Network 2006: Service message

The best message an airport can hear at a route planning session is that a carrier is going to start service. And that was exactly what the marketing team at San Antonio International airport, the hosts of Airline Business-organised Network 2006, heard from none other than Emilio Romano the chief executive of Mexicana Airlines.

Romano was in San Antonio to deliver the keynote address to the meeting in early March, which gathered 60 airlines and 130 airports from across the Americas and further afield to conduct the route planning equivalent of speed dating, with 730 one-to-one meetings between them over the two days of the event. Much of Romano’s presentation concentrated on the impact of new low-cost carriers in Mexico’s increasingly liberalised and rapidly expanding market. Mexicana itself, invigorated since being privatised late last year, is already playing its part in this revolution with the launch of its own low-cost affiliate Click. More cross-border services to the USA will feature heavily both for Click and Mexicana. “We are planning to expand to international markets. Don’t be surprised to see us in San Antonio with Click,” he said.

Click, which Mexicana started in July 2005, has been profitable from its inception, said Romano, and it will add a further five Fokker 100s to its fleet of 10 of the 100-seat twinjet this year. It is one of eight low-cost carriers either already operating or planning to begin service in Mexico. The key drivers for this boom are economic stability in the country, combined with strong underlying traffic growth and a massive bus market that airline service is now beginning to compete with on price.

“This is one of the fastest, most intense launches of low-cost carriers in the history of aviation,” said Romano. The combined aircraft fleet of Mexican carriers today is some 160 aircraft, and there will be “almost be as much again with the low-cost carriers”.

But it will not be plain sailing for all, warned Romano. The Mexican market is characterised by high operating costs, such as airport and air traffic control fees, high taxes that can amount to over 35% of the ticket cost, and low internet penetration, which stands at less than 15% of Mexican households.

Romano believes Click will be one of the new players to tackle these issues successfully. It has already developed a network covering 16 destinations in Mexico, including services from both Mexico City International airport and the capital’s main low-cost base at nearby Toluca.

US challenge

The challenge for Mexican carriers, both legacy and new entrants, will also come from the growing presence of US carriers. More service south of the border, and into the Caribbean, has been an attractive option for US carriers looking for expansion opportunities outside their tough domestic market. “US carriers all decided the way to make money is to fly internationally, especially Delta,” said Romano. And while, US players already have a 63% share of the USA-Mexico market, Mexicana for one is fighting back.

Its expansion will focus on “high- growth Hispanic markets” like Dallas and San Antonio, said Romano. The carrier also has New Orleans and Fresno in its sights and has already announced three new services from Mexican cities to Bakersfield in California.

San Antonio is one of the cities that major conventions have turned to following Hurricane Katrina last year (see box story). The disaster left many events seeking new homes for their annual gatherings and Network’s Texan host has picked up its share. For example, SAP’s global marketing event, which involves 20,000 room nights, was forced to move from New Orleans and took place in San Antonio in January. This is in addition to the Texan city’s growing popularity as a convention destination, with 8.5% more room nights sold in 2005 compared with the year before.

The city’s airport has seen traffic grow healthily in the past few years, mirroring the trend across much of the USA. In fact, measured in revenue passenger kilometres, traffic has recovered to and now exceeded 2000 levels, although passenger numbers are still just below that high water mark. However, the rate of growth will slow from the 6% increase seen last year, according to Dave Swierenga, president of consultancy AeroEcon, and the former chief economist of the Air Transport Association (ATA), which represents US carriers. His forecast predicts growth of 1.9% in 2006.

Pricing power returns

The US industry did make progress in 2005. Rising traffic and some ability to raise prices, which grew overall by 2.8%, led to a revenue boost of 10.6%. Capacity only grew by 3.1% while unit costs rose by 5.5%. The bottom line, said Swierenga, was that in 2005 the industry achieved an operating profit of $800 million, an improvement over the $1.5 billion loss the previous year. However, at the net level the industry as a whole suffered nearly a $10 billion loss, which was even more than the $9.1 billion loss incurred in 2004.

The financial outlook for 2006 is more gradual improvement with some tough problems still for the legacy carriers. However, Swierenga is forecasting some more pricing power this year and more cost constraint. “After 9/11, low-fare carriers became the price leaders in the industry, they are holding a lid on pricing,” he said. “At these new price levels carriers have to figure out a way to get costs down to be profitable.”

He is more optimistic than some on the direction of fuel prices, which he believes will drift lower as national inventory levels rise. Overall he sees the industry making from $3-4 billion in operating profit this year, but still a net loss of $1-2 billion.

The challenge for legacy carriers is financing their growth when the time comes. “Carriers are borrowing to service their losses, which has ominous implications for the future,” said Swierenga. “It will be very difficult for carriers to acquire new aircraft,” he said, with many being forced to turn to the leasing market for new metal. The carriers more able to grow will be low-fare and regional players, he said.

During the airline panel session at Network, the contrast between the strategic models of two of the carriers most likely to capture that growth – JetBlue Airways and Southwest Airlines – was emphasised. Southwest is sticking to its tried and tested route planning policy. A decision to add service is “very much focused on local non-stop passengers”, said Will Berchelmann, senior route planner at Southwest. Despite this, across its network, around a third of passengers do connect to another Southwest flight.

JetBlue’s model does take connectivity more into account, which is inherently a more risky approach, said Bob Mann, president of the New York-based RW Mann consultancy. The carrier is building its connecting traffic, especially at New York, where passengers can change aircraft to go elsewhere in its network, said Adam Green, JetBlue’s manager route planning.

Berchelmann and Green are bullish about market prospects for this year. “Demand is very robust,” said Green. US Airways is also seeing a strong domestic revenue trend on the East and West Coasts, which started in the final quarter of 2005 and is continuing in early 2006, said Michael Britman, senior director strategy and capacity planning. “There has been a reduction in irrational capacity in the domestic market.” ■

To read all of the presentations given at Network visit www.networkusa.info

MARK PILLING / SAN ANTONIO

Source: Airline Business