Marketing and pricing: June 2008 Archives

Out of the garage and CRASH...Southwest proudly rolled out some schedule change the other day, the results of a major upgrade of its "Garage-O-Mizer" scheduling software.  It's called that because an employee developed it at home on his own time. As the blog Nuts About Southwest explains, "He had cracked the problem on his own and produced the solution himself, over Christmas break, on his home PC-metaphorically, in his garage.  He had done what was actually thought to be mathematically and technologically impossible at the time.  THE "GARAGE-O-MIZER" WAS BORN," writes Bill Owen, Southwest's schedule development lead planner explains.

But now, Owen explains, "The November 2008 schedule marks the debut of a new schedule optimizer, the new 'Global Optimizer' - one that takes all of our schedule rules and preferences and actually picks the one schedule that scores the absolute highest based on the in-put parameters we supply. Thousands of criteria are considered..".

The US airline industry just isn't worth a great deal. Look at the market cap of the US network carriers and compare it with just about any other segment of the world industry, and you'll see what we mean. Or least you'll see what Mark Schulte of Taurus Corporate Finance Group means. The US network carriers - Alaska, US Airways, Continental, Northwest, American, Delta, and United- are worth about $7 billion, based on valuations in mid-June, while the low-cost sector is worth about $11.6 billion, he says.

Combine them, and you're still not worth as much as the European network carriers ($26.5 billion) or the Asian network carriers ($26.2 billion). But all these estimates of what an airline group is worth fade when compared with the two big package and express carriers, FedEx and UPS. FedEx comes in at just under $25 billion, but (drum roll) consider UPS. Schulte says it's got a market cap of about $67.6 billion. (At the left above is our idea of a market cap, ideal for wearing on a rainy day when you're going to market.)

It used to be simple. To figure out when people would buy airline seats and for how much was a fairly straightforward undertaking: just look at what they did a year ago. That's how airline revenue management worked, with a few tweaks here and there. But the formula has changed with the change in consumer habits as the new airline paradigm, the paradigm of crisis, is upon us. Roger Harris, the chief revenue officer for Sun Country Airlines, explained the changes the other day. "Consumers and travelers are changing the closer-in side of the curve, waiting and then booking earlier as they see that the price of fuel is rising every day. They wonder oif the price is going to go up again, so they make their last-minute bookings a little sooner in the last few days before the flight." But the data does not follow their purchases soon enough, Harris told the Low-Cost Airlines World Americas 2008 Conference. "We need more and better data, and we need it sooner," Harris said. 

The bag match match and the Piedmont pour: US Airways as expected came out and matched the American fee for checking a first bag, pegging it at $15 - the same as United, which had attached the ancillary charge earlier in the day. But Tempe, Arizona-based US Airways is also rolling out an array of other charges. The most interesting fee: $2 for a can of Coke, Pepsi, or whatever. This is reminiscent of much earlier battle, back when US Airways was still USAir and had just taken over Piedmont (much a better airline, in our not-so-humble opinion.) Back then, it was faced with a choice between Piedmont's tradition of giving customers a full (and free) can of Coke, or the USAir cabin service alternative of pouring just a glass of soda for the passenger. After a minor rebellion, it decided to stick with the Piedmont pour - at least for a while.

Perhaps American and United are competing again - at least on extras. United has just matched American's plan to start charging for the first checked bag, (yes, the first), following American's decision to adopt United's plan to start charging for the second (extra) checked bag. United will impose the $15 fee, raising perhaps $275 million a year; much like American, it exempted premium-level frequent flyers and those in first or business class. United is also raising fees on overweight and third bags by 25%. The fact that both of the nation's two largest carriers are charging the fee makes it all but certain that will soon become universal, and US Airways is expected to be the next to jump on board. Left Field talks about the United decision on Chicago Public Radio here.

When the big guy pulls out...the ink was barely dry on American Airlines' memo that it will be cutting back its San Juan, Puerto Rico, flights dramatically when comes this word that JetBlue will be increasing its service to the Island. For instance, it will offer seven daily flights from New York JFK by December; that's up from three now, and the frequencies will grow gradually. And it's along with daily flight to Aguadilla and Ponce, two of the Island's smaller destinations. From Orlando, JetBlue will offer four daily flights, double its current schedule, as well as flights to the other two cities. Orlando, interestingly, is the single largest source of US visitors to the Island.

Coming after United's 737 retirements, Continental's move to park its 737 Classics marks the end of the old-generation Boeing 737 as a significant player in the United States. The last big player is US Airways, and their fleet, mostly used in Northeast-to-Florida service, has been living or flying on borrowed time. People often get dewy-eyed when an aircraft leaves the fleet, but having flown those United -500s and indeed those truly decrepit US Airways -400s, with their broken seatbacks and sad, tired interiors, we are glad to see them go. (The above repainted 737-400 is seen in better days!) They are not only too old, too slow, and too small to make money, but in today's fuel-price environment, they're just too thirsty. And airlines have been reluctant to upgrade their interiors since they're going to go and be beer cans some day soon. For some thoughts on who and what might replace them, our friend and colleague Flightblogger has some thoughts. 

Now the alliances are cracking down. The airlines have long used analytic tools - i.e. data-interpretation programs to figure out if the corporate customer was fulfilling its side of contracts. They want to see if the company is actually delivering on what it's promised, from the number of flyers to the number of segments it has agreed to use; in return, the airline is supposed to make sure that it gives the corporate account access to certain airfares. Now, as the global alliances take a larger and larger share of corporate accounts, these big groupings are moving to crack down, too.