A conversation with David Siegel, CEO, US Airways

Transcription

1 A MAGAZINE FOR AIRLINE EXECUTIVES OCTOBER 2003 T a k i n g y o u r a i r l i n e t o n e w h e i g h t s E X T R E M E A I R L I N E M A N A G E M E N T A conversation with David Siegel, CEO, US Airways I N S I D E Traditional carriers launch low-fare subsidiaries How airlines weathered "the perfect storm" Cathay Pacific Airways crisis management process 2009 Sabre Inc. All rights reserved. wearelistening@sabre.com

2 InsideJob An By B. Scott Hunt and Stephani Hawkins Ascend Editors It may not be a case of if you can t beat em, join em. But several traditional airlines, faced with increasing competition from low-cost carriers, have begun looking at ways to re-deploy their assets, incorporating elements of the low-cost model in their own carrierwithin-a-carrier startups. With low-cost carriers now controlling nearly a quarter of the U.S. market and a growing percentage in Europe and Asia/Pacific as well traditional carriers have been forced to take extreme measures to deal with the growing threat. The low-cost carriers have put tremendous pressure on traditional network carriers to cut costs in order to compete with the LCCs and match their discount fares. Traditional airlines have fought back by reducing labor costs, developing rolling hubs and simplifying their fleets. But none of those steps match the radical approach of those Song Reaches Top of the Charts By Stephani Hawkins Ascend Editor With 30 percent of its traffic coming from Florida, Delta Air Lines definitely wanted to protect its market share in a vital area. Long the state s dominant carrier, Delta faced the growing presence in Florida of low-cost carriers such as Southwest, AirTran and jetblue. Fending off the upstarts, however, posed a challenge. Historically, yields in Florida were low and, with low-cost carriers entering the market, were actually spiraling even further downward. The Atlanta, Georgiabased carrier knew it had a lot at stake if it didn t find a radical way to meet the demands of the changing market in its own backyard. The carrier looked at several options. It could follow the lead of other airlines and pull out of Florida. It could maintain the status quo, continuing to lose money and hoping to make it up in stronger markets. Or, ideally, it could find a way to rejuvenate its Florida routes and make money. The third option led to the concept of Song, Delta s low-cost carrier within a carrier. On April 15, Song took to the skies with its maiden voyage from New York City, New York, to West Palm Beach, Florida. The airline, which provides direct service from the northeast to key Florida leisure destinations, also recently added service between Atlanta and Las Vegas, Nevada. When the concept of a new, lowcost airline was introduced to Delta employees, it was welcomed with tremendous support and cooperation, said John Selvaggio, president of Song. continued on page ascend

3 continued from page 30 Every department assisted in setting up the new operation. I think people were in the mood to do something different and build a winner, and everybody wanted to be part of the team, Selvaggio said. So while it was a challenge in that we were always up against the media and Wall Street saying it couldn t be done, we found that there were more optimists in the world, and fortunately, a lot of them work for Delta. In creating a new low-cost carrier, Delta learned from its experience with its earlier carrier within a carrier, Delta Express, which started in the late 90s connecting airports in the northeast United States to Florida. We had a pretty strong position in Florida, and we weren t making money the way it was being served, so we decided to find a way to lower costs, said Selvaggio. Our costs kept going up, he added. Delta Express had been serving our Florida markets since 1996, well before low-cost carriers moved in there. Over time, the cost structure had really increased. Cabin crew and ground labor costs increased and maintenance costs on its s rose dramatically. We had to create an entirely new airline with a brand of its own. Forming Song, therefore, wasn t a matter of swapping a few aircraft and calling it Delta Express version 2.0, Selvaggio said. We had to create an entirely new airline with a brand of its own. Starting a carrier within a carrier was much simpler in many ways than it would have been for an independent, Selvaggio said, in large part due to the resources available from the parent company. Photo courtesy of Song Because it is an offshoot of a wellestablished brand, the carrier wasn t burdened with a large capital outlay or the need to purchase or lease several new aircraft and bid on new airport Under the leadership of President John Selvaggio, Song has helped Delta Air Lines reassert its dominance in the Florida market. slots. Those were all advantages the parent airline passed down. That s why we are flying 36 aircraft rather than a handful or less, Selvaggio said. We ve moved very quickly. We have airport facilities. We have trained staff. We have all those things available to us. We didn t have to start from scratch, get a certificate and try to launch this airline without all the necessities. Yet, Song also needed to become a completely different product than its parent company, Selvaggio said. You get the lower cost structure by reducing ground time and getting full utilization out of your fleet by scheduling more flights per day on the same airplane, said Selvaggio. If you can get four flights a day rather than three out of a single aircraft, you re generating additional revenue with that resource, and at the same time, you re getting better utilization of your people and your airports. It doesn t cost more to lease the aircraft or the gates, he added. And in most cases, you don t need additional staff. It s just that they have less downtime in between flights. So we found we could do this at very low marginal costs while putting more seats into the market place, and that s how we drove our cost structure down we simply optimize the use of our assets. We knew that to get the utilization we needed, we had to turn them (airplanes) faster, which meant we wouldn t be able to offer some of the amenities, such as pre-departure cocktails or special boarding privileges, that Delta s frequent flyers were getting, Selvaggio said. We needed to be different from our mother company. That was very important since we were going to offer an all-coach product on a bigger airplane. As a member of the Delta family, the new airline had to maintain a certain level of service to keep the overall company s reputation intact. Initially, many people thought Song would be a less-than- Delta product, which, Selvaggio said, is what most offshoot carriers have been. It s always been less than the mother brand, Selvaggio said. And we decided that our new operation was going to be different from, but not less than, our parent operation. In starting the new airline, Delta replaced the s on many of its Florida routes with Song s 757s, which have a lower unit cost but also have more seats to fill. Changing out aircraft types was part of a strategy to create a low-cost airline, Selvaggio said. And we knew if we were going to do this, we better have a pretty good brand because we were going to have to drive a lot more revenue, and the low-cost model would 32 ascend

4 Song employees sport stylish uniforms and accessories created by designers Kate and Andy Spade. Female flight attendants take to the skies in Kate Spade uniforms while male employees wear Jack Spade created by Andy. only work on a bigger plane if we were able to fill the seats. Although the 757s cost about 30 percent more to operate than the s, they have nearly 70 percent more seats. If Song could fill the extra seats, it would more than offset the additional operating costs, and Song would come out on top. Illustration courtesy of Song If you feel you can make the revenue side of the equation work, you ll come out ahead, said Selvaggio. True, you re going to have about a 30 percent higher operating cost, but you ve got an opportunity to make 70 percent more revenue. The structural savings allowed Song to maintain the same employee pay scales as its parent company, from where it drew the majority of its employees. Many of our flight attendants make more money now than they did when they flew for the mother airline, but they re working more flights and more hours, Selvaggio said. We ve changed the methodology in the structure of how people get paid, but it encourages them to fly more. And the same thing with our ground employees they re paid the same, but they re working more flights in their eight-hour shift, so there s potential to earn more money. Our pilots are on the same pay scale as Delta pilots as well, but the pay rates are just a byproduct of the way we schedule the airplanes; they ll (pilots) have more productive flying. In addition to its fleet and pay structure, Song has incorporated other changes to the traditional low-cost model. Unlike many independent low-cost airlines, Song offers its passengers SkyMiles from its parent company s frequent flyer program. That s a big advantage over our competition, Selvaggio said. We ll meet the competitive fares of anybody, and on top of that, we offer rewards for flying with us. Song also offers other amenities to differentiate itself from its low-cost competitors. We have a minimum pitch of 33 inches between our all-leather seats that are equipped with personal video monitors incorporating touch-screen technology and credit card swipe capability, he said. Our passengers have access to live, all-digital satellite television programming, digitally streamed MP3 audio programming, pay-per-view programming and an array of video games. And to top it off, we offer buy-on-board snacks and meals. Passengers can purchase meals onboard, including freshly made sandwiches, salads and wraps; healthy snacks such as yogurt, breakfast bars and juices; old standards such as chips and candy; and top-shelf cocktails Cosmopolitans, Martinis and Mimosas. People hate airline food, but they still love to eat, Selvaggio said. And people will eat no matter what the airline We have a motto, Song was founded by optimists and built by believers. And the people on my staff are definitely the optimists, and we created a nation of believers. offers them. So we said, Suppose we offered food our passengers would actually enjoy. With that, we decided to stock brands people recognize and like, and we give our customers the option to buy on board if they so desire. Selling brand-name food products on its flights meets the needs of Song s core customers females between the ages of 34 and 56 who typically want a better quality of food, especially for their kids. We realize that women are a very fast growing component of all travel, Selvaggio said. In terms of leisure travel, they book about 75 percent, and they book about 90 percent of Internet and family vacation travel as well. Having a strong presence in Florida a high vacation destination we chose to target females in that age group. october

5 All of the amenities designed to benefit passengers make flying enjoyable again, Selvaggio said. The airline business used to be exciting and romantic, he said. We have made our planes safe, clean, on time and affordable, but we ve kind of lost the romance along the way. So we ve strived to get that back by introducing an airline with a more unique The airline business used to be exciting and romantic. We have made our planes safe, clean, on time and affordable, but we ve kind of lost the romance along the way. So we ve strived to get that back by introducing an airline with a more unique flavor than the traditional types. flavor than the traditional types. If we can give our passengers choices of things to do while on our flights, it will make their experience that much better, he said. That mindset is also what led to the new carrier s identity, a name that embraced lots of choices, Selvaggio said. The airline wanted an identity completely different from that of any other airline a light-hearted name with flair that was easy to remember yet had meaning behind it. Just about every airline has a name that pretty much ties to geography, such as American, United, Continental, Eastern, Western, Delta and so on, Selvaggio said. We decided that if we could get out of that space and not be like every other airline, we could go anywhere we wanted. While in search for the perfect name, the carrier came across many Photo courtesy of Song options that were musical in nature, and environment, Selvaggio said. It keeps after sifting through some 600 options, things a little lighter for our employees, Song stood out. who we call our talent, by the way, and Everyone has a favorite song, that transfers to our passengers. Selvaggio said. And when you think of With capacity up about 50 percent your favorite song, you get a smile on year over year in its Florida markets and your face. That s how we want our passengers to come to us and that s how percent and 77 percent Song has cer- load factors on the rise between 70 we want them to leave with a smile. tainly achieved the goal of returning this According to Selvaggio, music is a part of Delta s network to profitability. In universal language that can calm a lot September, the airline announced it had of beasts, so the carrier plays music carried its one-millionth passenger in on its jetways, Web site and airplanes. less than six months of operations. In keeping with its motif, the carrier asks We re taking back our territory, but employees to use musical metaphors we re not giving (our product) away, whenever possible, and even at its Selvaggio said. Our ticket values are headquarters, conference rooms are improving every month, and I think it s referred to as studios. remarkable that we ve been able to add In fact, in staying within a musical that much capacity without sacrificing lexicon, we auditioned our employees, load factors or ticket value. he said. We hired people for attitude We have a motto, Song was they had to be willing to use their personality, have a little fun, make someone s ers, he added. And the people on my founded by optimists and built by believ- day and simply be there. staff are definitely the optimists, and we We try to keep the spirit of a musical created a nation of believers. For its single-fleet type, Song chose the Boeing 757, a larger aircraft than the Boeing 737 used by many low-cost carriers. The larger aircraft have a lower unit cost because they have 70 percent more seats.