Airworld War

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My three-week barnstorming stint through a dozen airports and airlines-a journey into the heart of what I dubbed "Airworld"-started with the leather seats and satellite TV of JetBlue and Song, and finished cocooned in the long-haul luxury of Virgin Atlantic's Upper Class and Singapore Airlines' "Spacebeds."

In between, I flew United, Northwest and Delta back-to-back-to-back on my Midwest leg, which I jokingly described as the "Bankruptcy Tour." The flights were short, only a few hours, and perfectly pleasant (as pleasant as a coach seat can be), not that I could tell any of them apart.

As it happened, I flew Delta and Northwest less than a week after both carriers, the third and fifth largest in the country in terms of traffic, respectively, filed for Chapter 11 on Sept. 14. For a few weeks last month, until US Airways re-emerged from bankruptcy a second time Sept. 27, more than half of the available seats in this country were being flown in bankruptcy.

Not one of the four major carriers that had applied for court protection in the wake of 9/11 and spiraling jet fuel prices-US Airways, United, and now Delta and Northwest-was ever in serious danger of liquidation. In fact, United's especially productive three years in bankruptcy-which gave the carrier the leverage to wring deep pay cuts from its unions, offload its pension responsibilities to the federal government, and still have enough cash left over to launch its own airline-within-an-airline, Ted-have transformed Chapter 11 into just another (albeit drastic) strategic decision.

"Overall, I think the airlines are feeling remarkably bullish despite being in bankruptcy," said Steve Hafner, CEO of the ticketing search engine, who had close ties with the airlines in his former role as exec VP-consumer travel at Orbitz. "They see it not so much as an admission of failure, but as an opportunity to get their costs in line with some of their low-cost carrier rivals. I met with Northwest executives last week, and they were almost proud to say `We're the healthiest carrier to ever go into bankruptcy, with a billion dollars in the bank."

All of the "Big Six" carriers, which also include the still-somewhat-healthy American Airlines and Continental, are furiously cutting costs yet again to fight a two-front war against the low-cost carriers on one side and the intractably high costs of jet fuel-which has doubled in price since the beginning of the year-on the other.

"It's a war of attrition," Bear Stearns' influential airline analyst David Strine wrote in his September report. "We believe that the amount of capacity, high oil prices and low fares cannot coexist through `06 given burn rates, and favor legacies with decent liquidity... or labor catalysts."

In an attempt to flee ruinous competition with the low-fare carriers who have started service and slashed the prices of average fares on 80% of the heavily trafficked domestic routes, the legacies have begun canceling their worst sinkholes and transferring the plans to their most profitable long-haul routes, where the low-cost carriers can't catch them.

The industry is essentially bifurcating in its attempt to cater to two kinds of customers-casual fliers generally looking for the lowest price, and business travelers whose deep pockets come with a set of demands for great service. It remains to be seen whether the legacy airlines, once they begin saturating international routes, will have any more success competing for the latter with the British Airways, Virgin Atlantics and Emirates of the world than they did with Southwest.

Critiques of the airline industry's current crisis have focused, like Mr. Strine at Bear Stearns, on the glut of capacity. There are too many seats being sold for too cheap a price for anyone to make money, in a nutshell. The only solution, then, is for a big enough chunk of capacity to fall out-the failure and liquidation of a major carrier, say-to create a scarcity of seats and thus push prices upward, to the point where everyone can make money again.

The underlying assumption is that no airline on its own possesses the power to command a premium price over its rivals through a superior product, or service or customer loyalty-everything that a brand should do. In a world with Internet ticketing engines like Orbitz, pricing information is perfectly transparent; there is no need to spend more than the rock-bottom price if you believe you are purchasing a raw commodity-human air freight from Point A to Point B.

And it may very well be wrong. "Travel is an area in which 44% of leisure passengers are willing to indulge themselves," said Forrester's VP-travel research, Henry Harteveldt, who was an advertising manager at TWA in the mid-`80s. "More than four in 10 travelers say they're willing to pay more for a quality product. The problem is that airline managers focus on costs," he said. "They don't understand the concept of give more, get more."

Muddled middle

Is it even possible in current conditions for an airline to rebuild its brand? The evidence suggests that a few already have, led by Virgin Atlantic and British Airways at the top of the market and by JetBlue, Frontier and AirTran at the bottom. The question is whether the muddled middle has the willingness and the cash to reposition themselves in time.

"I've talked to airline executives who worry about this," said Dave Emerson, partner at Bain & Co. who frequently advises airlines. "They're wondering `Are we eroding our long-term competitiveness by not doing more?' If you look at their product innovation, it's been a long time since we've seen anything new. The frequent-flier programs were a significant development, but that was 25 years ago. The lie-flat seat in international business class was huge, but that was pioneered overseas. They're only just starting to introduce that here now."

"The legacy carriers will tell you-largely by way of excuse-that it's a commodity industry: `All we can do is compete on price,"' said Stuart Klaskin, a principal at KKC Aviation Consulting, which often works with low-cost carriers on strategy. "They've abdicated the need to brand their companies. It's the cheap excuse. `I'm terminal, so why should I pay for chemo?"'

Southwest ushered in the low-fare era 34 years ago with dirt-cheap tickets, a cost-effective single type of aircraft, and an in-flight product that included eccentric flight attendants and peanuts for a snack. Today, the crews are still eccentric, the peanuts are still free (Northwest now charges $1 for trail mix) and Southwest will ring up its 58th consecutive quarterly profit by year's end. Its market capitalization is more than $12 billion, topping the Big Six combined.

JetBlue updated the low-cost carrier formula when it launched five years ago with an all-new Airbus fleet, live satellite TV and friendly, non-unionized flight attendants, all of which were packaged in a cheap-chic image that positioned the carrier as a lifestyle brand along the lines of Target or Ikea. Its New York City customers may have signed up for the low fares, but after their flights, it was watching the Food Network at 35,000 ft. they were raving about. Flying JetBlue became a sign of tasteful frugality-even the dowagers of Palm Beach adopted the airline as their shuttle bus. The end result is that JetBlue is competing less and less on pure price-often it's not the lowest fare even on routes with the legacy carriers, and the airline has leveraged this into a run of 18 consecutive profitable quarters (a run that's about to end due to the spike in the cost of jet fuel).

180-degree reversal

JetBlue is also the darling of the industry, beloved by the press for being a role model eagerly studied by legacy carriers and fellow low-cost carriers alike. "The JetBlues and Southwests are largely differentiated in the public's mind now," Mr. Klaskin said. "This is a 180-degree reversal from a generation ago, when low cost carriers were the identical ones in the muck."

Frontier, which began life 11 years ago as your typical startup "flying two planes to North Dakota," in the self-deprecating words of director-advertising Diane Willmann, reinvented itself with its own all-Airbus fleet and the same TV technology as JetBlue's. Frontier repainted its planes with animals on the tails, and hired Grey Worldwide's Sticky Grey to craft a TV campaign which ran its hometown of Denver that cast the animals as the airline's spokespeople. It worked, boosting Frontier's local brand awareness from 47% to more than 80% over three years, and has helped it steadily chip away at United's share in Denver, which slipped from 41.7% in June 2004 to 35.9% this June. Frontier's rose from 14.3% to 17.2% during the same period. AirTran performed a similar feat in Atlanta, hammering away at Delta's regional business with a young all-Boeing fleet and its own local TV campaign.

"Frontier and AirTrain have built brands by being based in legacy carriers' hubs," Mr. Klaskin said. "They can say `We're the anti-Delta' or `anti-United,' and when you've got someone to play the fool, it's much easier."

Determined not to play the fool for much longer, Delta announced last month that as part of its Chapter 11 reorganization that it would increase the number of seats on international flights 25%. In doing so, it will join American and United, both of which have increased their capacity abroad by 10%-15% over the past year, in piling onto routes where the competition isn't JetBlue or Southwest, but Singapore Airlines, Emirates, Cathay Pacific, BA, Lufthansa and Virgin Atlantic-all among the most profitable airlines in the world last year.

Instead, to fill as many seats as possible while keeping costs down, these carriers spend freely on amenities. Lufthansa, for example, has created business class-only trans-Atlantic flights; opened a VIP terminal for first-class passengers in Frankfurt, and installed Boeing's in-flight wireless service Connexion on long-haul flights. Emirates has installed private suites on its planes at the cost of $125,000 each, while first-class passengers on Singapore Airlines received Givenchy pajamas and Bulgari amenity kits.

On the Atlantic route, BA was the first to roll out lie-flat beds in business class, while Virgin Atlantic and its agency of record, Crispin Porter & Bogusky, have cemented the airline's status as the coolest in existence since Mary Wells ran the marketing efforts of Braniff International. Virgin's appeal to "Jetrosexuals" encompasses everything from its own lie-flat beds to the on-board bar, to its swank "Clubhouses" to a print and outdoor campaign expressly designed to make its customers feel cool about flying the airline, customers who return the favor: "They're innovative, they're modern, they get it," one told me in the Clubhouse at JFK.

"One thing that they have done, and BA has done, and other carriers have done is completely focus on the experience," said David Melancon, president of FutureBrand North America, a unit of Interpublic Group of Cos. On FutureBrand's watch, BA introduced the lie-flat beds and opened travel spas at Heathrow with Molton Brown-branded skin-care products.

The experience

"BA is more traditional, and Virgin is a little less so, but they both do an amazing job," said Mr. Melancon. "We diminish that by saying `That's the European way,' or `That's the Asian way,' in the case of Singapore or Cathay Pacific, but that's bull, because what you're doing is creating an experience. If you want to talk about what American carriers are doing, my grandmother used to have a saying about burning the furniture-it may keep you warm for the moment, but you've burned something you need."

And as they swarm into currently lucrative markets, one would expect the resulting competition to once again drive prices down.

"There are about 39 competitors in the Atlantic market, and because everybody and their mother is shifting their capacity into a high-yield market, those yields go away-and so do their rosy revenue projections," said Vaughn Cordle, chief analyst for Airlines Forecast.

The bifurcation of the air-travel market into price-conscious leisure consumers at one end and high-paying, high-service business and luxury travelers at the other bring to the mind the "well curve" that appears in the "trading up" phenomenon. As consumers' sophistication increases, they decide whether a product or service is emotionally worth paying a premium for. If it is, they pay it, and if not, they search for an acceptably pleasant low-cost option. The brands caught in the middle lose their luster and their customers, who now flock to either of the spectrum.

"This is one of the only post-Industrial Age industries that has never had a cataclysmic restructuring," said Mr. Klaskin. Mounting evidence suggests that restructuring may be here, and that cost-cutting alone won't be enough to save any given legacy carrier. Low barriers to entry and economics that favor new arrivals-who bring younger planes, lower costs, and can choose their spots-have begun attracting not only low-fare carriers, but a new breed of boutique airlines.

"Go into the terminals and watch the cross-section of people," said David Spurlock, the CEO of Eos Airlines, which is just starring to offer service between JFK and London's Stansted. "The world hasn't seen that kind of cross-section of customers since Sears & Roebuck lost its relevance decades ago. Retail went through its bifurcation in the `70s and `80s, the auto manufacturing business went through its bifurcation in the `60s, and the PC business went through it in the `90s. And the airline industry is leaps and bounds behind."

A few of the legacy carriers have begun to recognize this. Delta created Song, its airline-within-an-airline, two years ago in JetBlue's mold with an emphasis on new planes, satellite TV, and an elaborate constellation of supporting brands like Kate Spade, "Song Records," organic ala carte meals, and an ad blitz created by SS&K and Media Kitchen to address the perception that "uniformity was the enemy, and that travel was tiresome," said Song President Joanne Smith. "What if you could bring the glamour back to air travel? What the industry needs to deliver is a low fare and a better experience."

Is Song doing that? It's impossible to say, as its financial are buried beneath Delta's river of red ink. But Ms. Smith did say that the airline's load factor (i.e., the percentage of seats filled each flight) is a healthy 80%, and that the branded amenities are small profit centers, rather than wasteful frills. "Song has a cost structure that's 20% less than Delta's," said Mr. Cordle, "but because Song works out to be just 10% of the flights within the system, Song isn't big enough to have the impact they need. "

"The irony is that Song has a more robust brand at this point than Delta," Mr. Harteveldt said. "And if Delta were smart, they'd give Song more airplanes and let it be their domestic brand, and let mainline Delta focus on international flights." The airline has taken the second half of his advice-it will begin new service to 11 cities in Europe and Israel. In doing so, it will become the world's largest trans-Atlantic airline, as measured by number of daily flights.

When United emerges from Chapter 11 on Feb. 1, the fourth-largest carrier intends to focus on branding, rather than on the tactical skirmishes with Frontier and other low-cost carriers that consumed its attention and budget over the last two years, according advertising and promotion director Julie Koewler.

United will return with a portfolio of sub-brands and amenities it didn't possess three years ago, including its low-cost carrier Ted, its premium transcontinental service, "P.S.," and its "Economy Plus" seats with more legroom. They're good small steps, but still: "You're left with the same question-how do you end up with a competitive mainline product?" asks Mr. Emerson. "Those secondary brands can be good in that they can slow down market share loss and bring big losers closer to break-even, but if the core product isn't working..."

"What's steady is the willingness to pay more for a better product," said Mr. Harteveldt. "But where's the magic, and where's the sense of theater?" he asked. "It doesn't have to be caviar and champagne, but it doesn't have to resemble a Roman slave ship either. Marketing an airline should be a pretty cool job, but any marketer would run screaming from headhunter's call right now."

Unless, of course, the call was from JetBlue.

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