12 September 2010

Discipline Discipline - Key To Profitability

For veteran watchers of the airline business - the latest round of statistics from the US market which makes up the largest source market of travel - must be encouraging and even surprising.

The Professor has been digging into some detailed statistics evaluating the first half financials of the airlines and looking carefully at core data.

Airlines are on a roll and look like they are able to smooth out if not break the cycle of boom to bust.

Let's start with the boom. Almost all airlines have been sounding restrained in their comments regarding the state of their businesses. The common threads are as follows:

1. No double dip in the recession but dont expect a miraculous rise in traffic - this recovery is still very fragile.
2. No big advance in sales - with a few exceptions and across the board the traffic boost in first half of 2010 has been very slight perhaps a 1-2% advance in traffic (ATW says ASMs were flat but RPMs were up 1.6%).
3. with the exception of Southwest all airlines reported significant increase in Ancillary Revenues particularly bags and seats. Southwest while protesting that it is not implementing that it is doing fine without ancillaries is also reporting a significant uptick in its Business product sales which of course is - er - a bundled ancillary package.
4. International flights are reporting a mixed bag. Transatlantic was flat - Asia Pac is up and of course the smaller but growing Latam markets are continuing their 4th year of growth.

Seperate from the airlines reports I have been trying to match how the advance purchase as represented by ARC sales and the airlines flown passengers match up. Here we see something interesting. The market has moved out to a less advance purchase model. People are buying later. And paying for it....

Air travel costs soared from April onwards which caused the growth to slow but eventually the airlines only discounted a few of their total capacity seats and those discounts were relatively minor.

This means we are in for a bumper crop of airline Q3 results. The GDSs can also feel happy because as they continue their unbundling of their product their yields will rise.

What of the future?

The pressure is off the airline vs GDS battle - but its going to heat up again towards the end of the year. All eyes should be on the New United. Currently tied up in their fast track merger, once the dust settles - they must start to evaluate their distribution. Delta too must be thinking along the same lines. with #3 AA already making its moves - the other two cannot sit on their hands on this one.

And here now sits the conundrum of where the market will go. With the big 3 airlines occupying the space where the big 5 used to be - (and dont forget that WN has far less dependency on GDSs leaving only US and AS as in truth needing the GDS service), someone one day is going to wake up and say - wait a minute why am I paying for distribution when I own so much of the market.... and my occupancy levels are approaching max practical levels? There is that Abilene Paradox again...Discipline must move beyond the current capacity constraint across the airline infrastructure. With the added muscle that New United and New Delta have in the market, not taking advantage of this would be tantamount to admitting that airlines are still - less smart than we are giving them credit for. In the past it used to be an either or - Cojones or Brains. Why not both? Only time will tell who wins the next face off.


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