Analysts debate legacy lines survival prospects


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 consideration.

Legacy carriers are not dead, Boyd, president of the Colorado-based Boyd Group, proclaimed at the groups 10th annual Aviation Forecast Conference here.

These carriers can strike back. Legacy carriers probably have the strongest future in terms of revenue growth.

Boyds argument, 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.


Because the 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 there).

Staying alive with regional service

Major airlines 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, he said.

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 serve them.

The legacy 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.

Meanwhile, 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 said.

Dissent 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 entirety.

Even at the conference Boyds company sponsored, there was some dissent.

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.

Thats because Neidl believes there are too many hubs to support the existing and future market.

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.

Spirit Airlines 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 Latin America.

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.

A different viewpoint

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 traveler.

Chase concluded 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.

Chase also 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 predicted.

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 succeed.

To contact reporter Andrew Compart, send e-mail to [email protected].


From Our Partners

From Our Partners

Las Vegas Webinar image
The Latest in Las Vegas
Register Now
Los Cabos dining district
Los Cabos' 23400 District
Read More
2021 California Connect
California Connect
Register Now

JDS Travel News JDS Viewpoints JDS Africa/MI