Although the six legacy carriers have lost close to $40 billion over the past five years, some are showing surprising resilience in battles with their nemeses. One encounter is shaping up in Charlotte, N.C., the biggest hub for US Airways Group (LCC:NYSE) unit US Airways, where low-fare carrier JetBlue Airways (JBLU:Nasdaq) plans to start service.
Another is taking place in a little-known corner of the airline industry known as "yield management," where complex software programs continuously adjust fares in response to ticket-purchasing patterns. In both cases, legacy carriers appear to be using their superior resources to their advantage.
But it's gone further than that.
Early this month, US Airways moved to block JetBlue's fare increase of $25 to $50 each way on the majority of its east-west advance-purchase fares. "We believe US Airways' action represents further evidence of increased legacy hostility aimed at stunting discount-carrier revenue recovery," JP Morgan airline analyst Jamie Baker wrote in a recent report. Despite the US Airways move, JetBlue did not rescind its increase.
"US Airways feels really feisty, and they are fighting a tactical battle, trying to confuse the enemy," says airline consultant Robert Mann. "They drained the pool in Charlotte before JetBlue came, taking out the high prices; then they failed to match the transcon fare increase."
Part of the game, Mann says, is that US Airways "knows JetBlue isn't doing a sophisticated job of revenue management." On a conference call last month, JetBlue CEO David Neeleman acknowledged as much, saying the airline will start "using science to move average fares up where the company needs them to be."
JetBlue recently hired Rick Zeni, formerly a revenue-management executive at US Airways, to oversee changes. "This is an example of an area where JetBlue has to go back and tweak the simple systems that had given it an advantage when it started out," Mann says.
Revenue management, as it happens, is an area where a few legacy carriers, particularly AMR Corp. (AMR:NYSE) unit American Airlines, may have an upper hand. In a recent report, Calyon Securities analyst Ray Neidl says legacy carriers are taking advantage of an opportunity to improve revenue per available seat mile, not only through ticket-price increases, but also through better yield and seat-inventory management. "You could call it the revenge of the legacy carriers," Neidl says.
American's long-term investment in yield-management systems is helping it to maximize revenue in a period of limited capacity and high summer travel demand, says spokesman Tim Smith.
"We have good technical tools, and we obviously have years of experience using them, along with human intervention, to more accurately forecast demand sooner in the process," Smith says. "We perhaps have more degrees of options, so we can fine-tune not only demand by route, but also demand by individual flights on a route."
Among American's capabilities, Smith says it can quickly shut down low-fare "buckets," or groups of similarly priced tickets, when demand starts to rise for a specific flight, and can also compare the relative value of passengers' full itineraries before giving one a lower-fare seat on a certain flight.
So far, the improvements have been hard to capture statistically, although first-quarter results compiled by Eclat Consulting of Reston, Va., show that American produced an 11% improvement in passenger revenue per available seat mile (PRASM) without any change in overall capacity.
Some legacy carriers showed higher PRASM improvement, but largely as a result of reducing capacity and eliminating the least-profitable flights. "American has done a good job," says Eric Ford, Eclat's vice president and a former director of domestic pricing for US Airways. "It is easier to shrink capacity and grow PRASM than it is to grow both capacity and PRASM."
Eclat's numbers also show 10% PRASM improvement by UAL Corp. (UAUA:Nasdaq) unit United Airlines, despite a 1% capacity increase. Top performer AirTran Airlines (AAI:NYSE) showed 11% PRASM improvement despite 24% growth, while Southwest Airlines (LUV:NYSE) also showed growth in both areas. Overall, most legacy carriers continue to have higher absolute PRASM than low-fare competitors.
"The network carriers, through the complexity of their systems and fare rules, and higher fare structures, are achieving better revenue performance," Ford says. "Of course, it's their higher costs that have necessitated those more complicated systems and higher fare structures."
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