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Gaming Guru

Richard N. Velotta

Airlines Waging Classic Dogfight

19 October 2005

SAVANNAH, Georgia -- Airline experts are split over who the winners and losers will be when the battle between legacy airlines and low-cost carriers shakes out.

But one thing is clear -- Las Vegas isn't likely to suffer, since both have a presence at McCarran International Airport.

Discounters Southwest and US Airways dominate the local market with 34.8 percent and 22.5 percent shares of seats into the market, respectively. But legacy or major players United, American, Delta, Continental and Northwest have their own niche.

Boyd Group President Mike Boyd, speaking at the company's 10th annual aviation forecast conference Tuesay, has even come up with a third aviation category -- "second-tier carriers" -- which he doesn't even consider to be airlines. Las Vegas also has its share of those.

"These are jet carriers which focus on leisure and vacation passengers only," Boyd said of carriers such as Las Vegas-based Allegiant Air. "Their main destinations are Orlando (Fla.) and Las Vegas, and they usually have some kind of a package deal for their customers.

"There's nothing wrong with that, but they really aren't providers of air service."

Allegiant is joined by Sun Country Airlines, Spirit Airlines and Hooters Air as second-tier operators.

So which airline will survive the constantly changing industry that is important to Las Vegas because it delivers nearly half the city's tourists?

While many analysts have said low-cost carriers are the future of the industry, Boyd is known for his contrary views. While some say the hub-and-spoke system used by most legacy carriers is inefficient, Boyd says it will help save that segment of the industry -- if they can fix other problems before running out of cash.

Rapidly rising fuel costs are the primary reason several legacy carriers have had to file for bankruptcy, Boyd said. The cost of jet fuel has risen from $1.57 to $2.18 a gallon over the past year, a 40 percent increase, and it's up 211 percent since January 2004.

Since 2000, airline costs have changed dramatically: In 2000 fuel accounted for 12.7 percent of a company's expenses; today it's 20.3 percent. Labor costs, meanwhile, have dropped from 37.3 percent in 2000 to 29.7 percent today.

Boyd said he believes expenses other than labor and fuel are where companies will focus cuts in the future to make airlines financially viable.

There still is some fat to trim in regulatory matters, at airports and in operational efficiencies, he said. But those cuts won't be easy.

Boyd, a longtime critic of inefficient regulatory bodies, said the nation's air traffic control system, operated by the Federal Aviation Administration, has an estimated $8 billion in excess costs and failures in the system. But airlines "lack the gumption" to challenge those failures, he added.

Airport costs also are going to be scrutinized. Boyd cited strategies and recent moves by Southwest as an example.

Southwest has told Denver International Airport that it wouldn't fly there because costs are too high. More recently, it waged a losing battle in Seattle, where it sought access to Boeing Field, an airport closer to downtown Seattle, as an alternative to Sea-Tac International Airport, which it said is its most expensive station.

"The airline doesn't have to fly to your airport if your costs are too high," Boyd told the conference, which included many airport managers.

McCarran generally protects itself from rising costs with revenue from concessions such as its slot machines to offset higher expenses.

Boyd also said airlines would consider new operational efficiencies to cut costs. Among those are cutting the number of gate employees and arriving at gates on time instead of early.

There is a tendency for airlines to try to arrive early, but then aircraft must wait for another plane to clear the gate before parking. Airlines could better serve customers -- and save fuel -- by throttling back and arriving on time instead of arriving early and waiting.

He also said low-cost carriers would be confronted with their own issues thanks to their popularity.

"It's going to be a dog-eat-dog environment with lots of new capacity coming on line," Boyd said.

He cited new aircraft for JetBlue and Southwest in coming months. That will increase capacity in the market and raise competition, which could affect the legacy carriers.

Airline analyst Ray Neidl, another conference speaker, said mergers could help solve some problems confronting distressed legacy carriers.

Neidl of Calyon Securities in New York said merger speculation was fueled when Delta and Northwest filed for bankruptcy protection on the same day last month in the same New York courtroom, but he doesn't think that is on the horizon -- at least for now.

America West's acquisition of US Airways saved that airline from liquidation, but the Justice Department frowns on mergers because of antitrust concerns, he said.

The government could help the industry out of its financial woes without offering any subsidies, he said. Tax and fee cuts on what he considers to be an overtaxed industry would help the airlines. The Justice Department allowing carriers to develop partnerships for joint planning, marketing and profit sharing would also help.

Neidl differs from Boyd in suggesting that reduced capacity could help the industry overall. Independence Air, which operates primarily on the East Coast from Washington's Dulles International Airport and has a couple of daily flights to and from Las Vegas, is on most analysts' radar screens as the next carrier that could file for bankruptcy.

Not surprisingly, no airline represented at the conference expects its rivals will go away. And the carriers all have strategies for becoming profitable in an increasingly competitive world.

Delta and Northwest outlined some of their big-picture plans and had little to say about their Las Vegas operations, other than to note that they would continue their current courses.

Both want better productivity from their respective workforces and additional resources in their international markets. While neither is looking to put nonstop flights from overseas into McCarran, both have established hub-and-spoke networks that can bring travelers to the city with one stop and a change of planes.

Paul Matsen, Delta's executive vice president and chief marketing officer, said after the airline cuts labor costs by renegotiating contracts, downsizing its fleet and eliminating unprofitable routes, it would continue its "Operation Clockwork" plan of increasing efficiencies.

The airline plans 11 new international routes this year and has added the equivalent of 39 aircraft to its fleet by adjusting schedules to allow more flying time for existing planes, he said.

Northwest also will focus on international travel and is looking to reduce costs by flying a new aircraft, Boeing's still-in-design 787.

Tom Bach, Northwest's vice president of network planning and revenue management, said it has 18 firm orders and 50 options on the jet, which will be made of a carbon composite that is lighter but stronger than aluminum. Engineers say as a result, the jet would be 20 percent more fuel efficient than existing planes.

Through its international partner KLM, the airline hopes to develop the growing market of India with flights to three cities.