But the differences between ValuJet and Continental Lite, which compete head-to-head minimally, are as numerous as the similarities and in many ways considerably more important. The former, based in Atlanta, is a stand alone operation, while the latter - part of Continental Airlines - has led the 'airline within an airline' trend that has since been implemented by USAir and United Airlines in the US, and Lufthansa in Europe. ValuJet offers a maximum seven flights a day in any market, while Lite - imitating high-frequency Southwest - has at times put in more than 30, often meeting with a vigorous competitive response. And ValuJet only serves cities with significant populations, compared to Lite's belief that almost any market will support low-fare jet service.
All of this has led to the most significant difference: one has been profitable, and the other has not. ValuJet has turned in net profits every month except the first two following its October 26, 1993 start, changing naysayers into supporters and generating a stream of proposals for its founders to start up ValuJet franchises in Europe and elsewhere in the US. Continental Lite, meanwhile, lost an estimated $100 million last year and is now being pared. It has become a model of how not to imitate Southwest.
The launch of Continental Lite in October 1993 was the source of great expectations. Having come out of its second bankruptcy in April of that year, Continental was determined to rejig its entire system by establishing a Southwest-like short-haul operation giving blanket coverage of markets in which Southwest had no presence, primarily in the eastern US. 'This was an attempt to get our hard assets working a lot more productively,' says Don Valentine, Southwest's former marketing chief, hired by Continental as vice president of planning to head the Lite operation. Sounding defeated, he recalls the predictions for CALite (as it was then called) to break even in six months. 'It's been harder than we expected.'
No less ambitious at the outset was ValuJet. Unlike the Lite operation, ValuJet charted a path for growth that was slow and incremental, on average adding one DC-9 aircraft every month. Still, its predictions for profitability were met with circumspection by those who cited the inability of any carrier to survive against a hometown giant like Delta Air Lines. 'We've proven the doubters wrong,' says Lewis Jordan, president of ValuJet. He was president of Continental before being pushed out by Robert Ferguson, who was later fired as CEO due in large part to the Lite fiasco. Analysts now believe ValuJet could report more than $15 million in net profits for 1994.
ValuJet's success has come from a piecemeal approximation of the Southwest formula - low costs, low fares and a single aircraft type combined with a low-frequency strategy that would have the combined effect of helping to assure high load factors while not upsetting such competing majors as Delta. ValuJet's break-even load factor is 44 per cent, and with frequencies averaging six a day last year, it has become somewhat of a policy to achieve operating margins of 25 per cent - the system average - with connecting traffic representing just 25 per cent of the total. 'There is something to be said for local markets breaking even on their own,' says one ValuJet executive.
That can be done if those markets have dense populations and a lack of fierce competition. So far, ValuJet's network of 19 cities has been a mixture of high-density markets that include connecting services to Atlanta from Orlando, Tampa, Philadelphia, Chicago and Detroit, among others. In January, the carrier began a mini-hub of sorts at Washington/Dulles International airport, home to a small United Airlines hub and close to USAir's heavy presence at Washington National and Baltimore. Jordan says that ValuJet's leisure-based traffic is not a threat to bigger carriers: 'The market presence of an incumbent carrier is not nearly as big a factor to us as the population base of the cities we are considering.'
The Dulles experiment caps a year of profits bolstered by measured growth and sustained by maintaining and even reducing low costs. And, though some observers are concerned that ValuJet's 14 daily flights could be too much, the carrier's officials see a market with the appropriate basics: a high-income, populous area - suburban Washington - that lacks a low-cost carrier. ValuJet will also boost productivity to help keep down costs, which at roughly 6.5 cents an available seat mile are the US industry's lowest.
Destinations from Dulles will include Florida cities already served by ValuJet from Atlanta. No new gates will be added in the case of Miami, but personnel are turning round two daily flights from Washington in addition to the four already being served from Atlanta.
The Dulles expansion confirms an obvious advantage ValuJet has over operations like Continental Lite: it has started from scratch without the need to retrain line workers, and with little debt and no unwieldy amount of capacity to control, meaning it can grow where demand exists. 'ValuJet doesn't have the financial problems, and it doesn't have the history to undo,' believes David Stamey at Avitas, the Washington-based consultancy.
The problems with Continental Lite may have started with its premise. Although the operation was an attempt to improve Continental's overall productivity, it was also aimed at solving the dilemma facing the carrier at its Denver hub, where it has been reducing its position of dominance from over 300 daily departures in the late 1980s. By September 1993 Continental's 154 daily jet departures were losing a cutthroat hub battle against United Airlines, that month producing $14 million in losses on $65.8 million in revenue. The pulldown of Denver began in earnest in August and resulted in capacity being transferred to the Lite operation on the US east coast, and to Greensboro in particular.
Over the next year, a six-stage programme was implemented that saw the expansion of the Lite system from 173 daily departures and 3.8 per cent of Continental's entire available seat miles in October 1993 to 1,014 daily departures and more than 38 per cent by November 1994. With an average of 18 departures per city last year, Continental's assets have indeed been used more productively. But year on year figures for November show that Continental's domestic capacity increases outstripped upturns in traffic by more than 5 per cent due to badly coordinated new aircraft additions.
One Continental executive says this capacity shuffling in effect meant loss-shifting: in September 1994 Denver, no longer a hub, was down to 29 daily departures with much-improved losses of $4 million but the Lite operation was losing $10 million each month. 'We cleverly transplanted the losses at Denver to Continental Lite,' the source says.
Continental Lite has been felt as a corporate culture shock and indoctrination of the new way of doing business has been difficult at all levels. Management ranks have been distracted from airline operations with continuous meetings on Lite, and each department - from in-flight services to maintenance - 'wants a piece of the operation,' says one source.
After a year, consumers and many workers have apparently not come to understand the distinction between Continental Lite and Continental. Airline ground crews have had difficulty dealing with the operation's increased demands, and the two different aircraft types - the Boeing 737 and DC-9 - have caused gate-handling problems and more maintenance demands. Also, several Continental sources cite a stubbornness among many long-time employees - management and line - to conform to the increased demands of Lite. 'There are always those who believe the past should be the future,' laments Valentine.
The losses can also be explained by the overwhelming capacity build-up, head-to-head competition with resilient competitors, difficulty in establishing Lite's pricing structure, and poor market choices and forecasting techniques. 'It's a revenue problem' is the Continental Lite mantra.
The carrier's attempts at jumpstarting new markets, or 'linear' routes like Milwaukee-Kansas City that comprise 31 per cent of Lite's operations, may dispel the belief that any market can support high frequency jet service. Industry analysts like Paine Webber's Samuel Buttrick have doubted the ability for jet services to succeed in markets that had either no service or only commuter-aircraft operations. 'It is a good concept, but it would have been helpful if they had chosen markets where people wanted to fly,' Buttrick says.
The great finding for Continental executives is that an airline-within-an-airline works well for traffic feed to its hubs in Houston, Cleveland and Newark, where market presence was already established: these services now comprise the other 69 per cent of Lite. Even with capacity increases of 30 per cent, business fare reductions of close to 50 per cent and average fares dropping 20 per cent, Lite has still managed to increase Continental's share in 10 representative hub markets by 41 per cent. The carrier has even seen some small pre-tax profits in these markets, according to John Luth, executive vice president of operations.
Lite in its most definitive form may be seen in Greensboro, North Carolina, where a hub operation is based and the airline-within-an-airline manifests its most troubling traits: principally overcapacity, poor market development and heavy competition. 'Greensboro,' says Michael Boyd of Aviation Systems Research, 'is the fall of Saigon with better airport concessions.'
At its peak, Lite had more than 70 daily departures out of Greensboro, though the retrenchment which began in January has brought this down to 62 - a total that will probably be slashed further in the future. Cutbacks of 10 per cent are now planned throughout the Lite and main system but sources say they could total 18 per cent for 1995.
The idea at Greensboro was to establish a strong base and to lure locals away from American Airlines' faltering hub in Raleigh-Durham and, more importantly, USAir's Charlotte hub, with low fares. The problem is that the hub battle has diluted local traffic, leaving the operation to rely on connecting traffic that can equally well go through a host of other hubs, including Atlanta, Cincinnati, Memphis and even the Washington DC area. The plan was all part of what former Continental president Robert Ferguson told associates was an attempt to push financially precarious USAir 'into the sea.' In retrospect, for some executives at the airline, this infamous remark symbolises the faulty decision-making that resulted in Ferguson's departure last October. The pull-down of the Denver hub and consequent capacity shift to Greensboro and other Continental hubs relied at least in part on USAir's expected reluctance to respond to Lite's low fares.
But USAir fought back, first by matching Lite in competing markets and then by systematically lowering its prices throughout the southeast. Here Continental's size as a major airline played against it: as opposed to the likes of ValuJet, it was a competitor of similar significance to USAir. Jordan says a weakened player like USAir can be like 'a cornered animal.' With Lite's pullback, USAir considers itself to be in a superior position. 'Though the fight isn't over, it is evident to us that the market dominance and the hub position that we have in the area will prevail,' says Robert Gallo, senior director of business planning at USAir.
Though executives like Valentine insist the fight is not over for Lite, many Continental officials believe the experiment will soon be talked of in the past tense. In practical terms, this means the short-haul, low-fare product will still exist as a feeder operation to the hubs, though it could be whittled down to 20 per cent of Continental. Aircraft will not be painted as Continental Lite, advertising will not focus on Lite, while all employees will not consider themselves as part of the airline-within-an-airline.
For Continental, the downsizing of Denver will result in a hub at Greensboro - so far not referred to as a hub by the carrier itself - and increased services at the other hubs in Houston, Newark and Cleveland, says Buttrick. Most importantly, he adds, there will be a clear divide between 'flying that makes money, and flying that loses money,' a distinction that was made by ValuJet right from the beginning.
For Continental, the downsizing of Denver will result in a hub at Greensboro - so far not referred to as a hub by the carrier itself - and increased services at the other hubs in Houston, Newark and Cleveland, says Buttrick. Most importantly, he adds, there will be a clear divide between 'flying that makes money, and flying that loses money,' a distinction that was made by ValuJet right from the beginning.
Source: Airline Business
