Airline's
New Diet Has Rivals Watching
By
EDWARD WONG
http://www.nytimes.com/2003/01/12/business/yourmoney/
WHO
knew that beef jerky and chicken
cards as portents of the future?
But
ever since America West started an experiment last Monday to sell food
aboard flights, other airlines have been trying to divine
the industry's
fate in how the meals are received.
The
willingness of America West's passengers to pay $3 to lick ice cream at
30,000
feet is being looked upon as a significant test of whether ailing
airlines can charge passengers for things that were once
included in the
price of a ticket.
Desperate
for revenue, big airlines with nationwide hub-and-spoke systems —
the so-called network carriers — have tried levying, with
varying success,
surcharges for fuel, paper tickets, standby flights and
extra or oversized
baggage in the last few months. America West's proposal is
one of the most
audacious, if only because airline food is the punch line of
so many jokes
about bad cuisine.
"I
think it's an interesting experiment, and we're certainly watching it to
see how it fares," said Jeffrey A. Smisek,
executive vice president for
corporate affairs at Continental Airlines. But Continental,
he added, had no
plan to start charging for meals on its flights.
It
does not surprise people in the industry that America West is willing to
try new ways to generate more revenue. In the span of a
year, the airline,
the country's eighth largest, has become a pace setter,
provocateur and
guinea pig for an industry in transition. It was the first
network carrier
to simplify its fare structure and ease restrictions on
cheap tickets, and
it beat its rivals applying for — and getting — a federal
loan guarantee.
Whether
travelers will ultimately accept this latest experiment remains to
be seen — about one-quarter of passengers on test flights
bought box meals
last Monday and Tuesday.
But
industry experts credit America West for being willing to be creative,
even at the risk of irritating passengers who used to get
food free. Its
goal, which is shared by other network carriers, is to match
the success of
Southwest, JetBlue Airways and other
low-cost carriers. All of
West's
recent efforts have been directed at turning the airline into what W.
Douglas
Parker, its chief executive, calls the country's "second-largest
low-fare carrier."
What
has emerged so far is a sleeker if occasionally ungainly hybrid.
America
West's costs are lower than those of its network rivals, but not as
low as Southwest's. It is sticking with its hub-and-spoke
model, rather than
adopting Southwest's approach of flying directly from city
to city; as a
result, it cannot use its planes as efficiently. It will for
now keep using
a mix of plane types, resulting in higher labor and
maintenance costs than
airlines that use only one type of plane.
It
has also failed to achieve anything close to the name recognition of
JetBlue, which through aggressive marketing has made itself
synonymous with
cheap fares and friendly service. Yet Wall Street analysts
estimate that
America
West lost $139 million, or $4.21 a share, in 2002 on an estimated
$2.04
billion in sales; they forecast that the loss will narrow to $51
million, or $1.50 a share, this year.
Still,
America West's intense efforts to woo passengers have given its
competitors something else to chew over amid one of their
worst slumps ever.
And
now come the $5 cinnamon buns and $10 chickens
In
many ways, America West is the perfect lab rat for all these experiments.
With
884 daily flights, most of which connect to two big hubs in
quick, sweeping changes. Its biggest rival in the two large
hubs is
Southwest,
so it has the chance to test its initiatives against the
industry's standard for success.
At
the same time, America West, which was founded in 1981, has little to
lose in terms of reputation. It has already been in
bankruptcy once, from
1991
to 1994, and it alienated many of its customers when a spate of
mechanical problems in 2000 forced it to cancel 6 percent of
its flights.
"At
least they've been trying some creative things that haven't been seen in
the industry, and you have to give them credit for
that," said Jim
Corridore, an
analyst at Standard & Poor's. "They're making some great
strides in cutting their cost structure, but they're still
losing a lot of
money.
"If
America West wants to follow the Southwest model," he added, "they
have
to go full bore with it. They're not going to get much
closer to the
Southwest
model unless they abandon some of the costly hubs and abandon some
of their markets. They need to become a smaller
airline."
The
reinvention of America West began with the overhaul of its fare
structure last March, a result of a project led by J. Scott
Kirby, 35,
executive vice president for sales and marketing.
Mr.
Kirby, a graduate of the Air Force Academy who once worked as an
economist for the Pentagon, was promoted to his current
position a day
before terrorists hijacked four airliners and crashed them
in
attacks forced him to scramble just to keep America West in
business, but he
was able to turn to the airline's long-term reorganization
within a few
months.
In
fall 2001, America West got some financial breathing room. By
mid-November, it had become the first airline to apply for a
federal loan
guarantee under a $10 billion aid program set up by Congress
after the
terror attacks. Mr. Parker was told in late December 2001
that the Air
Transportation
Stabilization Board, which administers the program, would
give the airline a $380 million loan guarantee on a $429
million loan if it
would promise to keep labor costs under control — and give
the government
the option to buy up to 33 percent of its stock in the
future.
America
West's application, and the government's demands on it, prefigured
similar requests from US Airways and United Airlines, as
well as a host of
smaller carriers. US Airways got conditional approval for a
$900 million
loan guarantee. United's
application for a $1.8 billion guarantee was
rejected early last month, forcing the airline to file for
Chapter 11
bankruptcy protection.
Working
feverishly, Mr. Kirby's team eventually came up with numbers that
led to what he called "the most heavily analyzed
decision we ever made" —
dumping the old fare structure for a simplified model. All requirements
for
Saturday-night
stays were dropped, and unrestricted walk-up fares — the kind
popular with business travelers — were cut by around 70
percent. One-way
fares now cost no more than $400.
THOUGH
Southwest and other low-cost airlines had long operated with this
kind of system, this was the first time that a network
carrier had tried to
copy it. Business travelers embraced the move. America
West's rivals gave it
the evil eye.
"Clearly
we've done some things that have upset other airlines," Mr. Parker
said as jets swooped over palm trees outside the tinted
windows of the
company's boardroom here. "I think upsetting your
competition is not a bad
thing. We're trying to serve our employees and shareholders.
If I were at
the other airlines, I would not necessarily do what America
West has done,
and I might be upset at America West for doing it."
Competitors
have not blindly copied America West, but they are watching it
closely and reacting swiftly. The day America West put its
new fare
structure in place, Continental, Delta Air Lines and
Northwest Airlines
drastically cut fares on routes where America West was the
main nonstop
carrier. Continental also dropped a code-share alliance that
it had had with
Mr.
Parker has said that his rivals' actions are anticompetitive, but his
rivals dispute that accusation.
This
winter, several other airlines have moved in the same direction,
starting their own experiments with simpler fares.
Last
Monday, United made deep cuts in unrestricted fares on direct flights
from its hubs in
markets. American Airlines, and
Continental immediately matched those cuts.
Jamie
Baker, an analyst at J. P. Morgan Chase, said those routes represented
32 percent of total domestic sales.
Delta
and American Airlines have similar, though more limited, experiments
in other markets. On Nov. 14, for example, American reduced
unrestricted
fares and simplified its fare structure on 23 "city
pairs," or routes, then
expanded that to more than 400 last month. Sonja Whitemon, a spokeswoman for
American,
said the company had based its move on its own needs rather than
on what America West had done.
MR.
KIRBY, the marketing executive, said America West's fare overhaul was
bringing in more passengers who travel on short notice. The airline's
revenue per available seat mile generated by full fares was
up 1 percent in
the second quarter and 14 percent in the third quarter over
the comparable
periods last year, he said.
But
he added that what had worked for America West might not work for other
network carriers because only 5 percent of America West's
revenue had come
from full fares before its structure change. That contrasts
with 10 percent
for the industry over all, according to the Air Transport
Association, the
industry's main trade group. This means most other airlines
risk losing more
revenue if they try to lower their full fares systemwide.
"With
the system they operate, on low-yielding routes, it's a perfect
formula for them," Raymond L. Neidl,
an analyst at Blaylock & Partners, an
investment bank in
their market, it's something that's worked for them."
America
West started its experiment of charging for food on a dozen daily
short flights from
items like hot sandwiches, chips and cookies for $3 to $5.
This week, the
experiment will expand to a dozen medium-length flights. In
the third and
final week, America West will ask long-distance passengers
to pay $10 for
meals like chicken
Mr.
Parker said one gauge of success will be whether the airline can cover
the cost of providing meals, which runs $250 to $300 a
flight. Jeffrey D.
McClelland,
executive vice president for operations, said that two
days into
the experiment, 20 to 30 percent of passengers on the test
flights were
buying the food. "We expect it'll go up a little bit as
we go to long-haul
markets," he said.
Though
European low-cost carriers like Ryanair already sell
food aboard
flights, analysts are skeptical that America West will
recoup its costs.
They
say Southwest's success has shown that passengers want nothing more
than to get from one place to another as cheaply as
possible. Besides, they
say, why would passengers buy an airline meal when they can
get food from a
real restaurant in the airport?
"At
least somebody at America West is thinking outside of the box," said Joe
Brancatelli, an advocate for business travelers who writes
an online
newsletter. "But the airlines should do what they do
best. They fly people.
Stop
trying to be the department store. Don't sell me food; don't sell me
entertainment."
American
Airlines has determined that selling food on flights would be too
complicated and expensive, and it is in early talks with
concessionaires to
sell food at gates, said Todd Burke, a spokesman for
American. Northwest,
though, is planning to sell food aboard some flights in a
month-long trial
starting on Wednesday.
SELLING
sandwiches may be symbolically significant, but it is only one of
the issues facing America West. A larger challenge is to
whittle its cost
structure so that it can continue to offer cheap fares and
compete
effectively with Southwest in
2002,
it spent 8.61 cents flying one seat one mile, according to Back
Aviation Solutions, an airline consulting company. That was
less than any
network carrier, but still almost 17 percent higher than the
7.37 cents
spent by Southwest.
Industry
analysts point to several obstacles that prevent America West from
slimming its operations. Because it operates using hubs, for
example, its
planes spend more time on the ground to allow passengers to
connect — 50 to
55
minutes, according to Mr. McClelland. Southwest's planes have a
turnaround time of 20 to 30 minutes.
America
West flies its planes an average of 9.3 hours a day, versus 10.9
hours at Southwest, according to Back Aviation. Airlines, of
course, cannot
collect revenue when their planes are idle.
With
three types of planes in its fleet, America West also spends more on
labor and maintenance than do low-cost airlines that use
only one type of
plane. Mr. McClelland said the company had been working to
switch its fleet
entirely to Airbus A319's and A320's, but that fell through
after the Sept.
11 attacks.
America
West has also had a tougher time dealing with its unions than has
Southwest, and its mechanics' and flight dispatchers'
contracts are up for
renegotiation this year. It reached a tentative agreement
last month with
one union, the Air Line Pilots Association, but only after
rancorous talks
that required federal mediation.
Finally
— and this may matter more to travelers than to anything else — it
ranked eighth in on-time performance in November, according
to the
Transportation Department. That gets to the heart of what
passengers want
from their air travel experience. Given the choice, would
they rather pick
an airline that sells a $5 cheese omelet sandwich, or one
that has a better
track record flying them to their destinations by the
promised hour?
As
Mr. Brancatelli observed, "I don't know anyone
who makes the decision on
flying based on the food they
get."