CAPA Weekly | 9 Feb 2018

Transcript

Peter HarbisonHello, and welcome to CAPA Weekly. There's talk in the U.S. market of a modest price war, as United, in catch-up mode, breaks ranks and proposes expanding capacity. This would rock the boat in an ocean that's been relatively calm and blue in recent years. Aside from United's need to regain lost ground, three other factors suggest a new environment could be around the corner.

There's been hub consolidation, leaving some large, regional airports out in the cold. Secondly, ULCC's like Spirit and Indigo's Frontier are gaining traction. And thirdly, the U.S. still has some of the highest domestic and international fares, and hence, relatively low growth rates.

Given their market dominance, the three majors, and Southwest is still operating on a different level, even if it's costs haven't been refreshed by bankruptcy, have been able to compete by stripping back fares in the back of the bus using basic economy or similar strategy.

This falls short of a long-term solution. Firstly, it relies on having plenty of capacity to keep the ULCCs at bay. And secondly, the airlines can only apply that competition on routes which are able to support the full-service operation. They can't compete on leaner routes, or at least they can't do it profitably. That's why the basic economy low fares, or no response at all, can only be a temporary fix. Even though, for example, they have generated good upsell rates or ancillaries, this doesn't put them in a position of preventing the spread of ULCCs. It reduces yield declines, but it doesn't provide wider appeal, nor does it stimulate new growth.

It is a strategy waiting to be disrupted. It survives only as long as the big three retain their untouchable position. As the ULCCs intrude further into the low fare end of the market, it will become impossible to cover this market segment within the existing operating full-service envelope.

And meanwhile, in the outside world, almost every major airline in Asia-Pacific and Europe, has established at least one low-cost subsidiary, for long and for short haul, to compete effectively on more or less equal terms with the ULCCs. Those airlines operate in much more competitive markets than the tidy U.S. domestic market. Yet, even elsewhere in North America, Air Canada has even adopted this strategy. And remarkably, too, the former LCC, WestJet, has its own.

Okay, so the U.S. carriers had bad experiences over 15 years ago with subsidiaries. But the world's moved on since then, so why haven't the U.S. majors followed suit? Reasons, perhaps so far their dominance has managed to keep competition under control. But also, their unions, particularly pilots, will oppose it strongly, even if it does allow the airline to grow. And in almost equal measure, the airlines are fearful that Wall Street's analysts will punish any airline that doesn't promise immediate returns. They don't like forward looking strategies.

But it's only a matter of time before the U.S. majors are forced to adopt an approach that, for the rest of the world, has become simple common sense. But their backs will have to be against the wall before they can make that move.

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