacuum. If AirTran wants to be an attractive choice to business travelers, the airline needs to offer a more competitive frequent flyer program. Recently, Frontier's frequent flyer program, EarlyReturns, won first place in the annual Freddie Awards, sponsored by InsideFlyer Magazine. AirTran's program, A+ Rewards, partners with EarlyReturns to offer more earning and redemption opportunities for travelers on either airline. A+ Rewards isn't a very friendly frequent flyer program to many travelers. It requires passengers to fly 16 one-way flights with AirTran in a year in order to earn a free ticket. While business travelers who fly frequently can meet those parameters, individuals who travel less frequently find little utility from A+ Rewards. For example, A+ Rewards isn't friendly to many small business travelers who travel just a few times a year, but often at the last minute. These business persons would rather travel with an airline where they know their travel is being adequately rewarded, most likely a legacy carrier, and sometimes a good frequent flyer program is the difference between a traveler choosing one airline over the other. With last-minute tickets, the stakes for airlines couldn't be higher, and AirTran should do what it can to court these travelers. Travelers on most other carriers have at least 18 months, and can extend all their miles with any sort of earning or redemption activity. If AirTran cannot make other aspects of its operation attractive to customers who buy tickets at the last minute, then capacity dumping will be worthless.

AirTran has a real challenge on its hands, to add capacity in a profitable manner, when overcapacity is the main concern in this industry. AirTran must reevaluate how it is adding capacity if it is to be competitive in the future, and dumping capacity on certain routes may be a profitable strategy, provided that it is done carefully and methodically.

Delta Exits Bankruptcy and Rebrands: Can the Airline Now Compete Freely?

Delta Air Lines formally exited bankruptcy today, ending its protection from creditors. But the airline exits bankruptcy when the industry is still experiencing difficulties, particularly with regard to fares that are still too low and potential overcapacity with two new competitors coming on line this year. Delta's restructuring has focused on reducing costs, and the company has done a fair job of that. Delta will continue to face uncertainty in several areas, but particularly with regard to its hubs. Right now, much of Delta's profits are being made with customers flying to or from a hub, and that will inevitably change in the future, given the expansion of low-cost carriers in this country. As a result, Delta will need to focus more on connecting traffic, especially to higher-margin international destinations for a greater share of its profits.

One of Delta's largest profit centers is in Cincinnati, where according to the Department of Transportation, the airport has the highest average fares of any major airport in the country other than Anchorage (which for geographical reasons is likely to have very high fares). Cincinnati even has higher average fares than Honolulu! And while Delta has a virtual monopoly in Cincinnati, that probably won't last. I suspect that in the next couple years an LCC, most likely AirTran or Frontier, will add service to Cincinnati (although Southwest and JetBlue are reasonable possibilities as well), and Delta will try to drive its new competitor out of town, a tactic that has worked in the past and may work in the future.

However, if an LCC can maintain an adequate foothold in Cincinnati, especially one that offers connections to many business centers across the country, then fares in that market will decrease, and the massive profits Delta is making in the city will decline sharply, which could spell more bad news for employees at Delta's regional subsidiary Comair, who have already had a tough time accepting significant pay cuts during Delta's bankruptcy. It's important to note that since Comair operates an all-regional jet fleet, its costs have skyrocketed in the past few years, since regional jets are more fuel-hungry than larger planes, and as a result, its competitiveness has decreased. Pay cuts, which have damaged employee morale, were necessary to help stabilize the company (though it's debatable whether Comair management made cuts that were too steep). Since Comair does much of Delta's flying in Cincinnati, an LCC could force employees at the subsidiary to sacrifice even more, and Delta's network at the hub may shift, since additional regional jets may get trimmed from the network in order to reduce Delta's costs. Those changes may be necessary soon if low-cost competition enters Cincinnati, and in any case will eventually be within 5-10 years in order to modernize Delta's hub there and lower its costs. These changes could make Delta's overall transformation strategy more difficult, especially if yields from Cincinnati decrease substantially.

Delta's other two hubs in Atlanta and Salt Lake City may also face changes, but not nearly as many as Cincinnati will. Atlanta and Salt Lake both have low-cost competition, and Delta has adapted nicely to the competitive climate in both markets. Both Delta and AirTran are struggling to figure out how to add capacity in an East Coast market which is oversaturated by low-cost competition. As a result, Atlanta will see mainly a boost with international flights in the next few years. The number of domestic services may increase, especially if Delta increases frequencies on routes where larger 767 aircraft are being replaced with smaller 757 or 737-800 aircraft, but the amount of capacity will not change substantially. AirTran will likely focus on building domestic operations in focus cities outside of Atlanta (as I will discuss in a post to be added within a day or two), while Delta will concentrate on adding service from Atlanta to a growing number of destinations, particularly in Latin America and the Caribbean, Europe and the Middle East, and depending on the DOT's decision in 2008 concerning China route authorities, Delta could add additional service to Asia to complement China flights.

Salt Lake City is a bit harder to analyze, because the West will become increasingly important for Delta, as the airline tries to target additional traffic to Latin America as well as in the growing Southwestern United States. Salt Lake City will be an important connection point for Delta destinations in the West, but its importance in the Delta network could diminish if Delta cuts regional services to many smaller cities due to high costs. Right now, Delta doesn't seem to be heading that direction, in fact, the airline seems to be using its massive regional jet fleet (much of which is service Delta contracts to SkyWest Airlines in Salt Lake City) to serve a growing list of destinations, including Yakima, WA and Salem, OR. However, much of Delta's future depends on the viability of regional jets as a cost-effective means for transporting passengers. If fuel costs skyrocket, then Delta's transformation plan could get derailed, and the effects in Salt Lake City and Cincinnati would be disastrous. Let's hope Gulf War III doesn't start anytime soon.

However, the future importance of Salt Lake City could also depend on how Delta's expansion in Los Angeles goes. Delta seems to be using its reoriented international focus to turn its Los Angeles focus city into a small hub, adding to the list of cities it serves from Los Angeles in both the US and Mexico, partly through a new regional jet contract with ExpressJet Airlines for ten regional jets to serve cities on both sides of the border. Delta plans on offering convenient connections between major cities in the US and destinations in Mexico. If Delta's Mexico flights don't attract sufficient yields and loads, then the entire Los Angeles operation could be downsized, and the importance of Salt Lake City could grow. However, if the Mexico operations in Los Angeles succeed, then Delta could place a renewed focus on Los Angeles, adding flights from the city to other key markets in South America, the Caribbean, and possibly Asia.

Delta's focus cities in Washington DC, New York, and Boston will continue to be important for the airline in the near future. This is especially true in New York, where Delta has a sizable presence at JFK with transcon and a growing menu of international flights as well as at LaGuardia with a profitable mix of flights popular with high-yield business travelers. Boston and New York will continue to receive point-to-point flights from major US cities in the near future, even though Delta has reduced its presence somewhat in Boston due to low-cost competition. Business travelers are very important for Delta from all three markets, and will be courted even more aggressively as Delta continues to improve its amenities and services on shuttle, transcon, and international flights. Moreover, the Delta Shuttle operation is still a very profitable enterprise, even with new competition from JetBlue, and it will continue to be profitable unless demand from business travelers slows significantly. There is no reason to believe that Delta will want to realign capacity at its hubs and engineer a pullback from its lucrative business markets in these three cities. As a result, Delta's focus city operations from the three major East Coast business centers will continue for the time being.

As part of the announcement today, Delta announced an agreement with Pinnacle to fly 16 CRJ-900 aircraft in a 76-seat two-class configuration to help feed Delta's operations. This should enable Delta to add frequencies on routes to select midsize markets while still being able to cater to their premium class customers. But in addition to this minor announcement, Delta plans other announcements throughout the week, as it celebrates its emergence from bankruptcy. These announcements may include a major new aircraft order. Delta has dozens and dozens of older 767 variants that need replacement in the next ten years, and the airline has been rumored to be considering the 787. It's entirely possible that Delta and Boeing have negotiated an agreement for new aircraft, and are waiting to announce it until after Delta's formal emergence from bankruptcy protection for legal reasons. A Delta 787 order is a rumor, but one that makes perfect sense given Delta's need to transform into a more cost-effective carrier with an international focus. Within the few years, Delta plans on transitioning from using many of its widebody aircraft from routes within the lower 48 to international routes, where they are needed more. Delta is launching service to more and more international destinations, and has been strained to use 767s on some longer routes, such as to Lagos where the aircraft needed to be retrofitted with special crew rests. Delta needs aircraft other than 777s (of which Delta may order more as well) for its longest international routes, and since some variants of the 787 can fly farther than comparable 767s, it may make the plane even more attractive to Delta as a partner for 777s on very long routes. It's also possible that Delta will order additional short-haul aircraft, most likely Boeing 737-800s, which Delta will need as it upgrades frequencies on domestic routes when additional 767s are replaced. However, Delta may wait until Boeing or Airbus release a new 737/A320 variant before making a large purchase. Even though this is pure speculation, given the opportunity Delta has right now, a major widebody aircraft order makes sense. 

But what Delta needs even more than new aircraft is a new way to target travelers through amenities and services. Delta is upgrading its amenities on transcon and international flights, but it's still not enough if Delta wants to compete with international carriers. Delta needs to invest more in upgrading its amenities in all classes of travel. One key service that Delta needs to improve is its frequent flyer program, SkyMiles. Even though the program partners with Northwest and Continental, offering its members hundreds of ways to earn or spend miles, it is still considered by many business travelers to be one of the more mediocre frequent flyer programs in the US. Delta, and all airlines for that matter, need to make a renewed effort to increase award availability for its business travelers. Because planes are fuller than ever, airlines have trimmed the number of seats that can be redeemed with the lowest number of frequent flyer miles. Delta needs to ensure that its most frequent flyers are given preferences when searching for available award seats, but Delta also must enable those who fly less frequently to still have a realistic shot at redeeming miles. With rising ticket prices, frequent flyer miles are becoming a more important source of tickets for travelers and a more important component in a traveler's decision when choosing an airline. Because of this, Delta must do what it can to maximize availability without sacrificing revenues. If Delta doesn't take the lead on this issue, then it will hurt the airline's reputation with business travelers, which will only diminish the airline's yields and the overall effectiveness of its transformation plan.

Another service Delta plans to offer is carbon offsetting, a first for a US carrier. This is a brilliant move by Delta that I believe will serve them well in courting many younger, more environmentally aware travelers, who typically flock to low-cost carriers. Carbon offsetting is gaining popularity in Europe (though not necessarily respect, as the Guardian discusses here), and it's an important service that airlines will be expected to offer their customers within the next five years. By getting a jump on the competition in this area, Delta is preparing for a long-term trend in the industry of environmental awareness and action. Delta appears to be approaching this issue, and the other pressing issues facing the company with a long-term focus, which is exactly the kind of thinking that will keep Delta out of bankruptcy long into the future. Even though Delta will continue to encounter difficulties from all sorts of pressing issues facing the airline, now that Delta has had an opportunity to restructure, the company seems to be better prepared for the challenges it will face in the future.

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Frequent Flier Benefits!

This is a short, and basic summary about frequent flyer programs, and useful if you fly a lot, or even if you don't (most miles on major carriers don't expire at all as long as you gain/spend miles every three years).

Shorter Rides, Less Cost. With most of the major carriers, a standard roundtrip award is 25,000 miles. However some carriers are offering discount award travel on shorter markets (750 miles or less), to compete mainly with Southwest Airlines, LUV, which traditionally files flights less than two hours long. American, AMR and United is offering this discount travel award in markets such as Seattle/Tacoma-San Francisco, and Chicago to New York.

Ways to Get Miles!
There are many fliers out there who are unsure about what to do with the miles that they have amassed from business trips, and there are just as many who need to know how to get miles. Many major carriers offer 1,000 miles just for booking at their websites. When some of these carriers, Continental CAL and Northwest, NWAC have the guaranteed lowest fare at their websites, it's a win-win. Most carriers also offer web check-in, and 1,000 bonus miles when you do it for the first time. In addition, many airlines offer self-check in at the airport, although most airlines don't offer bonus miles for doing that anymore, however you should check. In addition, most airlines offer credit cards (with an annual fee) where for every dollar you spend on the card, you get 1 mile. Still, airlines will give even travelers who purchase most discount fares frequent flyer miles.

Other Frequent Flyer Programs. Look at Frontier Airlines FRNT, for a great frequent flyer program, where if you get 15,000 miles, you get a round trip ticket in the U.S. In addition, if you amass 15,000 miles in a year, you get to the next level of membership, which includes the benefits of free DirectTv service on its flights. Alaska Airlines ALK has a frequent flyer program where free travel starts at 20,000 miles, and although that does include some flights cross country, those are mostly from Seattle/Tacoma, where the airline is based. AirTran Airways AAI, and Southwest Airlines, offer similar programs, where at AirTran, those who fly in Business Class can earn miles at an increased rate, otherwise is identical to Southwest. People who fly 16 one-way flights of any distance, and regardless of connections earn 1 credit, for example Denver-Atlanta-Orlando is 1 credit. After 16-one way flights, or 8 round-trips, the passenger earns a free round-trip flight. JetBlue Airways JBLU offers a similar program, but a little different where flights are classified by distance, and a point value is awarded accordingly. For example Buffalo-New York is 2 points, but New York-Oakland is worth 6 points. When you have reached 100 points, you have earned a free-round trip flight. None of the low-cost carriers who offer these point/credit programs offer many other bonus credit opportunities, such as self-check in, or buying a ticket online, however, AirTran and JetBlue are offering double credit/points however JetBlue is ending their $3 one-way discount due to the weak environment (and for most travelers, assuming that they do redeem their points for a reward, that's about what they are worth). However Southwest is the exception, passengers who purchase tickets on Southwest.com can earn 3 for 2 credit for roundtrip purchases. Southwest also offers many more ways to gain miles from car rentals and hotel stays than JetBlue or AirTran.

It's important to see what city you live in, and know where you fly to find the right airline to choose to a frequent flyer program. You can certainly use more than 1, and if you buy a discount fare on one airline and get miles, and keep saving towards an award on that airline, even if you use other programs and are saving there. Keep in mind that low-fare carriers offer frequent flier programs that are just as good, or better than what the majors offer, however many of those credits expire within one year, so keep that in mind.