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!

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.

What a United/Continental Merger Would Look Like...

With the recent Delta/Northwest merger proposal being made official, it appears that United and Continental may announce a deal within the coming days in order to help the two carriers compete in the changed marketplace. Both United and Continental released statements this morning expressing their desire to be proactive about consolidation opportunities. In other words, they're hard at work coming up with a deal. Like a Delta/Northwest deal, a United/Continental deal would have to target capacity and service, but in different ways than a Delta/Northwest deal.

For instance, looking at capacity, Continental has very been successful in filling planes to Newark and Houston, its two largest hubs. Flights to these cities from many large US markets could be increased in order to increase the number of passengers transferring onto profitable international flights. One beneficial attribute of this merger would be that Continental, which has struggled at times to get the right aircraft for its service requirements, would have access to additional larger, more cost-effective planes to use on services from hubs. For Continental, regional capacity isn't as much of a problem as it has been for other carriers, in that Continental has been able to divest itself of some capacity over the past few years. Continental has had leverage over ExpressJet, its main regional jet provider, to help that company reduce its costs and its capacity. Continental has already trimmed a number of ExpressJet routes and if fuel prices increase further, additional routes could be cut.

But the problem for Continental is that almost all of its regional capacity is on 50-seat or fewer regional jets, which are very expensive to operate in a high-fuel cost environment. While Continental is starting to integrate more fuel efficient turboprops into its regional network, they will make up a very small component of the company's regional services at a time when Continental really needs more cost effective planes. Contrast this to United, which granted, contracts for a lot of 50-seat regional jets. But in addition to this, United has a rapidly-growing fleet of 76-seat regional jets, which United has decided to configure in a 66-seat configuration, allowing United to increase yields on these flights by offering First Class and Economy Plus seating. This has given United a marketing advantage with high-yield travelers on key regional routes, as well as a degree of pricing power. If a merger goes through, expect to see a reshuffling of some regional routes, with a greater emphasis on turboprops, especially in California and Denver. United operates a wealth of short-haul routes from its California and Denver hubs, and many of these could be operated with newer, more fuel efficient turboprops.

Moreover, while domestic flights may not see dramatic additions or reductions, Continental's ability to access United planes may allow the combined carrier to launch key routes from its Newark hub, a long-term strategic asset for the company. Additional routes from Newark to Asia and Africa could be launched with the procurement of additional planes. Continental has struggled to get enough long-haul aircraft, especially 777s for very long routes. However, United has several dozen 777s that will permit the combined carrier to assert itself in the Asia-Pacific, as well as in Europe and the Middle East. If Delta and Northwest get the go-ahead to merge, United and Continental's combined presence will keep pressure on prices on key routes to Japan, China, and other Asian destinations where United and Northwest currently have the only presence by US carriers.

If there's a market in this deal that will be the loser, it's going to be Cleveland. Continental may say, just like Delta did in its press release yesterday, that all hubs will be saved. This is a fallacy that's being perpetuated in order to keep Senators and Congressmen happy until the merger is approved. These secondary hubs are filled with high-cost regional jets, and don't have the origin and destination traffic to keep operating at current flight levels. The economics of these secondary hubs don't work in this market, and Continental will be forced to make tough choices. Regional services will be the first to go, though some regional service is likely to remain for the foreseeable future. Some cities will eventually be axed altogether, and for others, service could just shift to Houston or Newark. Any international service Continental has from Cleveland will also likely be cut. Some domestic routes may be kept, a focus city arrangement that allows Continental to continue serving key business markets from Cleveland. But the bottom line is that Cleveland is going to see fewer destinations. Though the upside of this is that while more passengers may have to make connections, a downsizing by Continental could allow Southwest or other low-cost carriers to start additional flights, lowering fares for area consumers.

Servicewise, this merger is going to be tricky. Both United and Continental have good customer service, though both carriers have been faltering of late to deliver the same quality of service that many customers have come to expect, due in part to increasing pressures on overworked and undercompensated employees. Both United and Continental will have to recommit themselves to delivering high-quality service from all employees if they are to retain the large share of the business travel market that they currently possess.

But, other issues relating to service will have to be resolved. First, United has an Economy Plus section on all of its mainline planes and many of its regional aircraft. Continental does not have such a section, and depending on the structure of a combination, Continental may need to reconfigure much of its fleet. The Economy Plus section has helped United retain higher-yielding customers who often expect a higher level of comfort with a higher ticket price, and it is a concept that should be adopted throughout the combined company's fleet as a way to resurrect the service culture that airlines should be delivering and to retain key customer groups.

The second major service-related issue that the combined carrier will have to deal with concerns onboard food and beverages. On many longer domestic flights, Continental offers complementary meals to customers, something not matched by any legacy carrier. This is something that the combined carrier will need to think carefully about. Providing meals is a good selling point, but it's also expensive. If the company is focused on cutting costs, then for consistency of operations, meals should be cut on domestic flights. But, if the company is serious about attracting business travelers, then it will offer improved food service on additional flights, offering all travelers food service at a standard similar to what most airlines offer for buy-on-board meals. This won't be inexpensive, but it's a cost worth having if customers value the meals. Airlines can serve decent onboard food (many of the buy-on-board selections carriers offer are of a much higher quality than the "free" meals they gave out several years ago), and while it's a cost, with the hassles travelers are facing at the airport, having food available onboard the aircraft may be a selling point to a lot of travelers.

If this merger is completed, the combined carrier will have a larger base of business customers than Delta/Northwest, and a critical advantage over that carrier in key business markets including Washington DC, Chicago, Houston, Denver, San Francisco, Seattle, Los Angeles, and others. It won't be a perfect match, no combination between two legacy carriers will be, but they do have compatibility, more so than Delta and Northwest, and while it will take time, I have more hope for this deal being a long-term success than the Delta/Northwest agreement.

For more details about the United/Continental deal, check out this earlier (speculative) post, or this post for information about the Delta/Northwest deal. If you haven't subscribed to our free feed, please do so by going to the Airline Bulletin home page and entering your email on the right side of the page, under Get Posts By Email. And if you haven't had a chance to support the sponsors on the site, please do so next time you book a trip. By doing so, you're helping to ensure that Airline Bulletin can keep operating.

AirTran's Takeover Bid for Midwest Expires as TPG Group Makes Deal

AirTran’s multi-year long effort to take over Midwest Airlines has ended today as AirTran announced that it has let its tender offer expire. AirTran’s offer, much of which was comprised of AirTran stock, was valued at approximately $15.75 per share of Midwest given AirTran’s closing share price on Friday. TPG Capital, formerly known as Texas Pacific Group, a large private equity firm, which has a long history of investing in the airline industry, made a deal with Midwest to purchase the company for $16.00 a share in cash.

What has not been announced is whether regulators will accept the deal. There is another investor partnering with TPG on this deal, Northwest Airlines, and that may raise some antitrust issues with the federal government. However, Northwest claims that the company is only providing financing for the deal, and will not participate in the management or control of Midwest if the deal is successful.

TPG is a very experienced and savvy firm. And they will do what is necessary to help Midwest survive. However, it remains to be seen how Northwest’s involvement in the deal will affect Midwest. Like AirTran, TPG and Northwest may have big plans for Midwest, including restructuring its product, route system, fleet, and competitive strategy in order to more effectively compete with low-fare competitors in Milwaukee and Kansas City. And Northwest’s involvement will certainly raise antitrust concerns, as it could give Midwest and Northwest a disproportional amount of market share in Milwaukee and possibly in Kansas City and Omaha.

Northwest made a serious attempt to compete with Midwest a few years ago by opening up a focus city base in Milwaukee. However, Northwest was forced to pull out of many point-to-point markets from Milwaukee after a protracted battle with Midwest. Now, Northwest may finally have won the war.

From what Northwest has said, it appears that Midwest will not be turning into Northwest anytime soon. However, Northwest’s vague claim makes it very unclear how detached Northwest will be from operating Midwest. Should Midwest merge with Northwest, it would be worse for the airline than merging with AirTran. While Midwest’s customers would have access to a larger route system, spanning across the United States as well as three continents, they would also get some of the airline industry’s worst customer service and an on-time performance record that needs definite improvement.

But what is more likely is that TPG will help Midwest maintain its respected brand and keep its niche as a service-oriented carrier. But the big question is whether TPG can keep Midwest’s service standards high and its costs low while being attacked by low-fare competitors such as AirTran.

AirTran has likely been seriously damaged by this deal going through for Northwest and TPG. The airline was counting on Midwest to help propel its growth Westward and into new markets. Unfortunately for AirTran, the company must find ways to grow organically, which the airline has been struggling to do.

However, even though this presents a challenge for AirTran, it also presents an opportunity. AirTran must now focus on what has helped it in recent months, which are fare cuts. AirTran has some of the lowest costs in the industry, and the airline can pass those savings onto customers. AirTran can focus its growth on older markets. While the airline should certainly use some of its new planes to link focus cities on the East Coast with destinations out West, some of AirTran’s new capacity should also be put into tried and tested markets.

The best markets are along the Eastern Seaboard, between the Northeast and Florida. With JetBlue facing substantial difficulties in the next few years, now is the time for AirTran to nibble at the carrier’s market share. While JetBlue will continue to dominate the low-fare market in NYC for some time to come, AirTran has room to grow and steal passengers from JetBlue in Washington DC and Boston. Moreover, AirTran has growing operations in Baltimore and Philadelphia that have also been resisting competitive pressure from Southwest. All these markets are ripe for increased service to Florida.

AirTran has a decent enough product that it should be able to retain a fair number of the customers it attracts with its low fares. While customers may not flock to AirTran as they do JetBlue, there’s no major reason why AirTran cannot gain at least some brand loyalty in these markets. That loyalty will enable AirTran to charge higher fares once the carrier’s costs begin to rise in the coming years.

AirTran made an attempt to deal with future growth by making an acquisition. While it was a noble and reasonable effort on the part of management, sticking to what has been proven to work may be the best option for the airline at this stage. One of AirTran’s more recent expansion announcements was additional service from Las Vegas to several smaller markets in the Midwest. This is much riskier than Eastern Seaboard service and carries relatively low yields. Short-haul travel is still a growing market on the East Coast, and it’s the one that AirTran has been most successful in thus far in its operating history.

 

AirTran’s competitors, legacy and low-cost rightly feel that they need to change in order to ensure their future success. But AirTran doesn’t have as many of the cost imperatives and thorny expansion and labor issues that some of its competitors are dealing with. AirTran certainly has issues that it needs to work out, but perhaps those issues are best worked out in markets the airline is more experienced operating in, rather than in brand new markets.

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Status of the Midwest/AirTran Deal Uncertain

Midwest's new board of directors will welcome three new members on Tuesday: the three new directors who were backed by AirTran and elected to the board a week and a half ago. Midwest's senior management has promised to listen to AirTran's pitch, now that shareholders have voted for a change in approach to the AirTran deal, but it's unclear whether AirTran will get the change in attitude necessary from management and the other board members to secure a deal. On July 16, AirTran will give a formal presentation to Midwest concerning aspects of the proposed takeover. And after that date, a deal is possible, depending on how well the presentation and the three new board members sway their colleagues. However, it's also possible that a deal will wait at least a year, until the next Midwest board meeting when three additional board members will be elected. If AirTran-backed candidates win at that meeting, then a deal is virtually certain. But until then, Midwest may try to stall AirTran through provisions in Wisconsin law that currently give Midwest the upper hand. A recent Milwaukee Journal Sentinel article discusses Midwest's paradigm.

Midwest is in a very difficult situation. The airline is being pressured by competitors on all sides, and the company recently reported a reduction in earnings. Midwest will have difficulty turning itself around, even with its "Strategic Plan". Unfortunately, the company lacks two things that its competitors have. The first is size. Midwest is simply too small a carrier with costs that are too high in order to compete in a cutthroat marketplace. With a restructured Northwest that has lower costs, Midwest will have continuing difficulties as it struggles to match the fares of its competitors. Moreover, with higher fuel prices, Midwest will be paying more for fuel per passenger than some other carriers, including AirTran, because its planes are older and consume more fuel. The second thing Midwest lacks is a strong, unifying identity that customers can recognize. Midwest used to serve "The Best Care In The Air" throughout its fleet, with 2x2 seating, free meals (even on china in some cases), and unbeatable service. But after 9/11 and the downturn that Midwest was forced to weather, the airline created two separate service standards, "Saver Service" and "Signature Service". Saver Service were flights similar to those on any airline, with 2x3 seating throughout the cabin, like coach on most airlines, as well as a reduction in meal service (the cookies were still available for free). But, with Saver Service, Midwest was able to offer lower fares, because now that Midwest could fit more seats onto a given plane, it could extract more potential revenue from a given flight, so each passenger could pay less and Midwest would still profit. Signature Service, however, also saw a decline in the same service standards that once made Midwest the standard-bearer for amenities and service in the industry. Meal service was trimmed (and the china was eliminated), but the 2x2 seating remained. However, Midwest only kept Signature Service on routes which had a large concentration of business travelers, who were more willing to pay higher prices for better service and amenities. But the difference in service standards left Midwest with a split identity, and the company didn't have a clear vision for the future. The company had to market itself to two distinct sets of customers with two distinct products, and that confused consumers and left the airline struggling to balance this dichotomy. Unfortunately, this lack of vision has left the company where it is, in a predicament in an industry where management must be constantly reevaluating the company to determine whether it needs to change to compete more effectively. What separates good managers from bad managers is the kinds of changes they make. And unfortunately, Midwest had some bad managers who didn't make decisive enough changes in order to better prepare the airline for the changes the industry now faces.

The AirTran deal is far from perfect, but it will leave the airline in a better position than it is in currently. Midwest management must try to negotiate the best deal for the airline and its shareholders, which includes trying to secure an offer that's better than the $15 AirTran is currently making. Ultimately, however, Midwest management must accept the AirTran deal because it will help modernize the airline, provide additional service to the Milwaukee and Kansas City regions, and provide long-term job security for most current Midwest employees. Whether this deal goes through or not after July 16 is an open question, but in my mind, and in the minds of at least a substantial minority, if not a majority of Midwest investors, the takeover deal should be executed.

Current Status of AirTran's Takeover Bid for Midwest Airlines

On Monday, AirTran once again extended its takeover offer for Midwest through August 10. AirTran's current proposal values Midwest at $15 a share, which is equivalent to what AirTran has been offering since April 2. AirTran is still very much interested in Midwest, and in fact, AirTran is in the process of trying to get three of its appointees elected to the Midwest Air Group board of directors on Thursday in order to give AirTran a "full and fair hearing" about the takeover proposal. AirTran also encouraged Midwest to start takeover talks, given the failure of Midwest's standalone plan, as evidenced by Midwest's recent announcement that it will lose money for the second consecutive quarter. Meanwhile, Midwest argued that its standalone plan represents the best value for customers and shareholders, as it promotes a diverse stream of revenues. AirTran feels that Midwest is its best outlet for growth right now, as the carrier is still in the midst of a struggle to improve load factors and yields. While the carrier has contained costs nicely, it has struggled to use its leverage that it has with such low costs to attract customers. AirTran believes that Midwest can give the company more outlets for growth and a potential for higher yields.

It's doubtful that this deal will succeed in the next six to twelve months, unless AirTran significantly ups its bid or its candidates get elected to Midwest's board. However, the deal may go through in the next couple of years, as it seems to be the best solution for all parties involved. However, Midwest isn't planning to go down without a fight, and the company has made moves to diversify itself recently, with the formation of a new codeshare agreement with Northwest Airlines and the diversification of routes from Milwaukee and Kansas City, including the expansion of a regional jet program with service to smaller cities in the Midwestern region. Midwest is certainly not in a good competitive position. The carrier is trying desperately to retain its market share in Milwaukee and Kansas City, in part by trying to drop some of its older, more costly practices, such as 2x2 seating on every flight, and replacing them with more cost-effective practices used by AirTran and other LCCs, such as 2x3 seating throughout most of the plane and 2x2 seating up front. By cutting costs, Midwest can lower fares to help lure customers onto its planes. Midwest hopes that even as the company tries to cut its costs, it won't cut its level of service, which is essential to its brand. But unfortunately, with moves like this, the airline is seen more and more as just another typical LCC, trying to cut costs at the expense of customers' well-being. Midwest will struggle in the coming years against competitors with lower costs, including Southwest and AirTran, especially as the airline devalues its brand. Also, now that Northwest has exited bankruptcy, it too is a formidable competitor to Midwest.

Midwest's efforts may be futile. In a couple years, the operating environment is likely to change significantly, and AirTran is a company better-suited than Midwest to the likely realities of that environment, which include ever-lower costs and a simplified route network. If this deal doesn't go through, then it will probably cost AirTran more (and take the company longer) to achieve the growth in the Midwestern region that it desires. But eventually, it will happen. Meanwhile, unless Midwest makes additional changes to its business plan that allow the company to better contain its costs and maintain its brand, I foresee trouble ahead for the carrier. Milwaukee and Kansas City aren't strong growth markets. Midwest will have to do a reality check concerning how much growth Milwaukee and Kansas City can support in the coming years. Enplanement figures in either market aren't expected to skyrocket anytime soon, and there are only so many markets that can support nonstop service from either hub. AirTran has a larger, more cohesive network that Midwest passengers can benefit from. Even though Midwest passengers would lose out on many of the amenities they've come to love and the knowledge that they're supporting the hometown airline, a takeover by AirTran would probably benefit customers and shareholders more in the long term. While AirTran's tactics to push this deal through have been a bit slimy, and the price they're been offering to Midwest shareholders is less-than-ideal, it's probably the best offer that Midwest shareholders will get. It will be interesting to see the outcome of AirTran's push at the Midwest Annual Shareholders Meeting tomorrow. If AirTran succeeds in getting its candidates elected to Midwest's board of directors, then the whole situation changes, and the takeover deal is much more likely. But if that doesn't occur, then this deal is likely to stagnate until at least August 10, when AirTran will make another push for the attention of Midwest's investors.

Midwest and Northwest Announce Codeshare Agreement

Midwest Airlines and Northwest Airlines announced an important codeshare deal today that will bring important benefits for both carriers. This codeshare agreement will enable Northwest to sell tickets and award Northwest WorldPerks frequent flyer miles for flights operated by Midwest Airlines and vice versa. As a result, both carriers will offer more flight and frequent flyer options to their customers, helping to build loyalty in a fiercely competitive market. But aside from that benefit, one virtually all codeshare agreements bring, this codeshare agreement contains unique benefits for both Midwest and Northwest.

For Midwest, it will help the airline diversify itself and steer clear of AirTran's hostile takeover bid. Midwest is struggling to survive in the midst of AirTran's bid, and it recently has tried to diversify itself by adding flights on 50-seat regional jets and expanding its mainline flight offerings. But nevertheless, Midwest is still a viable takeover target for AirTran, and so it's essential for Midwest, if it wants to remain an independent company, that it try to maneuver in such a way that makes it difficult for AirTran to execute its bid. While AirTran has a marketing agreement of its own with Frontier Airlines (which has many of the same benefits and drawbacks as a codeshare agreement, but without the technicality of putting one airline's code on another's flight), AirTran is resistant to linking up with other carriers through codeshare agreements, since these agreements can increase costs and decrease expansion opportunities, even if they have the potential to increase revenues. It's also a very different thing for a low-cost carrier (LCC) to link up with another LCC, which is what AirTran is doing, than for an airline, Midwest, which is not an LCC (but not a legacy carrier, either) to link up with a legacy carrier. As a result, this agreement may make Midwest a less attractive purchase in AirTran's mind. But, the agreement is also beneficial for Midwest, since it enables the airline to demonstrate that it's committed to the interests of the Milwaukee and Kansas City public. The codeshare agreement covers international destinations, as well as cities in Alaska and Hawaii, which Midwest has no intention of serving in the near future. But rather than ignoring the demand for those markets, Midwest can raise revenues and offer customers some of the benefits of Midwest, such as Midwest Miles frequent flyer miles, without making the enormous investment to serve new markets. As a result, Midwest creates the impression to customers that it's a larger, more important airline than it actually is, which is exactly the impression it needs right now as it tries to maintain customer loyalty and customer support for its battle against AirTran.

For Northwest, the agreement enables the carrier to concede defeat in some Midwestern markets, especially Milwaukee. A couple years ago, Northwest tried to develop a focus city operation in the city, but was crushed by competitors, primarily Midwest Airlines. Northwest's focus city operation in Indianapolis has succeeded, and this agreement enables Northwest to keep Midwest out of that valuable market. Also, the agreement will help boost Northwest's loads on flights to Hawaii, since passengers can fly Midwest to a city where Northwest offers nonstop service to Hawaii, and then fly Northwest the rest of the way. But even though Milwaukee was an unprofitable location for Northwest to launch point-to-point flights, it's still an important market for Northwest for geographic reasons. Milwaukee is right in between Northwest's two largest hubs, Minneapolis/St. Paul and Detroit, and Northwest controls much of the market in the Midwestern US. Northwest has a lot of frequent flyers in the Milwaukee area, because Northwest offers the most frequent and convenient service from Milwaukee to faraway destinations, via its Minneapolis/St. Paul and Detroit hubs. And Northwest wants to provide those loyal flyers with the most options possible, especially where Northwest itself cannot provide them. This is true particularly with domestic flights, where Northwest offers a weaker network than some of its competitors. While Northwest offers connecting service from Milwaukee to most markets in the US, many business travelers are demanding nonstop flights. And since Midwest can provide them, and Northwest can't, Northwest made a smart decision to codeshare with Midwest, and offer customers more domestic options from Milwaukee and Kansas City.

While it's too early to determine whether this relationship will work, it will certainly have an effect on the market in the Midwest. Northwest and Midwest will still compete, no doubt, but it's less likely that either airline will invade the turf of another. Both airlines are relatively weak and vulnerable right now, and it's to neither airline's advantage to fight with the other. Instead, the market has been carved up, Northwest will stay out of the point-to-point market in Milwaukee and Kansas City, for the most part, and Midwest will stay out of the point-to-point market from Indianapolis, a Northwest focus city in the region, as well as Northwest's hubs. Northwest hopes to lure travelers on international flights, while Midwest plans to focus on the short-haul regional and domestic markets. It's indicative of how these airlines plan to grow their respective operations in the next few years. Northwest recognizes that it will be more profitable to fly internationally where demand is increasing and fares are high, instead of domestically where fares are still relatively low, and demand is flat. Midwest recognizes that as a growing company, it can capture a larger share of the domestic market, even if the market itself isn't growing, and the airline can maintain a fare premium to cover the added costs of domestic flights, provided it continues to offer a superior product to customers. This codeshare agreement is also indicative of the necessity airlines feel to diversify their offerings to customers. With more and more competition, offering choices is what builds loyalty, and both Midwest and Northwest are doing that with this agreement. As the market becomes increasingly competitive, more codeshare agreements will likely be formed in order to keep airlines profitable, and their market shares in certain key cities intact.

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.

How Changing Airline Demands Will Transform Regional Jet Utility

Now that Midwest Airlines and ExpressJet have made new commitments with regional jets which differ from traditional hub-small market routes, other airlines may have to be more creative with how they deploy their regional jets (or those of the regional lift providers they contract with). Airlines have been cutting regional jets from their fleets, specifically 50-seat and below jets, in an effort to cut costs. 70-seat regional jets, however, are still popular with airlines because they have better economics than 50-seaters, and it's unlikely many will be redeployed in the next couple years. Many of the 50-seat and below regional jets which remain will be used to fly traditional hub-small market routes which are still profitable, even with high fuel prices. However, some of the jets may also be used to start new point-to-point routes, similar to what ExpressJet is doing. Regional jets are well-suited for a couple of applications which will become more important to revenue-conscious airlines in the coming years.

First, regional jets offer a good way to deliver small amounts of capacity to in order to facilitate connections at focus cities. For example, Delta is building their Los Angeles operations, and has been adding an increasing number of flights to Latin America. And while Delta has a sizable operation in Los Angeles, and nonstop flights from LAX to many cities, particularly on the East Coast, Delta has stayed away from competing with the three big boys on the West Coast routes, Alaska, United, and Southwest. But Delta announced new regional jet service to begin June 7 from Seattle and Portland to Los Angeles. The new service will be operated by the former Delta subsidiary ASA (now part of SkyWest Airlines). Both flights depart early in the morning and return in the evening, timed perfectly for connections. Why did Delta add these flights on a regional jet which is far more inefficient to operate than a 737 which Alaska, United, and Southwest all operate? Primarily in order to facilitate connections at LAX for Latin America flights. Delta recognizes that in order to be successful on any route, it needs to maximize the amount of potential traffic that can utilize it. And while LAX has a lot of origin and destination traffic which will help sell tickets, O+D traffic alone won't fill planes. But LAX is a poor connection location, particularly on Delta's route network, since most of Delta's services from LAX are to the East Coast. With Delta's large Atlanta hub, passengers on the East Coast can easily connect to most of the same Latin American destinations they serve from Los Angeles nonstop from Atlanta. These passengers don't need to travel to Los Angeles. And so as a result, Delta needed to find ways to get passengers onto their LAX-Latin America flights, and connections to the Pacific Northwest made perfect sense. Delta isn't trying to compete for market share with Alaska, United, and Southwest on the Seattle/Portland-LAX route, that would be lunacy with a 50-seat regional jet. Delta is simply using some regional jets which would otherwise sit empty on the ground to expand their route network and to gain market share on routes to Latin America. The regional jet flights themselves may not be profitable, but Delta should make money because most of those passengers who travel from Seattle or Portland will continue on to Latin America, enabling Delta to charge a higher fare and make a profit overall. Finding niche applications for regional jets can be tough, but Delta's idea to use the aircraft to add capacity between large markets in order to facilitate connections should work well, provided there is sufficient demand for travel to Latin America, especially during the upcoming hurricane season.

Secondly, regional jets can also be used for starting point-to-point service, in the spirit of ExpressJet, to build up service from various markets. The excellent characteristic about regional jets is that they can be used to quickly build up service in a market to gain market share, and can be used to operate nonstop flights to many different cities, although its costly to do so, especially when competing against an airline using mainline aircraft. For example, in a city such as Omaha, regional jets could be used effectively by a lift provider contracting with a major airline to add service to a variety of cities unserved by mainline carriers. Service from Omaha to cities such as Seattle, Portland, San Jose, Austin, Raleigh-Durham, Indianapolis, and Richmond could enable an airline such as Northwest to build market share in Omaha without using precious mainline aircraft. Granted, Northwest would probably sell tickets at a premium to other airlines offering connecting service, but it would offer loyal customers more options for point-to-point service. And since those who are most likely to need nonstop service are business travelers, who already pay a premium for tickets, it could be a win-win situation, provided routes are carefully selected, and flights are timed to the needs of business travelers. This kind of service wouldn't facilitate many connections, it would simply offer nonstop service where none currently exists. Actually, Northwest has tried something similar to this in Milwaukee and Indianapolis, with mixed results. Both of those cities lacked nonstop service to many major business markets, and Northwest filled some of the gaps with mainline aircraft (mainly 100-seat DC-9 planes), and other gaps with 50-seat regional jets. Northwest has continued some of the routes, but had to cancel some as well. Unfortunately, Northwest tried to do to much in both markets. Northwest has had to pull most of its point-to-point flights out of Milwaukee because Midwest Airlines offered competing service with a better product than Northwest at a competitive price. Consequently, Midwest was able to dominate many of the point-to-point markets Northwest entered. Northwest's Indianapolis operations have been more successful, and the airline has retained many of its point-to-point flights from that city. If Northwest or any other airline wants to use regional jets to build market share, they need to do it in a location which is relatively free of competition on nonstop routes, and which offers the traffic levels to sustain point-to-point flights to multiple destinations. There are markets out there which fit this description. Omaha is only one example; Colorado Springs, Lexington, and Buffalo are all examples of markets which could benefit from the introduction of regional jet point-to-point service.

These are only two examples of how airlines can try to redeploy 50-seat and below regional jets. If airlines can find the right niches for these planes, then they will find a new life, because while their economics may be poor, there are still markets and routes where a regional jet is required and where that level of capacity isn't a competitive disadvantage (as many airlines with bloated regional jet fleets are now finding), but rather a competitive advantage. Airlines may find that because regional jets enable them to closely tailor capacity to market demands and to grow focus cities and other markets slowly, they will become assets. But, airlines must ensure that the routes they do start will be able to sustain themselves with higher fares, so airlines won't have to have sell seats at fire sale prices like Independence Air, an expedient way to failure. Airlines that fail to find ways to effectively redeploy their regional jets will find them increasingly costly and burdensome.

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Is Midwest’s 50-Seat Plan Really Aimed to Stabilize the Airline?

Midwest Airlines launched new flights today on 50-seat regional jets, operated by SkyWest Airlines. Midwest decided to launch the new service supposedly in response to demands from customers for new and expanded service from Milwaukee. However, Midwest's launch of 50-seater service comes at a time when no other American airline wants to even contemplate new 50-seat regional jet service; the planes are simply too inefficient for their needs. However, Midwest is an airline that is not only expanding, it's also one that's in the midst of a turnaround to profitability, and the company has demonstrated that it can turn itself around, as Midwest reported profits of $5.4 million last year. The 50-seat regional jets will supplement (but not replace) regional aircraft already flying for Midwest, making some routes cheaper to operate, since a 50-seat aircraft is cheaper to operate per passenger than the 19- or 32-seat aircraft which are currently flying for Midwest. However, regional jet flying, especially on 50-seat and below aircraft, seems to be a threat to any airline's profitability, even with trimmed costs. Midwest is one of the few US carriers that can command a price premium for its services, and its new regional jet service will offer convenience to business travelers who now won't have to connect to fly between certain markets. However, even with that price premium, regional jet flying is still a very risky, low-yield business, and Midwest is gambling that regional flying isn't dead. They may be right, and the shift in how airlines view regional jets may help Midwest. More and more regional jets are being placed on routes, not to small markets, but between intermediate and large markets which lack significant or any nonstop service. ExpressJet is testing whether this model will work, and whether business travelers are willing to pay a premium to fly nonstop. Midwest seems to be doing the same thing too, after all, Midwest's first routes with the jets will be service to large markets. Midwest's 50-seat planes will fly first from Milwaukee to Columbus, Ohio, as well as supplement existing service between Milwaukee and Minneapolis/St. Paul as well as Philadelphia. With the recent rise in airfares, this makes perfect sense, as regional jets are a convenient and flexible, albeit expensive, way for airlines to add capacity in small doses. This way, Midwest can slowly gain market share on routes to and from Milwaukee and become a more significant airline in the Midwest and East Coast.

However, there may be ulterior motives to Midwest's recent regional jet expansion. The expansion may be geared in part to stave off a takeover bid from AirTran Airways. Even though activity surrounding AirTran's takeover bid has died down in recent weeks, AirTran is trying to keep the bid very much alive, even if the takeover takes years to accomplish. AirTran has been mum about what exactly it would do with Midwest's regional operations if it were to take over the airline, however, it's likely that AirTran would eliminate certain, more costly, parts of Midwest which deviate from AirTran's core business model. Midwest's baked-onboard chocolate chip cookies may stay, but some of Midwest's regional routes and some of their older aircraft will likely be eliminated. But by adding new service that Milwaukee travelers will use, even if it's not very profitable service, Midwest can attempt to diversify itself enough such that AirTran will either lose interest in Midwest, because the compatible synergies between the two companies will not be sufficient to necessitate a takeover, or, if AirTran is still interested in a takeover, it will be more difficult for them to eliminate elements of Midwest they don't find suitable. It remains to be seen whether Midwest's 50-seater service will succeed, but Midwest's definition of a successful regional jet operation may be very different from ExpressJet's. For Midwest, successful service won't necessarily make money, but it will likely delay AirTran's takeover efforts.

Midwest's 50-seat regional jet operation raises some important questions about the future of third-party regional jet contractors, including SkyWest and Mesa, and whether their planes may have new missions, now that higher fares and growing demand from business travelers for nonstop service may necessitate expanded 50-seat regional jet service from some airlines. This industry is facing consolidation, and it's possible that further consolidation could ensue if Delta spins off its regional subsidiary Comair, whose fleet is primarily composed of 50-seat jets, before Delta's April 30 date to exit Chapter 11 bankruptcy protection. But I plan to discuss more about this next week, so stay tuned.

There are two interesting articles related to this post, one article about AirTran's plans to nominate three candidates for Midwest's Board of Directors at their upcoming annual meeting in order to gain influence over Midwest's business decisions, and another article about AirTran's attempts to purchase a strip club near the Milwaukee Airport from Midwest. (I lack the creativity to write a funny April Fools article on Airline Bulletin, but these writers do a good job).