Opportunity Knocks

[Thebean]

The law of unintended consequences is alive and well.

AAG has probably figured it makes good sense to go into transborder markets with a reasonable business component where others have abandoned J class service.

Just as WJ targeted CRJ flying in the late 90's, AAG and others may target transborder flying to pick off unhappy premium passengers, the core of their business.

The same sort of thing happened with Song and others. Give competition an inch and they'll take a mile until Delta figured out what was happening and gave up on the concept.

It'll be interesting to see how the AAG relationship with WJ works on these routes given the fundamental directionality.

US Airways from 02OCT14 is launching 2 new routes from Los Angeles to Canada, with service to Edmonton and Vancouver. Reservation for the new flight opened on Friday night (20JUN14) Pacific Time. The following schedule is only effective for the month of October 2014.

Los Angeles Edmonton 1 daily

US2751 LAX1745 2156YEG CR9 D

US2813 YEG0725 0949LAX CR9 D

Los Angeles Vancouver 2 daily

US2755 LAX1000 1247YVR CR9 D

US2813 LAX1350 1637YVR CR9 D

US2755 YVR1327 1628LAX CR9 D

US2755 YVR1719 2018LAX CR9 D

[FA@AC]

I expect that AA's entry to LAX-YVR/YEG has more to do with hub-building at LAX than it does with AC's transfer of YVR-LAX to Rouge. If AC had been getting a lot of full fare J or high fare Y traffic on YVR-LAX it wouldn't have sent the route to Rouge in the first place.

On the product side I'd say it's a wash. J on the CR9 is probably a more comfortable ride than Premium Rouge on the 319, but less comfortable than Premium Rouge on the 763 Rouge's 319 Y is likely as comfortable or as uncomfortable as Y on Mesa's RJ. Rouge Y on the 763 is probably a little better.

[Thebean]

Hub building is a whole lot easier when the competition walks away from their core business to focus on the low end leisure business.

One can't help but notice that all the restructured legacy airlines in the US have all but given up overtly chasing the LCC's with various ill-fated schemes to focus on their core competency. Indeed, they are all improving their product on the transcon with the premium products being launched.

Judging by their financial results, one would have to say that collectively, their strategy has been successful, (though United still struggles).

1Q 2014

Operating Margin (including interest expense as an operating expense).

1. Allegiant 17.9%

2. Spirit 13.7%

3. WestJet 11.5%

4. Alaska 10.6%

5. Delta 5.1%

6. AAG 4.9%

7. Southwest 4.4%

8. Industry Avg 1.8% (weighted)

9. Republic 1.3%

10. jetBlue .3%

11. Hawaiian -1.0%

12. Air Canada -4.5%

13. Skywest -5.6%

14. UAL -6.2%

History has a strange habit of repeating itself. If you are going to get into the banana business, it's always best that you are able to produce a pound of bananas for the same cost or less than your competitor.

After a couple of "overwhelmingly successful" years of operating "airlines within airlines"' the US legacies figured out that when all the costs were fully allocated, their bananas still cost quite a bit more to produce than the LCC bananas, and that their lower cost bananas were degrading their ability to charge a premium for their other lines of fruit.

Apparently, consumers slowly came to the conclusion that if Delta Song's bananas were substandard to their expectations, they were not going to risk buying their apples and oranges from the same supplier, namely Delta. It didn't happen overnight, but it inevitably happened.

It is interesting that Hilton owns both the Waldorf Astoria brand and the Hampton Inn brand, but you'll never see a Hampton Inn with Waldorf Astoria branding.

[FA@AC]

Hub building is a whole lot easier when the competition walks away from their core business to focus on the low end leisure business.

One can't help but notice that all the restructured legacy airlines in the US have all but given up overtly chasing the LCC's with various ill-fated schemes to focus on their core competency. Indeed, they are improving their product on the transcon with the premium products being launched.

Judging by their financial results, one would have to say that collectively, their strategy has been successful, (though United still struggles).

History has a strange habit of repeating itself.

I guess AC has decided that lower yield leisure business is in fact its core business in some markets. Thus the creation of Rouge.

AC is launching new premium products too. The US carriers are doing it on one or two transcon routes. AC is doing it mainly on international routes.

[Thebean]

I guess AC has decided that lower yield leisure business is in fact its core business in some markets. Thus the creation of Rouge.

AC is launching new premium products too. The US carriers are doing it on one or two transcon routes. AC is doing it mainly on international routes.

The US legacies came to that conclusion a decade or more ago, which resulted in an explosion of "airlines within airlines" that piggy backed on the mainline brand with denser seating, modestly lowered flight crew and in-flight costs on predominantly leisure roots.

Within a few years, they were all wound down due to their "overwhelming success" and replaced with a strategy that focussed on being the best at what they were good at and largely ignoring what they weren't good at.

The results speak for themselves.

[Johnny]

Operational control of the entire Airline has been handed over to two Americans from Air Tran Airways.

There is a large amount of "face saving" on the Rouge Operation, unlike the Zip / Tango failed experiment.

Even if it is a "day late and a dollar short" of jumping on the LCC bandwagan.

[FA@AC]

Operational control of the entire Airline has been handed over to two Americans from Air Tran Airways. .

And AC now generally flies on time and is profitable.

[FA@AC]

The US legacies came to that conclusion a decade or more ago, which resulted in an explosion of "airlines within airlines" that piggy backed on the mainline brand with denser seating, modestly lowered flight crew and in-flight costs on predominantly leisure roots.

Within a few years, they were all wound down due to their "overwhelming success" and replaced with a strategy that focussed on being the best at what they were good at and largely ignoring what they weren't good at.

Crew costs at Rouge aren't modestly lower than at AC mainline, they're hugely lower.

There are many additional cost lowering levers that AC has yet to pull. Ground handling for Rouge will likely move away from the CAW and the IAM or become less expensive if it continues to be performed by members of those unions. Denser seating is sure to come to mainline with the 737 deliveries even if AC decides not to convert its narrow bodied Airbus fleet to it before that.

Scoot, Jetstar, Vueling, German Wings and others are offshoots of legacy carriers and are still operating. Iberia code shares on Vueling, and BA is about to start doing it. Vueling seems to be moving more towards AC's model for Rouge than it is to SQ's model for Scoot.

Whether Rouge continues to operate as a sort-of-but-not-really-separate carrier or if all of AC becomes something more like Rouge remains to be seen, but AC is determined to lower its costs--the ones it can control--significantly, and has already made significant progress on that front.

[Zan Vetter]

On the one hand it is tempting to agree with thebean, that rouge is and continues to be a stupid idea. But the reality is that AC, if they see an opportunity for j class on YEG-LAX and the other announced routes, can easily upgrade that city pair back to mainline metal. I was shocked to see LAX sent to rouge, but the "5-hr" rule for corporate travel users booking J class seemed a very salient point, to me. Ie nobody pays for domestic J, but they'd take the upgrades to the empty J cabin if its there! Not good business, so it went to rouge. Now, either by magic or something else if profitable J demand on those pairs appears into AAG's lap, AC has options whereas others do not.

I dunno, I guess there is more than one way to skin a cat.

[Thebean]

S

Crew costs at Rouge aren't modestly lower than at AC mainline, they're hugely lower.

There are many additional cost lowering levers that AC has yet to pull. Ground handling for Rouge will likely move away from the CAW and the IAM or become less expensive if it continues to be performed by members of those unions. Denser seating is sure to come to mainline with the 737 deliveries even if AC decides not to convert its narrow bodied Airbus fleet to it before that.

Scoot, Jetstar, Vueling, German Wings and others are offshoots of legacy carriers and are still operating. Iberia code shares on Vueling, and BA is about to start doing it. Vueling seems to be moving more towards AC's model for Rouge than it is to SQ's model for Scoot.

Whether Rouge continues to operate as a sort-of-but-not-really-separate carrier or if all of AC becomes something more like Rouge dependentremains to be seen, but AC is determined to lower its costs--the ones it can control--significantly, and has already made significant progress on that front.

I was being a little understated on Song crew costs. They were significantly lower than main line.

Scoot has 6 777's so the jury is out there.

Vueling is buried deep in IAG's numbers so who knows what's happening there. The last independent numbers for Vueling published in 2013 showed a quarterly loss of 25m Euros.....

Qantas is a financial mess as we all know and Jetstar's "success" is a function of how costs are allocated between the two operations. Dollars to donuts the policy is "when in doubt, allocate the cost to the mainline..."

Germanwings / Lufthansa didn't exactly blow the markets away with there substantial loss and commentary that the TATL was going down the tubes this summer. They'll claim everything makes money, but when you lose $485m in the last quarter operating, something is sucking wind pretty badly.

So, again, it's hard to get particularly excited about all these "airlines within airlines".

I suppose WJ could take a dozen -800's and dense up to 189 seats to create a WestJet Holidays brand. That would cut unit costs by about 10% overnight.

Delta's success is a result of cutting across the board, rather than a little dabble here and a little dabble there. LCC's cost structures are low across the board.

That's the big difference, imo.

I could tell you that I get 80 MPG in my gas sucking F350 truck on the last leg of the drive from Vancouver to Kelowna, but somewhere in that calculation, one has to include the gas burned driving out of the valley, which is all uphill. Average it out and I bet I barely get 10mpg.

It's all how you allocate costs.

[airbrake]

From my sources at Rouge (pilots) they are making out pay way better than their A/C brothers and sisters, it seems there is a bit of a game going on to ensure they get drafted for work.

If that's the case, the crews costs won't be as much of a savings as planned for. But that's just what I hear from the crew.

[Johnny]

And AC now generally flies on time and is profitable.

You are absolutely right, the EVP/COO has made some substantive changes. A High School kid could have had a look around this outfit and figured out some obvious process improvements that would lead to better OTP.

Dealing with the "Union Asylum" - different story.

[FA@AC]

You are absolutely right, the EVP/COO has made some substantive changes. A High School kid could have had a look around this outfit and figured out some obvious process improvements that would lead to better OTP..

I agree, but I took your comment about the exec being an American from Air Tran as a snipe. Apologies if I misunderstood. I think the guy is doing a good job.

[FA@AC]

S

I was being a little understated on Song crew costs. They were significantly lower than main line.

Scoot has 6 777's so the jury is out there.

Vueling is buried deep in IAG's numbers so who knows what's happening there. The last independent numbers for Vueling published in 2013 showed a quarterly loss of 25m Euros.....

Qantas is a financial mess as we all know and Jetstar's "success" is a function of how costs are allocated between the two operations. Dollars to donuts the policy is "when in doubt, allocate the cost to the mainline..."

Germanwings / Lufthansa didn't exactly blow the markets away with there substantial loss and commentary that the TATL was going down the tubes this summer. They'll claim everything makes money, but when you lose $485m in the last quarter operating, something is sucking wind pretty badly.

So, again, it's hard to get particularly excited about all these "airlines within airlines".

I suppose WJ could take a dozen -800's and dense up to 189 seats to create a WestJet Holidays brand. That would cut unit costs by about 10% overnight.

Delta's success is a result of cutting across the board, rather than a little dabble here and a little dabble there. LCC's cost structures are low across the board.

That's the big difference, imo.

I could tell you that I get 80 MPG in my gas sucking F350 truck on the last leg of the drive from Vancouver to Kelowna, but somewhere in that calculation, one has to include the gas burned driving out of the valley, which is all uphill. Average it out and I bet I barely get 10mpg.

It's all how you allocate costs.

Well, however AC is allocating costs it's doing better than it has done in a while. Rouge may or may not be part of the reason.

Vueling might be losing money, but I'll guess that they lose less of it than Iberia did when it operated the routes that have been transferred. Lufthansa's loss might have been higher had it hung on to all the routes it has given to German Wings. You would argue that Iberia and Lufthansa (and I guess AC too) should just have dumped the routes. We'll see how things work out.

If AC, QF and the European carriers could lower costs across the board as easily as the US carriers did they'd probably have gone that route. We, the Europeans and the Australians have laws around bankruptcy, employment and pension that make it less easy to do.

[Thebean]

More unintended consequences of focussing on low yield traffic, thus leaving the high yield fruit on the tree for others to pick.

It'll be interesting to see if WJ and Delta code share on the route. The combined scheds work pretty well to create a very compelling sched both directions.

DELTA is expanding planned operations on Los Angeles Vancouver route, which previously scheduled to operate during the Christmas and New Year Holiday period from 18DEC14 to 05JAN15. The Skyteam member will expand service to year-round operation, including the addition of 2nd daily flight from 06JAN15.

DL5755 LAX0630 0920YVR E75 D

DL5758 LAX1925 2215YVR E75 D

DL5759 YVR0630 0930LAX E75 D

DL5770 YVR1730 2030LAX E75 D