Southwest Airlines

Southwest Airlines presses to improve its fortunes in Atlanta by officially de-hubbing in Nov-2013

Southwest Airlines aims to realise its goal of dismantling AirTran’s hub in Atlanta in Nov-2013 as a means to bolster local passengers at the airport in the hopes of improving Atlanta’s performance. The declaration that Atlanta will officially become a point-to-point operation completes efforts by Southwest to eliminate unprofitable flow-through routes and concentrate on areas where it, along with AirTran, has relative strength.

After completing its acquisition of AirTran in May-2011, Southwest set its sights on network optimisation between the two carriers. The exercise essentially resulted in many small markets being eliminated from AirTran’s network and Southwest’s determination that Atlanta would perform more effectively in the combined network through the adoption of Southwest’s point-to-point route management strategy.

Delta presses forward to build a competitive network in a consolidated and mature US market

Delta Air Lines continues to leverage the competitive strength it holds over its US legacy peers to flesh out its network and build pockets of strength as United and Continental remain in the throes of their merger integration and American and US Airways lay the groundwork to begin the complex process of combining their respective organisations.

During the last couple of years Delta has used the nimbleness it enjoys versus its legacy domestic competitors to broker equity investments in foreign carriers to build a robust network ahead of the completion of US consolidation. Those investments have moved in tandem with Delta’s bolstering its presence in New York through its slot swap deal with US Airways and its investment in facilities at JFK and LaGuardia airports.

During 2013 Delta is attempting to strengthen its position in the fragmented but strategic Los Angeles market through a 12% boost in daily seats year-over-year from Jul-2012 to Jul-2013.

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.

Frontier Airlines has numerous fits and starts in its network as it remains on the selling block

US ultra low-cost carrier Frontier Airlines has made sweeping changes to its network during the last few weeks as it attempts to find the right mix of profitable routes that act as shields from one of its largest competitors, Southwest Airlines.

The changes include axing a short-lived focus city in Colorado Springs, hopping between airports close in geographical distance and introducing new seasonal flights from its Denver hub. Despite the end to the brief test case of the Colorado Springs focus city, Frontier for now remains committed to building up point-to-point service from Trenton, New Jersey and Orlando, Florida.

While the argument could be made that Frontier’s swift reaction to ever-changing market conditions reflects the nimbleness that its smaller size allows, the constant upheaval could be a turn-off to customers that expect a certain level of network consistency. And as Frontier’s parent Republic Airways Holdings works to secure a sale of Frontier in early 2013, would-be buyers may be scratching their heads over the long-term value Frontier might provide.