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Tuesday
Oct072008

Just Who Will Inherit the US Domestic Market? Don’t Forget Today’s “Regional Carriers”

Will the legacy carriers today be the domestic providers tomorrow?

This post has been partially written for about six weeks. The US domestic market presents us with many things to consider as it evolves. “Darwinists” will say it will be the “survival of the fittest”, or the strongest competitor will be the last standing. In October 2002, Eric A. Marks wrote a book: Business Darwinism: Evolve or Disolve: Adaptive Strategies for the Information Age. Marks was writing on the critical importance of information technology in accelerating the necessary grab for global market share. He used the phrase the “survival of the fastest”.

Whether it applies to the US airline industry and its participants or not, the use of a phrase like “evolve or disolve” certainly applies to the current carriers of all ilk providing service to customers within the US domestic airline market. So as we move into the season of capacity cutting in a significant way, one could ask if we are dissolving or simply engaged in a practice of attrition of uneconomic capacity? No matter how we choose to refer to this period, it is an evolution of an industry structure that is unknown.

Republic Airways, SkyWest and Possibly Others

In the past weeks, Republic Airways, a “US Regional Carrier”, has made some aggressive financial plays at each Frontier and Midwest. Both carriers have strong local market followings and that could be described as an understatement. Warren Buffett likes brands. Are hub markets brands? And if these hubs are joined?

Pilots at Midwest might say that the current ownership is using the Indianapolis-based carrier as a stalking horse to win pay and productivity relief from current contracts. In Frontier’s case, Republic is part of the group that provided the “Debtor In Possession” financing necessary for the Denver-based carrier to construct its plan of reorganization.

Neither Frontier nor Midwest are vital to tomorrow’s US domestic air transportation system - as we know it - and they are joined in that regard by Sun Country in Minneapolis. Whereas this observer has been vocal of a need to consolidate carriers in the “regional space”, I am thinking that there just might be something more to consider. I refer from time to time to a piece I did in 2003 entitled: Low Cost Carriers: Thou Shalt Not Inherit the Earth.

Not so much that there is a need to consolidate carriers in the regional space as many of them will simply dissolve as hubs are closed in the face of high oil; an overall slowing of demand; and less reliance on domestic traffic flows for the network legacy carriers. But I am thinking that carriers like Republic, under it visionary CEO, Bryan Bedford (who should have been a CEO at a legacy carrier already – but then again why would you want to do that?), and SkyWest just might be tomorrow’s US domestic capacity providers. Carriers like Republic and SkyWest just might be the competition for the surviving “Low Cost Carriers” like Southwest, jetBlue, AirTran and possibly Virgin America.

It is Republic and SkyWest that are buying the right-sized aircraft for a market with higher prices and slowing demand. It is Republic and SkyWest that are building fleet scope that provides each of them with the economies of scale that are critical to manage any and all associated costs. It is Republic and SkyWest that have aircraft to serve communities of all sizes that will make "narrow-minded" lawmakers happy. It is Republic and SkyWest that will be looking for "natural partners" to code-share with as they will need international network scope in order to maximize onboard revenue. Republic and SkyWest have learned the lessons from Independence Air and ExpressJet (edited) that built failed models focusing only on the US domestic market.

SO……….

Hey Bill, what are you saying? I guess what I am saying very simply is that this labor negotiating period remains the most critical since deregulation – just as I have been saying for the past couple of years. As Aristotle first said, and was recently used by my dear friend Jon Abbet on the putting green when comparing the banking industries to the airline industry, “nature abhors a vacuum”. The US domestic airline system presents the greatest potential for a vacuum. Controllable costs have converged. But that will not last. Service from Lubbock to London would produce a vacuum if American were to leave and that will be filled. Lansing to Lagos would produce a vacuum if Northwest/Delta were to leave.

Carriers like Republic and SkyWest have the opportunity to take advantage of technology that ensures a “survival of the fastest” path. Remember the UPS whiteboard guy and the cargo industry - no real legacy impediments. Tomorrow they will be the carriers that deal more with an inefficient air traffic control system. STAR, SkyTeam and oneworld will only want to ensure that international connections arrive on time. Northwest and Delta have committed themselves to the US domestic market. But I am not sure that United, Continental, US Airways and American have. In the case of the latter two, they have more commitment today.

Whether it is seniority or a different compensation scheme for tomorrow’s "seniority" that works best for the future industry, never overlook a potential competitor - as it is present. That competitor is not the obvious but rather the well managed companies that have been tasked to adapt to the network model. Republic and SkyWest have.

So in this negotiation, labor will either figure it out or they will not. The US domestic network still provides the most jobs to the labor organizations representing the employees at the legacy network carriers. Will that be the case tomorrow? I am not sure. This is a time to negotiate a construct that rewards blood, sweat and tears. This is also a time to negotiate a construct that recognizes that tomorrow is different. And in the course of doing so, membership numbers can be protected, and possibly augmented.

So ask Boeing and the IAM if a strike is worth it? I am not sure. Ceding competitive advantage to Embraer and Bombardier and others in tomorrow's narrowbody market is the ultimate question. The same is true for airline labor. Domestic economics are different from international economics. Beware of the underdog as is it not the LCCs to fear, it is Republic and SkyWest. Attrit and dissolve; attrit and resolve. That is the question?

Never doubt that nature abhors a vacuum. For ALPA and pilot's unions this is a watershed issue as you represent both sectors. For the flight attendants, membership numbers might not grow but at least you will protect what you have. This is big. Really big.

More to come.