Many missteps led to Mesa’s bankruptcy, will the airline learn from its mistakes?

On Jan 5th, Mesa Air Group Inc. filed for Chapter 11 bankruptcy protection in New York, citing an untenable financial situation.

The Phoenix-based regional airline is asking a federal bankruptcy court to allow it to continue flying and operating during its reorganization.

Although many analysts have seen this coming for a long time, the news still caused quite a stir among airline industry professionals, people are wondering: what happened to Mesa? Granted the airline industry in general is going through a rough patch among the current economic crisis,  but why is Mesa faltering while other regional carriers are doing relatively well?

Here are some factors I feel may have contributed to Mesa’s downfall:

1. The operating environment for 50-seat regional jets has changed.

Between 1993 and 2001, the 50 seat regional jet enjoyed tremendous growth. Although many people were doubtful about those small jets in the beginning, once Cincinnati-based Comair, a launch customer for the 50-seat Canadair Regional Jet, showed real success filling in gaps that Delta mainline planes couldn’t do profitably, or doing some hub bypass flying, the race was on to get as many RJs as you could get, at one point, airlines need to wait for 2 years for deliveries.

That was then, the operating environment for small regional jets changed dramatically over the past few years.

On one hand, the fuel price doubled or tripled to over 5 usd/gallon in late 2008 before settling down in 2009 when the recession hits, but is still much higher than the 1990 price, that greatly increased regional aircraft operating costs. On the other hand, with the fast growth of the low cost/low fare airlines such as Southwest Airlines and Ryan Air, the average airline ticket price has demonstrated a downward trend for the past ten years, basically airlines are paying more money to operate aircraft but getting less revenue on each flight. While this trend negatively impact mainline operations, the small regional jet operation is hit extremely hard. Due to its small capacity, the operating cost per seat of the 50-seat regional jet is almost twice as much as that of larger aircraft such as a A320. Combined with a low fare, some 50-seat flight can’t make money even if the aircraft is full.

As a result, the industry is increasingly shifting to 70-0seat or 90-seat regional jets for their added customer comfort and improved economics.

2. The regional airline business model is changing, and Mesa is not adapting very well.

In the years following 9/11, while almost all the mainline carriers in the US were in the red and needed government bailout money to survive, the regional airlines were doing surprisingly well- they were all profitable and making money. but how?

Turns out all the regional airlines have a “Guaranteed revenue per departure” agreement with their mainline partners, under this agreement, the regional airlines are guaranteed a fixed payment from their mainline partners regardless of how many passengers they actually feed into the system, and the major airlines are responsible for pricing, route planning and marketing efforts.

In Mesa’s case, about 96 percent of its consolidated passenger revenue came from code-share “revenue guarantee” agreements with US Airways, United Air Lines and Delta.

Under current harsh operating environment, it is only natural that mainline carriers such as Delta, United are looking to their regional to shoulder some of that risk.

In May 2008, Skywest, another US based regional airline, entered into a “at-risk” agreement with United airline to fly seven 50-seat Bombardier CRJ200 for the mainline carrier. Under this agreement, Skywest will absorb all the operating costs of the regional aircraft and pro-rate any profits with United, it is not doubt a welcoming development for United Airlines.

In Nov 2009, United terminated an agreement for Mesa to operate 26 CRJ200 on its behalf, with the aircraft to be phased out by April 30, 2010. Prior to that, Mesa also lost a contract to operate 10 Dash8 for United.

3. Missed opportunities and poor relationship management with mainline partners.

In an interview with Flight Global reporter Mary Kirby, Mesa CEO Jonathan Ornstein admitted that he has made a mistake and missed a opportunity to secure more business for his regional airline.

That opportunity was seized by Republic Airways, another regional airline group, who in September 2005  purchased 113 slots at Ronald Reagan Washington National Airport, 24 at LaGuardia Airport, and 10 Embraer 170 aircraft from US Airways with an agreement to lease those assets back to US Airways. The deal was necessary for US Airways to emerge from bankruptcy protection. In return, Republic got a new contract and made a handsome return on its investment.

"Clearly the company would be in far different shape if we had in fact invested in US Airways," says Ornstein.

He adds: "I would say probably the single biggest mistake in my career was not making that investment…"

You can read Kirby’s story here: http://www.flightglobal.com/blogs/runway-girl/2008/02/mesa-ceo-jonathan-ornstein-adm.html

It is well known that Mesa is locked in an legal fight with Delta , after Delta canceled its agreement with a Mesa unit in 2008 saying it had poor completion rates.

Mesa also got into fight with United over some quite straightforward language in a contract to replace 10 CRJ200 with CRJ700. According to aviation blogger Brett Snyder:

If you’re interested in the anatomy of a dysfunctional relationship, let me introduce you to United (UAUA) and its regional partner Mesa Air Group (MESA). A relatively straightforward part of the contract in which Mesa flies some aircraft under the United Express brand is now the center of attention. A combination of what appears to be ego and lack of interest has now exploded to land these two in court, fighting it out.

… …

Mesa, on the other hand, really screwed this one up. If they were willing to deliver the airplanes by April 30, why go through all these shenanigans? Who cares if the first notice was valid? They kept pushing the issue and now, it wouldn’t surprise me to see them out of luck.

 You can read the whole story here: http://industry.bnet.com/travel/10004273/united-airlines-fights-mesa-air-group-over-airplanes-part-i/

4. Unscrupulous business practices – The Hawaiian debacle

While Hawaiian Airlines and Aloha Airlines went through bankruptcy in 2004, Mesa met with them and reviewed operational records and forecasts, but ultimately decided not to acquire or invest in either airlines. Two years later, after Mesa announced plans to launch a subsidiary airline called “Go!” in Hawaii, Hawaiian Airlines sued to block the launch, claiming that Mesa had violated a confidentiality agreement. Aloha Airlines filed a similar suit against Mesa later in 2006.

In September 2007, the CFO of Mesa Air Group was fired after being found deleting files from his work computer, even though the company argued that he was deleting porn from the computer, the judge overseeing the Go! case ruled that Mesa destroyed evidence and ordered Mesa to pay an $80 million settlement with interest, along with legal fees, to Hawaiian Airlines.

No doubt that settlement is a huge blow to Mesa’s cash flow and contributed to its eventual bankruptcy filing.

5. Bad fleet planning

Mesa has a total of 177 aircraft in its fleet, but 52 of them are parked. Most of these out of service aircraft are 50 seat RJs and even smaller turboprops such as Beechcraft 1900 and Bombardier Dash8.

In addition, 25 more aircraft will be out of service after their contract with United ends in the near future.

Clearly the company didn’t plan for market volatility and failed to respond to the shifting market trends in a swift and decisive way.

In Dec 2006, Mesa entered into a joint venture agreement with China’s Shenzhen Airlines to form a regional subsidiary called Kunpeng Arilines. Mesa was hoping to offload their idle CRJ200s  to Kunpeng,  that plan was quickly proven to be just wishful thinking, Kunpeng now fly 5 Embraer E190 with 100 ARJ21 on order.

In Aug 2008, Mesa indicated that it intends to sell all of its shares in Kunpeng to Shenzhen Airlines.

6. A bad reputation, and a tarnished brand

After the news of Mesa’s bankruptcy application broke, there are a lot of discussion on the internet and some common themes about Mesa emerged:

• Bad customer services
• Low reliability
• Low pay for pilots and staff
• Won’t be missed
• Other airlines will easily pick up their routes and services

With these kind of brand image, it is not surprising that both Delta and United wanted to end their code-share agreement with Mesa. If Mesa survive it is current crisis, it will have to work hard to address these issues.

What lies ahead?

As painful as Chapter 11 is, it is probably the medicine that Mesa desperately need.

"After careful consideration, the company determined that a Chapter 11 filing provides the most effective and efficient means to restructure with minimal impact on the business and our customers," Chairman and CEO Jonathan Ornstein said. "This process will allow us to eliminate excess aircraft to better match our needs and give us the flexibility to align our business to the changing regional airline marketplace."

He added that despite efforts over the last two years to trim costs and debt, MAG is

"nonetheless faced with an untenable financial situation resulting primarily from our continued lease obligations on aircraft excess to our current requirements. . .Our company has ample liquidity to support itself during this process and we are confident we will emerge from Chapter 11 an even stronger operation."

Breaking free from leases or purchasing obligations through Chapter 11 will no doubt offload some unwanted smaller aircraft and financial burden from Mesa’s shoulder, but to return to profitability and to drive future growth, Mesa need to do some soul searching and address some of the issues listed above.

Image below is Ritz Carlton Hotel’s advertisement as it appeared on Business Traveler Middle East Sept/Oct 2009 edition:

Compare it with American Airlines’ Ads on Fortune Magazine:

hmm… See the resemblance?

Is this a case of Ad Agencies not doing their due diligences or Ritz and AA joining forces in their marketing efforts? There is no evidence to suggest it is the latter case though.

What do you think? Leave a comment!

Check out and rate some of other airlines’ print ads at http://www.betterwings.net/2009/08/print-ads-of-airlines-a-live-post/

Special thanks go out to my Twitter friend Yvette who spotted the Ritz ads and kindly send it to me, follow her on Twitter @AviationStudent.

By the way, you can also follow me @BetterWings.

This is a case study on Air Macau that can be viewed on its own,  however, for a better understanding of the dilemma Air Macau is facing, please view  part one of this document by clicking here.

Click on “full” to enable full screen mode for a better reading experience.

JetBlue CEO Dave Barger talks about focusing on customer services and profitability, adopting new technology and fostering a strong company culture, instead of fleet growth in the near future.

The premises for Air Macau’s business model has been taken away, what should the airline do to survive a rapidly changing operating environment?

Air Macau is in trouble.

The net asset value of the airline stood at a negative 91.2 million Chinese Yuan (USD $13.3 million) at the end of last year, to avoid bankruptcy according to Macau laws, shareholders had to pump a 431.2 million Chinese Yuan emergency fund into the airline to keep it float. 

The situation is not likely to improve, if not deteriorate, as the Air Macau’s  main revenue source – cross Taiwan Strait traffic between Mainland China and Taiwan will no doubt shrink significantly, as direct air link between the two sides have been established since 2008 and continue to grow rapidly in 2009.

A little background

In 1949, after suffering defeat in the Chinese Civil War, the KMT party led by Chiang Kai-shek fled mainland China and retreated to Taiwan Island, where it continued its rule as the Republic of China, while the winning communist party established the People Republic of China on the mainland.

Fearing an invasion from the communist party, the KMT banned direct flight, mail and cargo transportation with the mainland. Passengers traveling to mainland will have to go through a third point, usually Hong Kong or Macau.

However, in the past 20 years, as the economy in the mainland takes off, traffic volume and frequency across Taiwan Strait grew exponentially. Since 1980, more than 53 million visits to the mainland by Taiwan residents have been recorded, more than 2 million Taiwanese live in Beijing, Shanghai and other mainland cities permanently for business and personal reasons. Further more, Taiwanese investment in the mainland has reached USD $100 billion since 1990, resulting in huge business travel demand between the two sides. But travelers between Taiwan and China have to stop in Hong Kong or Macau and change planes, a requirement that adds four hours to what could be a one-hour flight across the 100-mile-wide Taiwan Strait and is seen as a costly obstacle to further economic integration.

About Air Macau

Air Macau was established in 1994 to take advantage of the cross Taiwan Strait travel demand, if fact, more than 70% of its revenue comes from transporting passengers between Taiwan and Mainland China via Macau.  It offers a one-plane service for passengers travelling between the two sides, although they must complete a brief transfer procedure in the Macau International Airport and wait for about 30 minutes in the departure lobby, passengers can board the same plane once again and continue to their destinations. The airline will also assist Taiwanese passengers to obtain mainland entry permit if required.

Ownership info

Air Macau Route Network

Air Macau Fleet (Credit: Wikipedia)

Financials (Latest data available)

Reputation / Brand Equity

Air Macau is not an inspiring airline when it comes to its brand image, unfortunately.

Here are some passenger reviews found on airlinequality.com

“Economy class was full, seats were cramped but bearable for the 1.5 hr flight. Food was poor. MFM-TPE sector had no boarding bridge so has to take the bus to the aircraft.”

“Shanghai to Taipei The flight was delayed for more than 3 hours without explanation. Eventually, we were informed to board an A300. It was an awful and old aircraft and full of terrible smell, and the air conditioning was not functioning properly. This airline does not pay attention to flight safety – I consider Air Macau is the worst airline I have ever taken.”

“Macau-Shanghai. Business Class. Full cabin. Drinks, meal, tea and coffee all served and cleared away 45 minutes after take-off. Why the rush? I filled in a Customer Comment card requesting a reply but never received it. I definitely recommend avoiding Air Macau – it is worth going to HKG just to use DragonAir – 1,000 times better than Air Macau.”

The problem: Political landscape changed & the cash cow is dying

In spite of being a mediocre airline with few endearing attributes, Air Macau has survived so far by relying on the cross-strait traffic created by political barriers between Taiwan and the mainland. However, things are changing, trade and transit ties have improved quickly since Beijing-friendly Taiwan President Ma Ying-jeou took office in May 2008.

As of July 2009, seven mainland airlines, including China Southern, Xiamen Airlines, Hainan Airlines, Shenzhen Airlines, China Eastern Airlines and Shandong Airlines have set up offices in Taiwan and started direct flights between mainland China and Taiwan. At the same time, Taiwan based China Airlines, Uni Airways, TransAsia Airways have started their own direct flights to mainland China as well.

As a result, travellers now enjoy shorter travel time, lower ticket prices and more frequency than ever before to fly across Taiwan Strait.

Therefore, Air Macau is in a dire situation: 70% of its revenue comes from travellers between Taiwan and Mainland China, however, there is little, if any reason for most people to transfer through Macau after Aug 31, 2009, when airlines from both sides of the Taiwan Strait started or increased their own direct flights. The premises at the core of its business model has been taken away, how does this airline survive? or will it have no choice but fade away? 

In part II of this post, I will examine the obstacles and opportunities in Air Macau’s operating environment, and propose a few strategic directions that Air Macau might take to rethink and revitalize its business model. (… to be continued. )

Image by Joits via Flickr

Anyone who has watched reality TV show ‘Survivor’ knows how important it is for a competitor to form an alliance with other players to ensure one’s survival on the show; therefore, it is not surprising to see that, in the latest airline fight for survival on the very lucrative yet increasingly crowded Sydney to Los Angeles route, airline alliance might be the deciding factor that determines who stays and who goes.

Qantas is the dominant airline on the SYD-LAX route with about 70% market share up until now and the route generated 30% of its pre-tax earnings last year.  United is the other airline that served this route with 30% market share;  the numbers are going to change however, with V Australia started operation on this route this past February, and Delta early July.

With the arrival of V and Delta, the total capacity is estimated to have grown by more than 35%, while yield level has slumped more than 25%. In fighting to keep its market share, Qantas put A380 on the route, allow children to fly for free and put out a 2 for 1 sale for its business class seats. Other three responded with their own fare discounting and promotion. All these during an economical downturn when the demand is already depressed.

No wonder analysts are predicting that at least one of the airlines will have to pack up and leave soon. “It is unlikely that all of the carriers will continue to serve on the route. There’s simply too many seats on the route and you can’t fill them,” says one airline analyst.

However, almost all airlines involved have expressed their determination in staying put on the route, so what gives? At the end of the day, the airlines’ staying power depends on their ability to attract enough business travellers and frequent flyers who are willing and able to pay for fares that can sustain long-term flight operations on the route, and in this regard, Qantas, United and Delta clearly have an advantage over V Australia.

Business travellers and frequent flyers, especially those paid to travel by their employers, clearly prefer airlines that can offer an expansive network in which they can collect and redeem frequent flyer miles, have access to lounges at most airports worldwide, easily transfer to domestic flights beyond international gateway cities.

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United is the founding member of the largest airline alliance the Star Alliance, which includes Lufthansa, SAS, Air China, Singapore Airlines and South African Airways, just to name a few. Qantas belongs to another big airline alliance “One World”, which includes American Airlines, British Airways, Cathay Pacific, JAL and a few other airlines. Delta, on the other hand, belongs to Sky Team, with team mates like Air France, Korean Air, China Southern and others. Frequent flyers on Qantas, United and Delta can collect and redeem miles on any member airlines’ flights, have access to airport lounges of any alliance member airlines all around the world, they also enjoy a more extensive flight network within the US to get to their final destinations .

V, on the other hand, doesn’t belong to any influential airline alliances, doesn’t have an extensive domestic network within the United States, even though they have a partnership with Virgin America. V has some good measures to attract business travellers, for example, free limo pick up to its business class passengers, however, in the fierce competition on the Sydney to Los Angeles route, I believe it is the weakest player and probably will have to withdraw operations before end of the year.

What do you think? Feel free to leave a comment!

Union rep wrote that Canadian air travel market should be re-regulated, is she right? 

Air Canada is once again teetering on the brink of bankruptcy protection after emerging from it just six years ago. Peggy Nash, the chief negotiator for CAW in the most recent round of talk with Air Canada, argued that the Canadian government should re-regulate the airline industry in order to provide some much needed long-term financial stability for Air Canada. She made some convincing points in her article, however, is re-regulation is right way to go? Will re-regulation bring just as much problems as those it might solve?

Peggy’s main points in support of re-regulation are:

• During the last round of bankruptcy protection six years ago, Air Canada’s holding company ACE sold off key profitable segments of Air Canada, for example the Aeroplan rewards program, the maintenance section and its regional subsidiary Air Canada Jazz. The approach fixed the airline balance sheet temporarily, but the goal was extremely short-term oriented.
• Huge profits out of these selling benefited the investors, especially U.S. hedge funds, and the senior executives, including Robert Milton, the former CEO of Air Canada who, in many analyst’s opinion, ran Air Canada to the ground.
• The 2-billion-dollar concession from Air Canada workers didn’t get invested back into the airline, instead they went straight to the pockets of the investors.
• Contrary to common belief, the private sector does not all do better. Anyone who needs proof only need to look to Wall Street, where institutional and personal greed works against public interest and dragged the whole world into the worst recession in several decades.
• Privatisation caused many airlines to fail, Air Canada has lost 6 billion dollars since it was privatized, and is feeling extremely vulnerable in the current market environment.
• To make things even worse, West Jet and Porter Airlines are beefing up their assault on Air Canada, hoping to grab even more market share from it, therefore exacerbating a precarious operating environment that Air Canada already find increasingly difficult to survive in. The government should put a stop to it.
• The government taking a stake in Air Canada is much better than the alternative: a foreign take-over of Air Canada.

Although I agree with Ms. Nash’s criticism of the selfish and predatory nature of those hedge funds who specialize in corporate  restructuring and think the government should oversee the bankruptcy protection process , I doubt that the Canadian government should step in and protect Air Canada from competition, I don’t think it will do any good to the airline and general public in the long run.

What happened in the US and European commercial aviation markets have clearly demonstrated that deregulation and liberalization is the historical trend that benefited both the airline industry and the travelling public.

Without the  Airline Deregulation Act in the late 70s in the US, there wouldn’t be the wonderful new low cost airline called Southwest Airlines; without the Single Aviation Market initiative in EU, there wouldn’t be Easyjet and Ryanair; and millions of people wouldn’t have access to low cost air travel.

Since the mid-80s, many formerly state-owned airlines have now been fully privatised. British Airways, Lufhansa, Qantas, and Air Canada are examples. Without the protection of state-ownership, a lot of these full service airlines have not been able to compete effectively with their low cost rivals, partly because they are often still run like government entities with an outdated mentality and excessive bureaucracy. 

Unions must also share part of the blame for legacy airlines’ inability to compete: when airlines try to use regional jets on some routes to reduce costs and serve more markets, unions put a scope clause on it; when the economy is booming and airlines start to make a profit, unions negotiate hefty salary increases that simply can’t be sustained when the economy eventually slows down.

As for West Jet and Porter Airlines adding more capacity in a shrinking market to capture more traffic at Air Canada’s expense, as long as they are not asking Ottawa to fund their expansion, why should the government put a stop on that? Isn’t this what competition all about?

Now Air Canada is in trouble again, should the Canadian government step in and bail it out with tax payer’s money? I would like to hear your opinion, dear readers. Please leave you comments!

El Al’s new “Low Cost Economy Class” is not really low cost, but we think it might be a smart move, here is why.

I first read about the story about El Al’s “Inferior Economy Class” on travel blogger Steven “Fish” Frischling’s  blog flyingwithfish .

Here is how he described it:

El Al plans to integrate this stripped out economy class into its existing economy class cabin. Roughly 20% of the economy class cabin, sectioned off in single area of the aircraft, will be designated “Inferior Economy Class.”   Passenger who purchase seats in the “Inferior Economy Class” will have the same size seats and leg room as those seated in plain old “Economy Class” however these passenger will no provided amenities.

Passengers choosing the “Inferior Economy Class” will pay for everything when flying with El Al. No inclusive baggage, no headsets, no snacks, food, drinks, pillow, blankets, in-flight entertainment, nada, nothing.   Passengers in this section of the cabin will be subject to paying for everything in cash (or credit card) as an additional fee.

At first glance, this really looks like a bad idea on El Al’s part:

First of all, it put the airline image in a bad light.

It is the kind of airline initiatives that passengers love to hate:  Look what they have done now! They took all the little nice things away from flying, and ask us to pay extra for them? how awful!

Second of all, it does not even make economical sense for the airline.

By creating this “Inferior Economy Class”, EL Al must be selling those seats at price level much lower than their regular economy class fares; the problem is, for the airline, the cost to carry a “Low Cost Economy Class” passenger is almost the same as the cost to carry a regular economy class passenger.

How so? well, when you look at the operating costs of a flight, the big ticket items are:

• Aircraft ownership cost
• Crew labour costs
• Fuel
• Maintenance
• Navigation and terminal charge
• Ground handling
• Commission

After all these costs are accounted for, the catering costs associated with a little food and drink, some recyclable pillow and blankets in the economy class really are – just peanuts, they usually only make up for about 1% to 5% of the total operating costs.

So basically, the cost savings on a “Low Cost Economy Class” seat is only between 1% to 5% for the airline, yet fares on these seats are probably 20% to 50% lower than normal economy class fare. It seems that El Al is going to lose money on these seats, so why would they do it?

Actually, there are two possible scenarios where “Low Cost Economy Class” makes a lot of sense for an airline like El Al.

Scenario 1: When there is constant over capacity or low “Load Factor” on a certain route, in other words, unfilled empty seats on a regular basis.

Let us use El Al’s Boeing 737-800 as an example, this aircraft has 142 seats in total, with 16 in business class, 142 in economy. At reasonable cost level and price point on a particular route, the flight will break even  when about 100 tickets (see note 1) are sold,  anything beyond that point are pure profit. If there are empty seats left on the flight, it will be in the airline’s best interest to sell those seats, even if that means to sell the tickets at very low price points to attract customers, because at this point, the cost of the flight has already been recovered, any additional passengers just mean extra revenue.

In this case, a new economy class with super low fares to stimulate demand makes a lot of economical sense for the airline.

Scenario 2: The airline is in a “war” to protect its market share against invading low cost airlines.

This scenario is probably the real reason behind El Al’s decision to add a “Inferior Economy Class” to their current product mix. As Fish pointed out in his post, some low cost European carrier starts to serve Tel Aviv, a market no doubt very import in El Al’s network and crucial in its financial performance, since Tel Aviv is a popular destination for both business and leisure air travellers.

When a low cost airline enters a market, three things will happen:

• Its low fares stimulate local air traffic, attracting people who otherwise would not have flown.
• It will “steal” price sensitive passengers away from the incumbent legacy carrier in the market.
• It will drive down the Yield level on all the routes they serve for all the airlines in the market.

As the challenger in a new market, the low cost airline will under tremendous pressure to build up traffic quickly in order to fill those seats and sustain flight frequency.

On the other hand, the incumbent  legacy carrier, in this case El Al, really has no choice but to vigorously defend its market share at all costs, because if it does not, the airline might lose so much traffic that it has to cut flight frequency and lower fares across the board in order to keep a reasonable load factor, measures that will have a very negative impact on its bottom line.  In this situation, “Low Cost Economy Class” is a brilliant idea, El Al will be able to offer fares comparable to that of low cost airlines, therefore keeping the price sensitive market segment, at the same time, it will not alienate those passengers who are paying normal economy class fares because of the very visible service level differences; although in terms of underlying costs, as we discussed before, the two classes are essentially the same.  The airline will lose some money on those IEC fares, but if El Al play its card well, it might drive the low cost airline out of the Tel Aviv market: low cost airline usually withdraw from a market quickly if they fail to attract enough traffic in order to build up frequency and to turn a profit in a short period of time. After they left, fares will be restored to previous levels, that will be the best outcome from El Al’s perspective.

From a consumer’s perspective though, the best scenario will be that El Al and the low cost airline achieving some kind of equilibrium in the Tel Aviv market, so both high flying business travellers and bargain hunting families all have access to air services when they need to fly.

Note 1: 100 is randomly picked number to illustrate a point, it reality, the breakeven point varies, it depends on factors like sector length, underlying cost structures of the airline, its  fare levels and many other factors.

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• Airlines may jettison in-flight entertainment as personal gadgets proliferate (venturebeat.com)

When an airline tries to meet the demands of all market segments, it will fail. Apple focuses on the higher end of their markets and are very successful. Can legacy airlines do the same?

On the same day (July 22, 2009) Delta Airlines reported a $257 million loss for the second quarter while Continental Airlines announced a 1,700 jobs cuts, Apple Inc, the iPhone and Mac maker, posted a quarterly profit of $1.23 billion that blew past Wall Street forecasts thanks to strong sales and improved profit margins. In fact, this iconic company has consistently returned strong sales performance and profit levels bucking the trend of this unprecedented recession that seems to be depressing all other companies around the world. How did they do this?

Apparently, whatever Apple is doing, it is working out very well for them.  Can the airline industry, especially those so-called “legacy airlines’”, learn a thing or two from Apple? Can Apple’s business principles work their magic in the airline industry? I believe yes.

Target the market segment where you can compete profitably

Apple has been very careful about which segment of the market they participate in, they steadfastly refused to compete in market segment where the profit margin is too thin.

Take the netbook market as an example, since invented by Asus Computer about a year ago, this low cost, yet underpowered, stripped-of-all-bells-and-whistles small computer category has taken the consumers by storm; because of the growing demand, almost all PC manufacturers, from HP, Dell to Acer and Gateway have joined the market, churning out a large variety of netbooks, albeit all with cut-throat thin profit margins, furthermore, the netbook sales is threatening to cannibalize their more profitable traditional laptop sales.

A clear parallel can be drawn here with the airline industry. The product provided by low cost airlines such as Ryanair is not unlike the netbook of airline industry: they get you from point A to point B for a low fare, but that is pretty much all they offer. Forget all the comforts and amenities people used to associate with air travel: there is no complimentary food and drinks onboard a Ryanair flight, the seat pitch is small, seat back does not recline and a boarding pass will cost you 40GBP extra at the airport. In spite of these bare bone product offerings, the low cost airline sector has grown tremendously both in Europe and the US. Many legacy airlines (such as Delta and United) responded by lowering their fares to compete, yet couldn’t get their operating costs low enough to be competitive, as a result, they not only lost market share to companies like Southwest and AirTran, but also drove their own system profit margin too low to be profitable.

When confronted by reporters about Apple’s plan on the netbook market, Apple COO Tim Cook responded: “Our goal is not to build the most computers, it’s to build the best. Whatever price point we can build the best in, we will play there. At this point, we don’t see a way to build a great product at that price point, $399, $499.” Apple is clearly targeting the medium to high end computer market, and refuse to be entrenched in a mud war with all the other manufacturers in a low margin market segment.

In the same spirit, an airline’s goal should not be providing travel solutions for all the segments of the market, but the “best” segment for their product offering and cost structure.

Legacy airlines should concentrate their resources and efforts on the long haul international markets and the corporate travel markets where product features and services are valued by travellers and the profit margin is much higher. Usually, low cost carriers can’t compete in this segment effectively either. Passengers might forgo food and drinks on a one to two-hour flight, but on a flight last more than 5 hours, they will value food, comfortable chair and blankets much more. For business travellers, they are usually willing to pay a higher ticket price to be able to fly with an airline where they can continue to work during their journey or rest well before arriving for a meeting. Most low cost airlines will not be able to satisfy these needs.

Provide the most innovative products and best customer services in the market you choose to play

Apple products are expensive, they command at least 30% premium over competing product in the same category, yet people line up for them, because Apple products are innovative, provide excellent user experience and come with good customer care. Take the iPhone as an example, within two years of debut, it has grabbed nearly 50% of smart phone market and changed the Smartphone landscape with its revolutionary multi-touch screen and Apps store. The company’s profit surged with the release of new iPhones.

Legacy airlines like Delta, Continental or United should strive hard to find their own hit product like the iPhone. Instead of waiting for customers to tell them what to do, they should research their core customer base thoroughly, anticipate the needs of modern day corporate travellers before they realize those needs themselves and find a way to satisfy them. It could come in the form of a teleconference room in the airline’s lounge, free onboard WIFI, gourmet food or excellent frequent flyer services, it could also come in a package that include everything a business traveller needs to stay productive during his/her journey. The airline which can successfully do so will no doubt be able to charge a premium for its product and commend the loyalty of its most valuable customers.

Be creative in marketing and leverage social media!

Another reason Apple products enjoy such an loyal following has to be attributed to the company’s marketing prowess: it turns regular consumers, reporters and bloggers into not only loyal customers, but also vigorous brand advocates.

 Apple’s advertising campaign is always creative and memorable, Mac vs. PC, is a big hit on TV, as well as on You Tube, and Apple’s ability to generate buzz and free publicity for new product launch is unrivalled in any industry. Usually speculations begin months before Mac Expo and Apple’s developers conference in San Francisco, where Steve Jobs’ presentation was the highlight of the event for the past few years, and his famous catch phrase: “oh, one more thing…” will send all the traditional and new media into overdrive for weeks or months about whatever product Apple was launching.

For the airline industry though, we haven’t experienced anything remotely like that for a long long time, what happened? Airlines used to be such a sexy industry! Nowadays, when people talk about airlines, they are usually complaining about delays, poor customer services, or their broken guitar!

Airline industry in general needs a image make over, however, if an airline can manage to stand out from the pack and give passengers something positive to talk about its brand, it will build a tremendous competitive advantage; one way to achieve that is to have a well planned and executed social media strategy. Blogs, online communities and Twitter are powerful tools for airline to build a relationship with customers and engage brand advocates, increasingly, goodwill generated online will crossover into traditional media as well. One the other hand, negative stories about your brand in the social media universe can do serious damage, United Airline learned that in a hard way recently.

In summary, what airlines can learn from apple is: participate in the market where you are the strongest, for low cost airlines, that is the domestic leisure market, for legacy airlines, that is long haul international market and corporate travel market; airlines should invest in research and development to provide innovative travel products for their targeted markets, and they should put more efforts in launching effective marketing campaigns, social media is powerful tool that can help them achieve that goal.

Dear readers, any thoughts? Feel free to leave a comment!