Allegiant Air

Allegiant Air re-calibrates Hawaii as its expectations in trans-Pacific markets are tempered

Excitement exuded by Allegiant Air a year ago over its then-impending service launch to Hawaii has been dampened by the realities of operating the market. Allegiant has admitted the dynamics have changed in the US-Hawaii market place since it opted to acquire Boeing 757s during 2009 to link its small market US destinations with Hawaii. Now the carrier is tempering its expectations for its expansion into Hawaii and reining in capacity as a means to bolster its performance from the US west coast to the Hawaiian islands.

Allegiant is likening its seasonal capacity management from the US to Hawaii to adjustments it regularly makes in its Florida markets to properly align its supply with demand. But it is unclear just how firm the airline’s commitment is to Hawaii as it has not assured that some routes undergoing a seasonal suspension will return, and has hinted its Hawaiian operations are likely to be smaller in scale than originally planned.

Frontier Airlines straddles ultra low-cost and hybrid profiles (or falls between them)

Denver-based Frontier Airlines has experienced a vast upheaval during the last few years. Acquired by US regional operator Republic Airways Holdings in 2009, Republic decided more than a year ago to spin-off or sell Frontier.

Meanwhile, during its time as a subsidiary of Republic, Frontier has successfully executed a cost cutting scheme and network overhaul that has largely produced favourable results. As it worked to achieve cost efficiency Republic management declared its intent to transform Frontier into an ultra low-cost carrier to mimic the cost structure of other US carriers in that genre, namely Allegiant and Spirit.

But as Frontier has worked to improve its fortunes it has not developed a business model that falls strictly into a no-frills offering in the same vein as Spirit Airlines. Its network is a mix of flying from a hub in Denver and point-to-point operations largely from Orlando and its new focus city of Trenton, New Jersey. Frontier lacks the scale to develop into a full-blown hybrid carrier like JetBlue, yet does not strictly adhere to a pure leisure focus.

Airline business model transformation begins with customer segmentation

Making an active effort to understand customers’ needs and concerns will give airlines a better idea of the changes required in their business models to deliver and receive value.

The starting point for realigning business models so that they address passenger needs is to agree on which passengers to target; acquiring detailed knowledge of their travel behaviour; and designing appropriate processes and committing resources – whether it’s building new systems and facilities or training staff – to provide the right services.

This sounds fairly basic and easy. Yet, passenger frustration continues to exist and, in fact, in many cases it is increasing. Why?

Southwest Airlines, the US' fourth force, does not neatly fit the emerging US business models

Southwest Airlines sits at an interesting crossroads as the US market reaches a high level of maturity ushered in by legacy carrier consolidation and its own merger with AirTran Airways that is targeted for completion in 2014. With the changes, three distinct business models are emerging in the US – full service, hybrid and ultra low-cost.

But Southwest does not fit neatly into any of those categories, which the carrier might view as a positive attribute as it examines how to evolve its business model. Southwest's history of a skittish approach to change leaves many questions unanswered as to how the airline can retain the attributes that make it a recognisable brand while making key decisions to ensure a large pipe of steady revenue generation.

The low-cost pioneer during the last couple of years has seen its edge in that regard soften as Chapter 11 reorganisations and consolidation among the US majors has resulted in those airlines lowering their unit costs. During 2012 Southwest’s unit costs increased 4.2% year-over-year, and on a stage length adjusted basis there was roughly a 30% difference in its nearly USD7 cent unit costs compared with Allegiant Air, who along with Spirit is considered the new breed of ultra low-cost carrier.

American and US Airways likely to see little competitive change in their overlap markets

American and US Airways are pressing full steam ahead to close their merger by 3Q2012, including stressing to US legislators that the combination will improve the overall health of the country’s airline industry and make the merged airline a more viable competitor with legacy and low-cost carriers alike. With just a dozen routes that overlap, the carriers should not encounter any resistance from anti-trust authorities, and given that most the markets are hub to hub pairings, few changes are likely to be made to service patterns once the 18 month integration process is complete.

Some of the arguments made by American and US Airways over increasing competition from low-cost carriers and their potential service expansion into overlap markets might be overblown as those airlines in previous mergers have been selective in grabbing the low hanging fruit created by the tie-ups between Delta-Northwest, United-Continental and Southwest-AirTran.

US airlines deliver a 0.1% profit margin as government-induced havoc looms

US airlines moved closer to the razor’s edge during 2012 after collectively recording a profit margin of 0.1%. While the 10 largest airlines in the country may be commended for sustaining a three-year profit streak amidst record high fuel prices, they could find it tough to find creative ways to continue to achieve profitability as the potential to tap ancillary revenues reaches its peak.

On top of the seemingly everlasting threat of fuel price volatility, US carriers also face various forms of pressure from the US government, with looming threats of tax increases, as well as possibly significant operational disruptions triggered by bipartisan stalemate in budget negotiations.

Data compiled by US airline trade group Airlines For America (A4A) show the country’s largest carriers earned USD152 million during 2012, a 64% slide from the USD418 million in net income recorded the year prior. ExxonMobil earned around that much each day in 2012.

The 4.7% increase in airline expenses outpaced a 4.5% rise in revenue growth as fuel prices reached an average of USD128 per barrel during 2012. A4A estimates US carriers recorded USD50 billion in fuel costs during 2012, a 28% rise year-over-year.