SAVANNAH, Ga. --
Aviation consultant Michael Boyd has made a name for himself by
being a contrarian, but also because his views have sometimes
proven correct. When Boyd says that U.S. legacy airlines -- many
now in bankruptcy or struggling to avoid it -- have a brighter
future than their low-cost, low-fare rivals, it merits
are not dead, Boyd, president of the Colorado-based Boyd Group,
proclaimed at the groups 10th annual Aviation Forecast Conference
can strike back. Legacy carriers probably have the strongest future
in terms of revenue growth.
which he explained in detail at the conference, goes like this: The
ability to generate more revenue is just as important as the
ability to cut costs, and in the long term thats where carriers
like American and Northwest have an advantage.
future, Boyd asserted, lies in connecting midsize cities to each
other and to international destinations.
His reasoning is
that in the global economy, foreign investors -- particularly from
Asia -- arent just investing in major U.S. cities. Theyre also
investing in midsize communities: Hyundai in Montgomery, Ala.;
Eurocopter and a foreign steel mill in Columbus, Miss.; BMW in
Greenville, S.C.; and foreign-owned auto component suppliers to
Shreveport, La. (to be near the General Motors factory
alive with regional service
could fill regional jets with business travelers between such
cities and in markets such as Greenville-Lansing, Mich., Boyd said.
Those cities also will generate significant international traffic
because of the foreign investment and other foreign economic ties,
Those are markets
absent of low-cost competition and ripe for revenue growth, he
contended, and airlines such as American via Dallas/Fort Worth,
Delta via Atlanta and Northwest via Detroit are well-positioned to
carriers are the ones that not only have the revenue base, but
theyre in line to take advantage where the revenue in the [U.S.]
and elsewhere is growing, Boyd said. These are the growth sectors
in the coming years, and its not low-cost carriers that will get
it. Boyd calls it the Shreveport-Shanghai solution.
We firmly believe
well be talking in the next three to five years about legacy
carriers being the ones that have the strongest future [and] growth
opportunity, Boyd said.
between now and 2008, low-cost carriers will be taking delivery on
more than 250 100- to 150-seat jets, Boyd noted. He said that
portends a fight between LCCs forced to enter the same markets. Its
not that those other segments of the industry are going to shrivel,
but dont write off our friends at these bigger carriers, Boyd
among the ranks
Of course, theres
a reason for describing Boyds views as contrarian. There are plenty
of people who dont agree with them, at least not in their
Even at the
conference Boyds company sponsored, there was some
Ray Neidl, an
airline financial analyst with Calyon Securities, insisted he wasnt
contradicting Boyd, but he told conference attendees he expects the
number of legacy carriers to shrink to two or three, carrying 50%
or less of the domestic market.
Neidl believes there are too many hubs to support the existing and
Neidl also said
he believes the Embraer 190, a new 100-seat jet, is going to
revolutionize the industry by allowing airlines to bypass hubs and
connect midsize cities with nonstop service.
JetBlue just took
delivery on the first of 100 Embraer 190s it has ordered, and its
initial launch with the new aircraft includes routes such as New
York to Richmond, Va., and Austin, Texas.
President Ben Baldanza, formerly a marketing executive with US
Airways and Continental, said he doesnt foresee an industry where
legacy airlines will be replaced by low-cost carriers, but he
doesnt quite share Boyds vision, either.
In a business
where many customers see us largely as commodities, being the
lowest-cost producer in that kind of space is a strategy for
success to some degree, said Baldanza, whose airline is trying to
position itself as the only low-fare carrier to the Caribbean and
Baldanza said he
believes some legacy carriers will get stronger, but he doesnt
think theyll be as stable as low-cost competitors.
For example, when
the Pacific is strong, Northwest and United are going to make a ton
of money. When the Pacific is weak, theyre going to lose a lot of
money, he said.
Youre going to
see big swings with those carriers, even as they structure
themselves to be strong, he predicted. But I dont think youll see
those kind of swings on the low-cost carrier side.
Perhaps the most
detailed rebuttal to Boyd comes from someone who was not at the
conference, but whose report a year ago offers a very different
view of the industrys future.
In an Oct. 1,
2004, report to investors on the vulnerability of hub economics,
Lehman Brothers airline analyst Gary Chase used airline yield data
provided to the Transportation Department to make his case that the
major airlines make most of their hub profits from business traffic
that originates from the hub city.
While there are
isolated examples of high-value connecting itineraries, their
contribution to total revenues tends to be small, Chase said. The
main benefit of the connections, he said, is to feed enough traffic
to the hubs nonstop markets to increase their frequency, which
makes them more attractive to the high-yielding local business
the majors need to restructure hubs to rely more on high-yielding
local, nonstop traffic (Delta, it now happens, is doing just that
with Dec. 1 reductions in Cincinnati designed to increase its local
traffic from 36% to about 50%). Turning hub cities into focus
cities, such as US Airways has done in Pittsburgh, could become a
viable alternative, he said.
expects low-cost carriers to encroach on hubs more and more to make
use of their expanding fleets. That will force lower fares and have
a devastating impact on network profitability, he
The fragility of
hub economics is worrisome and, in our view, requires that the
network airlines undergo a constant process of restructuring, he
said. We are hard pressed to believe that all of these carriers
will suddenly and simultaneously get it right. We suspect,
therefore, that the weakest of these carriers will be marginalized
or eliminated over time.
Chase said he
didnt expect a picnic for low-cost lines especially as they begin
competing against majors at hubs. Only those with extremely low
costs, powerful brands and network presence are likely to
reporter Andrew Compart, send e-mail to [email protected].