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A MAGAZINE FOR AIRLINE EXECUTIVES

Ta k i n g

y o u r

a i r l i n e

2004 Issue No. 2

t o

n e w

h e i g h t s

AN ALLIED FRONT

A conversation with …

Geoff Dixon, CEO, Qantas Airways

INSIDE

© 2009 Sabre Inc. All rights reserved.

4

Air France and KLM form Europe’s Largest Airline

18

The Evolution of Alliances

26

A Conversation with oneworld, SkyTeam and Star Alliance

wearelistening@sabre.com


Photo courtesy of Independence Air

industry

Declaring Independence? Facing reductions in its fee-for-departure contract with United Airlines, Atlantic Coast Airlines decided to part ways and transform itself into a separate low-cost carrier. Could the launching of Independence Air be the “shot heard ‘round the industry” indicating a changed relationship between network carriers and their regional affiliates? By B. Scott Hunt and Stephani Hawkins | Ascend Editors in Chief

A

tlantic Coast Airlines didn’t intend to become the focus of attention in the regional airline industry. Until two years ago, the carrier was content to continue providing regional feeder traffic for its long-time partner, United Airlines. But in December 2002, United filed for bankruptcy and sought to restructure its contracts with regional partners. Under its fee-fordeparture agreement, common in the United States, ACA was guaranteed a set income for each flight regardless of the number of passengers on board. When United proposed revising the agreement to significantly reduce compensation, ACA officials said their hand was forced. “We would still be a fee-for-departure carrier had United chosen to honor our contract, and we would still be (flying for United) for the next six or seven years,” said Jeff Pollack, senior director of market planning for Independence Air. “We negotiated with them for many months, probably eight or nine, understanding that our partner was in pain and we were going to have to assume some of that pain as well and be good partners. We were willing to do that. But as the level of that pain and the level of what United expected to get out of the deal became more obvious, we had to just weigh that against what other opportunities we had. “At some point, the scales tipped, and we said what United is offering just does not provide the same risk/return value that independence does,” he said. “The unique risk inherent in partnering with a company in bankruptcy outweighed the security of a fee-fordeparture model.” So in June 2003, Atlantic Coast, literally, declared its “Independence.” A year later, the

42 ascend

Who’s Hub is it Anyway? Major carrier

Hub

Total overall hub carrier branded departures per day

% of hub departures operated by regional partner(s)

% of hub seats operated by regional partner(s)

Continental Delta

CLE DFW

216 258

79% 79%

54% 55%

United Delta US Airways

IAD CVG PIT

264 573 350

77% 73% 71%

53% 47% 40%

Delta Northwest

SLC MEM

315 213

70% 60%

39% 39%

US Airways Continental

PHL IAH

350 482

52% 51%

26% 25%

Continental US Airways

EWR CLT

310 443

50% 50%

26% 25%

Source: OAG June 2004 flight schedules.

The top five major U.S. airlines operate 11 hubs. Of those, regional partners fly half or more of the daily departures and operate 25 percent to 54 percent of the hub seats at those airports.

rebranded airline officially took to the skies as Independence Air, flying its fleet of 50-seat CRJs to 22 initial destinations. The decision, however, did not come without a bit of separation anxiety. “Without a doubt, it was not a snap decision,” Pollack said. “But all things considered, we’re pretty pleased with where we are. We think we’ve built a really strong customer base, and we’re beginning to develop our brand.” Steve Hendrickson, a partner with Sabre Airline Solutions Consulting, said leaving the security of guaranteed, though reduced, revenue for the uncertainty of a stand-alone, low-cost airline made sense. “ACA took a good hard look in the mirror and said, ‘This is just going to hammer our valuation. We’re not serving our shareholders. Is there a better way to go about this?’” Hendrickson said. “Certainly, one could have

argued, ‘Let’s go and see if we can move some of our capacity to other fee-per-departure programs.’ But, frankly, there was a pretty wellsupplied pipeline of other regionals offering to do that for other carriers. Ultimately, they decided that maybe there was an opportunity to become the next big success story.” Although it may have been a logical move, breaking away and launching a standalone airline is a decision that is being watched throughout the industry. “The jury’s out, and everybody is waiting to see how they’ll do,” Hendrickson said. “You sort of have the servant rising up against the master. “It has some risk, but what doesn’t?” he asked. “The other alternatives have risk as well without much upside. That’s a more prudent bet for the company to make than signing up for another round with United. You could be

Currently serving 40 cities, Independence Air plans to expand its network to 50 destinations with 350 flights a day, making Washington Dulles International Airport the largest low-fare hub in the United States in terms of total departures.

signing up at a lower profit margin only to go back into bankruptcy with them a year or two down the road.”

Watching Closely Whether or not Independence Air will generate a wave of imitators is subject to debate. “I don’t see a trend coming out of it,” said Shane Batt, also a partner with Sabre Airline Solutions Consulting. “There are only a handful of carriers that are large enough that can duplicate that behavior.” ACA was unique in that it held the rights to all of its gates at Washington Dulles

T H E

International Airport, where it fed traffic into United’s hub. Independence Air is now basing its core operation at Dulles. ACA also had outstanding cash reserves, a savvy and experienced executive team, and in-house expertise in marketing and planning. “We have some extremely unique resources in place here that have allowed us to do what we want to do,” Pollack said. “I’m not sure many other regionals could realistically try what we’re trying. But I think there’s a lot of interest, and I think people will learn a lot from what we’re doing.” Still, Independence could be on the

vıew

H I G H

forefront of a dramatic industry change if it achieves its goals. “If Independence is successful and builds up a market presence and shows profitability — which is a big ‘if’ — then other regional carriers would probably be more enthusiastic about embracing that model,” Batt said. “But if it is not, if it is unsuccessful and goes to the wall, then what choice do regional carriers have?” Debby McElroy, president of the Regional Airline Association, an organization representing 51 regional airlines that combine for 97 percent of the regional airline traffic in

L E V E L News Briefs from Around the Globe

Who

Why

goals. Our primary goal was to find

ATA Airlines

“We wanted a complete resource

a partner that had the experience

management system that could help

and ability to tailor a product for our

us plan and manage employee

needs, yet still meet our absolute

resources,” said Doug Yakola, vice

requirement to do so in the most cost-

Resource Management Suite to

president of station operations for ATA.

efficient way possible. After an inten-

increase its operational efficiency by

“The solution had to be flexible and

sive evaluation, the Streamline suite

optimally planning and allocating

adaptable not only to address our cur-

was proven to offer the solution that

employee resources.

rent needs, but also our future business

best fit our needs.” a

What Selected the Sabre Streamline ®


Photo courtesy of Independence Air

industry

Declaring Independence? Facing reductions in its fee-for-departure contract with United Airlines, Atlantic Coast Airlines decided to part ways and transform itself into a separate low-cost carrier. Could the launching of Independence Air be the “shot heard ‘round the industry” indicating a changed relationship between network carriers and their regional affiliates? By B. Scott Hunt and Stephani Hawkins | Ascend Editors in Chief

A

tlantic Coast Airlines didn’t intend to become the focus of attention in the regional airline industry. Until two years ago, the carrier was content to continue providing regional feeder traffic for its long-time partner, United Airlines. But in December 2002, United filed for bankruptcy and sought to restructure its contracts with regional partners. Under its fee-fordeparture agreement, common in the United States, ACA was guaranteed a set income for each flight regardless of the number of passengers on board. When United proposed revising the agreement to significantly reduce compensation, ACA officials said their hand was forced. “We would still be a fee-for-departure carrier had United chosen to honor our contract, and we would still be (flying for United) for the next six or seven years,” said Jeff Pollack, senior director of market planning for Independence Air. “We negotiated with them for many months, probably eight or nine, understanding that our partner was in pain and we were going to have to assume some of that pain as well and be good partners. We were willing to do that. But as the level of that pain and the level of what United expected to get out of the deal became more obvious, we had to just weigh that against what other opportunities we had. “At some point, the scales tipped, and we said what United is offering just does not provide the same risk/return value that independence does,” he said. “The unique risk inherent in partnering with a company in bankruptcy outweighed the security of a fee-fordeparture model.” So in June 2003, Atlantic Coast, literally, declared its “Independence.” A year later, the

42 ascend

Who’s Hub is it Anyway? Major carrier

Hub

Total overall hub carrier branded departures per day

% of hub departures operated by regional partner(s)

% of hub seats operated by regional partner(s)

Continental Delta

CLE DFW

216 258

79% 79%

54% 55%

United Delta US Airways

IAD CVG PIT

264 573 350

77% 73% 71%

53% 47% 40%

Delta Northwest

SLC MEM

315 213

70% 60%

39% 39%

US Airways Continental

PHL IAH

350 482

52% 51%

26% 25%

Continental US Airways

EWR CLT

310 443

50% 50%

26% 25%

Source: OAG June 2004 flight schedules.

The top five major U.S. airlines operate 11 hubs. Of those, regional partners fly half or more of the daily departures and operate 25 percent to 54 percent of the hub seats at those airports.

rebranded airline officially took to the skies as Independence Air, flying its fleet of 50-seat CRJs to 22 initial destinations. The decision, however, did not come without a bit of separation anxiety. “Without a doubt, it was not a snap decision,” Pollack said. “But all things considered, we’re pretty pleased with where we are. We think we’ve built a really strong customer base, and we’re beginning to develop our brand.” Steve Hendrickson, a partner with Sabre Airline Solutions Consulting, said leaving the security of guaranteed, though reduced, revenue for the uncertainty of a stand-alone, low-cost airline made sense. “ACA took a good hard look in the mirror and said, ‘This is just going to hammer our valuation. We’re not serving our shareholders. Is there a better way to go about this?’” Hendrickson said. “Certainly, one could have

argued, ‘Let’s go and see if we can move some of our capacity to other fee-per-departure programs.’ But, frankly, there was a pretty wellsupplied pipeline of other regionals offering to do that for other carriers. Ultimately, they decided that maybe there was an opportunity to become the next big success story.” Although it may have been a logical move, breaking away and launching a standalone airline is a decision that is being watched throughout the industry. “The jury’s out, and everybody is waiting to see how they’ll do,” Hendrickson said. “You sort of have the servant rising up against the master. “It has some risk, but what doesn’t?” he asked. “The other alternatives have risk as well without much upside. That’s a more prudent bet for the company to make than signing up for another round with United. You could be

Currently serving 40 cities, Independence Air plans to expand its network to 50 destinations with 350 flights a day, making Washington Dulles International Airport the largest low-fare hub in the United States in terms of total departures.

signing up at a lower profit margin only to go back into bankruptcy with them a year or two down the road.”

Watching Closely Whether or not Independence Air will generate a wave of imitators is subject to debate. “I don’t see a trend coming out of it,” said Shane Batt, also a partner with Sabre Airline Solutions Consulting. “There are only a handful of carriers that are large enough that can duplicate that behavior.” ACA was unique in that it held the rights to all of its gates at Washington Dulles

T H E

International Airport, where it fed traffic into United’s hub. Independence Air is now basing its core operation at Dulles. ACA also had outstanding cash reserves, a savvy and experienced executive team, and in-house expertise in marketing and planning. “We have some extremely unique resources in place here that have allowed us to do what we want to do,” Pollack said. “I’m not sure many other regionals could realistically try what we’re trying. But I think there’s a lot of interest, and I think people will learn a lot from what we’re doing.” Still, Independence could be on the

vıew

H I G H

forefront of a dramatic industry change if it achieves its goals. “If Independence is successful and builds up a market presence and shows profitability — which is a big ‘if’ — then other regional carriers would probably be more enthusiastic about embracing that model,” Batt said. “But if it is not, if it is unsuccessful and goes to the wall, then what choice do regional carriers have?” Debby McElroy, president of the Regional Airline Association, an organization representing 51 regional airlines that combine for 97 percent of the regional airline traffic in

L E V E L News Briefs from Around the Globe

Who

Why

goals. Our primary goal was to find

ATA Airlines

“We wanted a complete resource

a partner that had the experience

management system that could help

and ability to tailor a product for our

us plan and manage employee

needs, yet still meet our absolute

resources,” said Doug Yakola, vice

requirement to do so in the most cost-

Resource Management Suite to

president of station operations for ATA.

efficient way possible. After an inten-

increase its operational efficiency by

“The solution had to be flexible and

sive evaluation, the Streamline suite

optimally planning and allocating

adaptable not only to address our cur-

was proven to offer the solution that

employee resources.

rent needs, but also our future business

best fit our needs.” a

What Selected the Sabre Streamline ®


industry

Photo courtesy of RAA

the United States, also said members of her organization are taking a wait-and-see approach before possibly following in Independence Air’s footsteps.

“Independence is not only competing with the regional carriers, but they are competing with some of the limited-service carriers, like AirTran, and with some of the major carriers like US Airways and Delta,” she said. “I think Independence is not only many people in the competing with the regional industry are watching carriers, but they are comIndependence Air.”

peting with some of the limited-service carriers, like AirTran, and with some of the major carriers like US Airways and Delta. — Debby McElroy, President Regional Airline Association

A Changing Industry

The transformation of ACA to Independence Air is one aspect of a regional airline industry that is undergoing significant change. Even what constitutes a “regional carrier” is under revision. “Our old definitions of what a regional carrier are have kind of been reshaped,” Hendrickson said. “Regional carriers have grown out of their traditional mold. You used to be able to point to a carrier that had propellers on its airplanes and say, ‘That’s a regional airline.’ You used to be able to say they’re not going to fly anything more than 350 miles, maybe 500 at the utmost.” Today, regional carriers fly jet aircraft on longer and longer routes. Although still

“Independence Air is being closely monitored by all the regional carriers, so its success could change the viewpoint of many carriers, and they may seriously consider an independent operation, but I am not aware now that there are large numbers of regional carriers that are considering doing the same thing,” she said. Regional carriers aren’t the only spectators closely watching the developments with Independence Air, she said.

vıew

T H E

H I G H

industry in flux, the definition of a regional carrier “is probably in today’s world a carrier that operates airplanes at or below 70 seats,” Hendrickson said. As regional airlines have outgrown those old definitions, they have also changed the relationship with their larger airline partners, he said.

A Revised Relationship? Regardless of how Independence fares, it will likely affect the relationship between major carriers and their regional partners. Hendrickson said future agreements between major airlines and their regional partners might be structured so that the major airline controls not only the marketing of its regional partner but also some of its key resources. He pointed to the example of Northwest, which controls the gates and aircraft of its regional partners such as Mesaba Airlines. “For Mesaba to break away from Northwest is almost impossible because it would lose its gates and its airplanes,” Hendrickson said. “Not that it couldn’t try to go out and get more gates and more airplanes, but it makes it much harder to revolt. “United allowed ACA to control two vital elements, which were gates at the hub and aircraft,” he said. “All it had to do was add a marketing infrastructure and stir — not to belittle what it’s gone through because it did have to recommercialize the airline.”

L E V E L

For years, many in the industry have debated whether it is better for majors to own their regional partners. In recent years, some major airlines have considered selling all or part of their regional subsidiaries in order to generate much-needed cash. Hendrickson said ownership is unnecessary — as long as the agreements are structured in such a way as to prevent an Independence-type move. “You don’t want to spin them off and wind up losing the value of the feed,” he said. “With a well-structured, protective agreement, you can still, as the marketing carrier, enjoy the benefits of a codesharing relationship with regional operators, and you don’t have to own them to get that.” McElroy agreed there is “a mixture of opinion in the industry” on regional ownership. “Some carriers believe it is not necessary to own their regional partner and have spun them off,” she said. “There are others that have stated in the past that for now, they are going to keep their regionals.” In fact, Batt said, the issue regarding ownership of regional partners has been around for years, and actually lies at the heart of the Independence issue.

Underlying Causes “The perception is that Independence is something that is brand new,” Batt said. “It is not. This phenomenon has been happening for a while. The mechanism that triggered the Independence Air situation is a mechanism

T H E

that has been playing itself over and over again since deregulation. You have a small partner that is a capacity provider. It gets to a certain level and the amount that the mainline carrier is paying to the regional operator grows high enough that something has to occur. “The difference is, in the past, what normally happened was that the mainline carrier, in order to increase its assets, would purchase the smaller carriers,” he said. “But now they don’t have the money to purchase the smaller carriers. They have to increase their profitability by lowering their costs. So, they are going to ask their regional partners to lower their margins.” And as the network carrier struggles financially and faces competition on its major routes, it turns to its regional partners for additional relief. “ACA was continuing to prosper and grow, and its cost structure was a lot lower,” Batt said. “United wanted to renegotiate the fees because it was losing money while ACA was making a bundle off of the relationship because it was insulated from revenue and demand fluctuations.” The issue is not limited to United and ACA, he said. “More of these (regional) carriers are growing to such a level that they are a major expense for the mainline carriers,” Batt said. “And as they become a larger expense, they are generating more earnings. Then the mainline carriers are saying, ‘Hold on a second

vıew

H I G H

News Briefs from Around the Globe

here. You are making higher earnings while we are losing money’ Then they say, ‘Let’s renegotiate the agreement.’” The issue of disagreement between majors and their regional partners also stands to become more pronounced given the changes many major carriers are making to become more cost efficient. As carriers de-peak their hub operations, for example, they will conduct more point-to-point flying, squeezing out regional carriers from these markets. The increased point-to-point service resulting from a depeaked hub also has major carriers looking to fly the smaller aircraft that will be only slightly larger than regional jets. “You will see a divestiture in the mainline carriers of capacity,” Batt said. “They will get rid of their bigger units and fly less hub to hub. As they do that and bring in 100- to 120seat jets to operate those routes, the regional operators will have fewer routes.” Meanwhile, regional carriers are looking to fly larger aircraft, increasing the number of markets in which they can compete with major carriers. Independence Air, for example, has added Airbus 319s to its fleet, and regional carrier Chautauqua Airlines recently began adding 50 Embraer 170 aircraft, which seat 70 to 78, to add additional capacity for United. Previously, the airline flew Embraer 135, 140 and 145 aircraft with between 37 and 50 seats. One issue currently slowing this competition concerns the scope clauses in many

L E V E L News Briefs from Around the Globe

Who

Why

flexibility we need to quickly adapt to

Who

Why

the most experienced vendor in the

Air One

“Our growth goals are aggressive,

growth and new business models in

Air Tahiti Nui

“We are entering an exciting phase at

market and turned to the expertise of

What

and we need an aggressive technology

the future. This technology integrates

What

Air Tahiti Nui with the future expansion

Sabre Airline Solutions after an

Entered a multi-year agreement to utilize

partner,” said Air One Chief Executive

with its decision-support software to

Signed a five-year contract for

of our flight services to New York and

exhaustive six-month evaluation. We

the SabreSonic Passenger Solutions to

Officer Lino Bergonzi. “Our business

keep a keen focus on operational

the SabreSonic Passenger

Sydney and the move to adopt e-tick-

are 100 percent confident in the services

boost its reservations, check-in and Web

strategy is based on offering convenient

excellence while driving out costs and

Solutions to help manage its

eting standards across our network,”

and capabilities of the SabreSonic ™

capabilities. As part of the agreement,

and efficient service, and the agree-

improving our revenues, all in a rapid-

end-to-end reservations and

said Nelson Levy, chief operating offi-

solutions, and we are looking forward

Air One has access to an integrated

ment with Sabre Airline Solutions is a

growth environment. During the

departure control operations,

cer for Air Tahiti Nui. “In line with this

to leveraging the new capabilities of

package of performance-enhancing

key element of our strategy. The

course of our evaluation, there was

as well as manage the airline’s

operational expansion, we required

the passenger management suite and

and decision-support tools as well as

SabreSonic solutions have the tech-

no other company that could provide

new electronic ticketing

the information technology support,

the added e-ticketing capability to

the Sabre global distribution system.

nology we need now and provide the

the power of this combination.” a

capabilities.

functionality and commitment from

support our expanded operations.” a

®


industry

Photo courtesy of RAA

the United States, also said members of her organization are taking a wait-and-see approach before possibly following in Independence Air’s footsteps.

“Independence is not only competing with the regional carriers, but they are competing with some of the limited-service carriers, like AirTran, and with some of the major carriers like US Airways and Delta,” she said. “I think Independence is not only many people in the competing with the regional industry are watching carriers, but they are comIndependence Air.”

peting with some of the limited-service carriers, like AirTran, and with some of the major carriers like US Airways and Delta. — Debby McElroy, President Regional Airline Association

A Changing Industry

The transformation of ACA to Independence Air is one aspect of a regional airline industry that is undergoing significant change. Even what constitutes a “regional carrier” is under revision. “Our old definitions of what a regional carrier are have kind of been reshaped,” Hendrickson said. “Regional carriers have grown out of their traditional mold. You used to be able to point to a carrier that had propellers on its airplanes and say, ‘That’s a regional airline.’ You used to be able to say they’re not going to fly anything more than 350 miles, maybe 500 at the utmost.” Today, regional carriers fly jet aircraft on longer and longer routes. Although still

“Independence Air is being closely monitored by all the regional carriers, so its success could change the viewpoint of many carriers, and they may seriously consider an independent operation, but I am not aware now that there are large numbers of regional carriers that are considering doing the same thing,” she said. Regional carriers aren’t the only spectators closely watching the developments with Independence Air, she said.

vıew

T H E

H I G H

industry in flux, the definition of a regional carrier “is probably in today’s world a carrier that operates airplanes at or below 70 seats,” Hendrickson said. As regional airlines have outgrown those old definitions, they have also changed the relationship with their larger airline partners, he said.

A Revised Relationship? Regardless of how Independence fares, it will likely affect the relationship between major carriers and their regional partners. Hendrickson said future agreements between major airlines and their regional partners might be structured so that the major airline controls not only the marketing of its regional partner but also some of its key resources. He pointed to the example of Northwest, which controls the gates and aircraft of its regional partners such as Mesaba Airlines. “For Mesaba to break away from Northwest is almost impossible because it would lose its gates and its airplanes,” Hendrickson said. “Not that it couldn’t try to go out and get more gates and more airplanes, but it makes it much harder to revolt. “United allowed ACA to control two vital elements, which were gates at the hub and aircraft,” he said. “All it had to do was add a marketing infrastructure and stir — not to belittle what it’s gone through because it did have to recommercialize the airline.”

L E V E L

For years, many in the industry have debated whether it is better for majors to own their regional partners. In recent years, some major airlines have considered selling all or part of their regional subsidiaries in order to generate much-needed cash. Hendrickson said ownership is unnecessary — as long as the agreements are structured in such a way as to prevent an Independence-type move. “You don’t want to spin them off and wind up losing the value of the feed,” he said. “With a well-structured, protective agreement, you can still, as the marketing carrier, enjoy the benefits of a codesharing relationship with regional operators, and you don’t have to own them to get that.” McElroy agreed there is “a mixture of opinion in the industry” on regional ownership. “Some carriers believe it is not necessary to own their regional partner and have spun them off,” she said. “There are others that have stated in the past that for now, they are going to keep their regionals.” In fact, Batt said, the issue regarding ownership of regional partners has been around for years, and actually lies at the heart of the Independence issue.

Underlying Causes “The perception is that Independence is something that is brand new,” Batt said. “It is not. This phenomenon has been happening for a while. The mechanism that triggered the Independence Air situation is a mechanism

T H E

that has been playing itself over and over again since deregulation. You have a small partner that is a capacity provider. It gets to a certain level and the amount that the mainline carrier is paying to the regional operator grows high enough that something has to occur. “The difference is, in the past, what normally happened was that the mainline carrier, in order to increase its assets, would purchase the smaller carriers,” he said. “But now they don’t have the money to purchase the smaller carriers. They have to increase their profitability by lowering their costs. So, they are going to ask their regional partners to lower their margins.” And as the network carrier struggles financially and faces competition on its major routes, it turns to its regional partners for additional relief. “ACA was continuing to prosper and grow, and its cost structure was a lot lower,” Batt said. “United wanted to renegotiate the fees because it was losing money while ACA was making a bundle off of the relationship because it was insulated from revenue and demand fluctuations.” The issue is not limited to United and ACA, he said. “More of these (regional) carriers are growing to such a level that they are a major expense for the mainline carriers,” Batt said. “And as they become a larger expense, they are generating more earnings. Then the mainline carriers are saying, ‘Hold on a second

vıew

H I G H

News Briefs from Around the Globe

here. You are making higher earnings while we are losing money’ Then they say, ‘Let’s renegotiate the agreement.’” The issue of disagreement between majors and their regional partners also stands to become more pronounced given the changes many major carriers are making to become more cost efficient. As carriers de-peak their hub operations, for example, they will conduct more point-to-point flying, squeezing out regional carriers from these markets. The increased point-to-point service resulting from a depeaked hub also has major carriers looking to fly the smaller aircraft that will be only slightly larger than regional jets. “You will see a divestiture in the mainline carriers of capacity,” Batt said. “They will get rid of their bigger units and fly less hub to hub. As they do that and bring in 100- to 120seat jets to operate those routes, the regional operators will have fewer routes.” Meanwhile, regional carriers are looking to fly larger aircraft, increasing the number of markets in which they can compete with major carriers. Independence Air, for example, has added Airbus 319s to its fleet, and regional carrier Chautauqua Airlines recently began adding 50 Embraer 170 aircraft, which seat 70 to 78, to add additional capacity for United. Previously, the airline flew Embraer 135, 140 and 145 aircraft with between 37 and 50 seats. One issue currently slowing this competition concerns the scope clauses in many

L E V E L News Briefs from Around the Globe

Who

Why

flexibility we need to quickly adapt to

Who

Why

the most experienced vendor in the

Air One

“Our growth goals are aggressive,

growth and new business models in

Air Tahiti Nui

“We are entering an exciting phase at

market and turned to the expertise of

What

and we need an aggressive technology

the future. This technology integrates

What

Air Tahiti Nui with the future expansion

Sabre Airline Solutions after an

Entered a multi-year agreement to utilize

partner,” said Air One Chief Executive

with its decision-support software to

Signed a five-year contract for

of our flight services to New York and

exhaustive six-month evaluation. We

the SabreSonic Passenger Solutions to

Officer Lino Bergonzi. “Our business

keep a keen focus on operational

the SabreSonic Passenger

Sydney and the move to adopt e-tick-

are 100 percent confident in the services

boost its reservations, check-in and Web

strategy is based on offering convenient

excellence while driving out costs and

Solutions to help manage its

eting standards across our network,”

and capabilities of the SabreSonic ™

capabilities. As part of the agreement,

and efficient service, and the agree-

improving our revenues, all in a rapid-

end-to-end reservations and

said Nelson Levy, chief operating offi-

solutions, and we are looking forward

Air One has access to an integrated

ment with Sabre Airline Solutions is a

growth environment. During the

departure control operations,

cer for Air Tahiti Nui. “In line with this

to leveraging the new capabilities of

package of performance-enhancing

key element of our strategy. The

course of our evaluation, there was

as well as manage the airline’s

operational expansion, we required

the passenger management suite and

and decision-support tools as well as

SabreSonic solutions have the tech-

no other company that could provide

new electronic ticketing

the information technology support,

the added e-ticketing capability to

the Sabre global distribution system.

nology we need now and provide the

the power of this combination.” a

capabilities.

functionality and commitment from

support our expanded operations.” a

®


industry union contracts that dictate the size of aircraft that can be flown by majors and its regional partners. Because regional airlines have a lower cost of operation, they can better fill the 90- to 110-seat niche, McElroy said, and therefore, her organization would like to see scope clauses removed so regional airlines can help their partners “match the right size airplane to the right market.” Scope clauses, she said, are “an anachronistic, artificial restriction on the market.”

Fee-For-Departure As the changing industry impacts the relationship between majors and regionals, it could also affect the fee-for-departure arrangements common in North America. The fee-for-departure agreements evolved as major carriers sought to exert more influence over their regional partners. In the days of regulation, major carriers and their much smaller regional partners maintained a “more or less symbiotic relationship,” Hendrickson said, with joint fare agreements and joint bag agreements on a bilateral basis as well as a “really crude form of sharing traffic and revenues.” Over the years, airlines developed more formal codeshare arrangements of linking with regional carriers, and the partners developed a form of revenue proration to settle accounts. Such agreements, however, failed to provide the network carriers with the regional traffic they needed for their hubs. “The way in which regionals behaved

T H E

was somewhat self-serving and not always for the betterment of the overall combined network,” Hendrickson said. “In those days, (regional airlines) kept all the revenue from a local passenger. Often, even relatively high-fare connection passengers did not produce enough revenue, after subtracting the majors’ prorated share of the ticket value, to overcome the alternative value the regional could get from even a discounted local passenger. “This is the force behind the majors wanting to reinvent the relationships with the regionals,” he said. “Basically, they were saying, ‘These guys, because they control their inventory, pricing and scheduling, they have shown a tendency to do their own revenue optimization by showing preference toward the carriage of local passengers and to avoid all but the richest of the connecting passengers. That’s contrary to what we’re trying to accomplish as a major network carrier. “‘If we just opened the inventory a little bit more for connections, we would see a tremendous amount of revenue and traffic on our network,’” he said. To encourage regional airlines to carry connecting traffic, the major carriers began to pay the regional partners a set fee that covered expenses and provided a profit margin in exchange for taking over scheduling and pricing. I n t h e f e e - f o r- d e p a r t u r e m o d e l , Hendrickson said, the major carriers took the position that “rather than sharing risks and rewards in the marketplace with our regional partners, let’s throw that model out and put in

vıew

H I G H

industry place a different model that would basically say that you are now risk free.” “We’ll refocus your company to do virtually nothing of a commercial nature and virtually everything of an operational nature,” he said. “This will get your cost levels down. We will give you a schedule and tell you when and where to fly. We’ll price your inventory. We’ll do the inventory management. And for letting us do all this and for accepting this new business model, we will pay you the cost of the departure, plus a modest, but guaranteed, margin on top of that.”

The Changing Business Model Given the struggles of the major network carriers, the fee-for-departure model is undergoing changes, McElroy said. “We have seen those relationships evolve in a number of ways,” she said. “Obviously, they (regional carriers) have been asked to accept lower compensation. They have been asked to accept longer periods for adjustment. In some cases, the contracts used to be adjusted every quarter, every six months or every year; now, they are longer. There is less of a variable that allows for increases in costs whether they are airport or field related. It is absolutely correct to say that the regional carriers have been asked, like all other partners to the major, to sharpen their pencils, to be more efficient and to provide lower costs.” And that might lead to more regional revolt, Pollack said, and more carriers looking to follow Independence Air’s lead.

L E V E L

“If you pay enough of a premium, people are willing to give up control of their own destiny,” he said. “But when that premium goes away, all of a sudden people want to understand and be in control of their destiny.” Pollack said he believes the fee-fordeparture model “has got some fundamental flaws to it.” “For an airline getting paid the fee, it’s a great place to be,” he said. “From the other side, it’s hard to (encourage) that carrier, who you are basically paying a ‘cost-plus’ deal to maintain their cost structure. It’s really not a partnership anymore when you start talking about a fee-for-departure deal. All the responsibility goes on the major, and that’s really what they said they wanted, but it’s an expensive way to do business.” Batt said he also expects the fee-for-departure model to continue with some modifications. “Most likely, the fee-for-departure model will remain, although (major carriers) will want the regional carriers to accept less reward because they have less risk,” he said. The major carriers will also likely attempt to decrease the costs associated with feeder service by increasing competition for regional flying. “If I am a major airline and I have some new flying, I am going to have a bid process and say, ‘OK, everybody, give me your best offers to do this flying,’” McElroy said. “If I have multiple partners, I have more opportunity to get the best cost.” In the same way, some regional carriers are looking to expand by providing service for

T H E

need for separate bilateral agreements,

process, but do not want to have

Philippine Airlines

saving US$2 to US$6 per ticket.

to build and host a separate system

What

Why

The changes for regional carriers are more pronounced in North America, where the fee-fordeparture relationship predominates. In much of the rest of the world, most of the majors continue to take an equity stake in their regional partners in order to directly influence their operation. “They (major carriers) set the schedule. They set the prices. They handle the sales and distribution. And the regional carrier provides lift,” Batt said. “They are simply a capacity provider, and they receive the prorated revenue from the passengers on their planes. “It is, ‘We are to going to purchase a portion of you and have a marketing relationship, but we are going to also take a couple of seats on your board of directors and have a symbiotic relationship,” he continued. “We tell you what to do because we are bigger, wiser, and we own a portion of you.”

Looking to the Future With the industry’s eyes trained on Independence Air, many will be interested to

see if the carrier successfully transforms itself from a regional feeder to a stand-alone airline. And according to the early results, Pollack said, it’s so far, so good. Within a month after its launch of independent operations, Independence Air increased the number of departures and number of passengers carried. It continues to add capacity, with the Airbus 319s coming on line in November. And it also continues to add destinations and routes, with plans to grow its hub and make Dulles the largest low-fare hub in America, eventually serving 50 destinations with 350 flights a day. “The competitive environment is one that I think everybody is struggling with right now,” Pollack said. “But the results in many aspects have just been wonderful.” If the airline continues to grow and expand, it might find itself leading a charge of independent regional airlines. “Should we have the success we believe we’re going to have here, it’s inevitable that other people will try to follow,” Pollack said. “Whether others can successfully follow remains to be seen. There aren’t a whole lot of successful airline business plans out there, so the ones that are successful tend to get emulated often, though not necessarily accurately.” a

B. Scott Hunt and Stephani Hawkins can be reached at scott.hunt@sabre.com and stephani.hawkins@sabre.com.

L E V E L News Briefs from Around the Globe

Who

The airline will also use the Sabre ®

information systems for Ethiopian

Ethiopian Airlines

AirFlite Profit Manager to effectively

Airlines. “We chose to work with

manage its earnings.

Sabre Airline Solutions because its

to do so, nor desire to change our current reservations system. The

Around the World

vıew

H I G H

News Briefs from Around the Globe

Who

a number of different partners. “Many of them are looking to diversify and grow their business,” she said. “They recognize that they have to continue to expand as a way to increase revenue and enhance shareholder value and to continue to provide opportunities for growth for their employees. Carriers have been aggressive in seeking new partners and expanding their business with existing partners. It’s a logical business strategy.”

What

industry-proven flight scheduling

Selected SabreSonic Ticket as a

“The Ticket component provides the

component approach of SabreSonic

Signed a three-year agreement to

Why

stand-alone component, taking advan-

perfect solution for us,” said Kevin

Ticket provides the flexibility to do

utilize the Sabre AirFlite Schedule

“As a critical link from Africa to the

it is our firm belief that further

tage of its flexibility to move quickly to

Hartigan-Go, vice president of

exactly what we want when we want

Manager to help develop a more

rest of the world, it is vital that we

implementation of Profit Manager

complete e-ticketing capabilities. The

information systems for Philippine

to move to a paperless environment

efficient schedule while improving the

can offer our customers as flexible

will give us a solid return on invest-

interline hub offering provides con-

Airlines. “We want to achieve the cost

while adding another positive

utilization of aircraft and providing

a schedule as possible,” said Henock

ment by keeping a close check on

nectivity between carriers without the

savings of moving to a paperless

customer service element as well.” a

customers with more flight options.

Woubishet, director of marketing

our profitability.” a

®

product can do just that. Moreover,


industry union contracts that dictate the size of aircraft that can be flown by majors and its regional partners. Because regional airlines have a lower cost of operation, they can better fill the 90- to 110-seat niche, McElroy said, and therefore, her organization would like to see scope clauses removed so regional airlines can help their partners “match the right size airplane to the right market.” Scope clauses, she said, are “an anachronistic, artificial restriction on the market.”

Fee-For-Departure As the changing industry impacts the relationship between majors and regionals, it could also affect the fee-for-departure arrangements common in North America. The fee-for-departure agreements evolved as major carriers sought to exert more influence over their regional partners. In the days of regulation, major carriers and their much smaller regional partners maintained a “more or less symbiotic relationship,” Hendrickson said, with joint fare agreements and joint bag agreements on a bilateral basis as well as a “really crude form of sharing traffic and revenues.” Over the years, airlines developed more formal codeshare arrangements of linking with regional carriers, and the partners developed a form of revenue proration to settle accounts. Such agreements, however, failed to provide the network carriers with the regional traffic they needed for their hubs. “The way in which regionals behaved

T H E

was somewhat self-serving and not always for the betterment of the overall combined network,” Hendrickson said. “In those days, (regional airlines) kept all the revenue from a local passenger. Often, even relatively high-fare connection passengers did not produce enough revenue, after subtracting the majors’ prorated share of the ticket value, to overcome the alternative value the regional could get from even a discounted local passenger. “This is the force behind the majors wanting to reinvent the relationships with the regionals,” he said. “Basically, they were saying, ‘These guys, because they control their inventory, pricing and scheduling, they have shown a tendency to do their own revenue optimization by showing preference toward the carriage of local passengers and to avoid all but the richest of the connecting passengers. That’s contrary to what we’re trying to accomplish as a major network carrier. “‘If we just opened the inventory a little bit more for connections, we would see a tremendous amount of revenue and traffic on our network,’” he said. To encourage regional airlines to carry connecting traffic, the major carriers began to pay the regional partners a set fee that covered expenses and provided a profit margin in exchange for taking over scheduling and pricing. I n t h e f e e - f o r- d e p a r t u r e m o d e l , Hendrickson said, the major carriers took the position that “rather than sharing risks and rewards in the marketplace with our regional partners, let’s throw that model out and put in

vıew

H I G H

industry place a different model that would basically say that you are now risk free.” “We’ll refocus your company to do virtually nothing of a commercial nature and virtually everything of an operational nature,” he said. “This will get your cost levels down. We will give you a schedule and tell you when and where to fly. We’ll price your inventory. We’ll do the inventory management. And for letting us do all this and for accepting this new business model, we will pay you the cost of the departure, plus a modest, but guaranteed, margin on top of that.”

The Changing Business Model Given the struggles of the major network carriers, the fee-for-departure model is undergoing changes, McElroy said. “We have seen those relationships evolve in a number of ways,” she said. “Obviously, they (regional carriers) have been asked to accept lower compensation. They have been asked to accept longer periods for adjustment. In some cases, the contracts used to be adjusted every quarter, every six months or every year; now, they are longer. There is less of a variable that allows for increases in costs whether they are airport or field related. It is absolutely correct to say that the regional carriers have been asked, like all other partners to the major, to sharpen their pencils, to be more efficient and to provide lower costs.” And that might lead to more regional revolt, Pollack said, and more carriers looking to follow Independence Air’s lead.

L E V E L

“If you pay enough of a premium, people are willing to give up control of their own destiny,” he said. “But when that premium goes away, all of a sudden people want to understand and be in control of their destiny.” Pollack said he believes the fee-fordeparture model “has got some fundamental flaws to it.” “For an airline getting paid the fee, it’s a great place to be,” he said. “From the other side, it’s hard to (encourage) that carrier, who you are basically paying a ‘cost-plus’ deal to maintain their cost structure. It’s really not a partnership anymore when you start talking about a fee-for-departure deal. All the responsibility goes on the major, and that’s really what they said they wanted, but it’s an expensive way to do business.” Batt said he also expects the fee-for-departure model to continue with some modifications. “Most likely, the fee-for-departure model will remain, although (major carriers) will want the regional carriers to accept less reward because they have less risk,” he said. The major carriers will also likely attempt to decrease the costs associated with feeder service by increasing competition for regional flying. “If I am a major airline and I have some new flying, I am going to have a bid process and say, ‘OK, everybody, give me your best offers to do this flying,’” McElroy said. “If I have multiple partners, I have more opportunity to get the best cost.” In the same way, some regional carriers are looking to expand by providing service for

T H E

need for separate bilateral agreements,

process, but do not want to have

Philippine Airlines

saving US$2 to US$6 per ticket.

to build and host a separate system

What

Why

The changes for regional carriers are more pronounced in North America, where the fee-fordeparture relationship predominates. In much of the rest of the world, most of the majors continue to take an equity stake in their regional partners in order to directly influence their operation. “They (major carriers) set the schedule. They set the prices. They handle the sales and distribution. And the regional carrier provides lift,” Batt said. “They are simply a capacity provider, and they receive the prorated revenue from the passengers on their planes. “It is, ‘We are to going to purchase a portion of you and have a marketing relationship, but we are going to also take a couple of seats on your board of directors and have a symbiotic relationship,” he continued. “We tell you what to do because we are bigger, wiser, and we own a portion of you.”

Looking to the Future With the industry’s eyes trained on Independence Air, many will be interested to

see if the carrier successfully transforms itself from a regional feeder to a stand-alone airline. And according to the early results, Pollack said, it’s so far, so good. Within a month after its launch of independent operations, Independence Air increased the number of departures and number of passengers carried. It continues to add capacity, with the Airbus 319s coming on line in November. And it also continues to add destinations and routes, with plans to grow its hub and make Dulles the largest low-fare hub in America, eventually serving 50 destinations with 350 flights a day. “The competitive environment is one that I think everybody is struggling with right now,” Pollack said. “But the results in many aspects have just been wonderful.” If the airline continues to grow and expand, it might find itself leading a charge of independent regional airlines. “Should we have the success we believe we’re going to have here, it’s inevitable that other people will try to follow,” Pollack said. “Whether others can successfully follow remains to be seen. There aren’t a whole lot of successful airline business plans out there, so the ones that are successful tend to get emulated often, though not necessarily accurately.” a

B. Scott Hunt and Stephani Hawkins can be reached at scott.hunt@sabre.com and stephani.hawkins@sabre.com.

L E V E L News Briefs from Around the Globe

Who

The airline will also use the Sabre ®

information systems for Ethiopian

Ethiopian Airlines

AirFlite Profit Manager to effectively

Airlines. “We chose to work with

manage its earnings.

Sabre Airline Solutions because its

to do so, nor desire to change our current reservations system. The

Around the World

vıew

H I G H

News Briefs from Around the Globe

Who

a number of different partners. “Many of them are looking to diversify and grow their business,” she said. “They recognize that they have to continue to expand as a way to increase revenue and enhance shareholder value and to continue to provide opportunities for growth for their employees. Carriers have been aggressive in seeking new partners and expanding their business with existing partners. It’s a logical business strategy.”

What

industry-proven flight scheduling

Selected SabreSonic Ticket as a

“The Ticket component provides the

component approach of SabreSonic

Signed a three-year agreement to

Why

stand-alone component, taking advan-

perfect solution for us,” said Kevin

Ticket provides the flexibility to do

utilize the Sabre AirFlite Schedule

“As a critical link from Africa to the

it is our firm belief that further

tage of its flexibility to move quickly to

Hartigan-Go, vice president of

exactly what we want when we want

Manager to help develop a more

rest of the world, it is vital that we

implementation of Profit Manager

complete e-ticketing capabilities. The

information systems for Philippine

to move to a paperless environment

efficient schedule while improving the

can offer our customers as flexible

will give us a solid return on invest-

interline hub offering provides con-

Airlines. “We want to achieve the cost

while adding another positive

utilization of aircraft and providing

a schedule as possible,” said Henock

ment by keeping a close check on

nectivity between carriers without the

savings of moving to a paperless

customer service element as well.” a

customers with more flight options.

Woubishet, director of marketing

our profitability.” a

®

product can do just that. Moreover,


DeclaringIndependence_OCT_2004