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  • North American legacies take another look at LCC concept
    Posted by Darren Shannon 8:42 PM on Nov 23, 2011

    Although derided just a few years ago as an ill-conceived concept unsuited for a mature market, a few North American legacy carriers are once again attempting to integrate low-cost operations into their mainline networks.

    The concept was most recently adopted by North American operators some 10 years ago, when so-called low-cost subsidiaries emerged as the apparent salvation for mainline carriers fixated on retaining leisure passengers after the lucrative business sector all but disappeared in the wake of the 9/11 attacks.

    But there was a problem with that solution: It simply did not work. Attempts to emulate new entrants failed to impress passengers and staff alike, diluted troubled brands further and, most importantly, did not achieve the basic goal of being low-cost as expenses inherent in a mainline operation encumbered the new subsidiaries.

    Low-cost, a definition that has lost much of its tarnish as legacies trim more and more of their non-fuel expenses, is difficult to define. It is not simply achieved through lower wage rates, although that is a powerful contributor at the beginning of a venture, nor is it about single configurations, single fleet types, point-to-point networks, simplified fares or even random capital letters. In fact, LCCs, as they have become known, are more easily defined by what they are not: and that is a mainline carrier.

    That difference was the key definer a decade ago, when the likes of Delta Air Lines and United Airlines dabbled with such ideas, and while Ted failed to end United and Song merely dulled Delta’s tune, they highlighted the risk of using a legacy company with legacy fixed costs as the foundation of a new venture. Eventually both dropped the LCC concept, opting instead to tighten their third-party feeder contracts and shift as much domestic capacity as possible to their regional partners.

    Air Canada bit twice on the LCC apple, but the only lasting effect of its Zip and Tango ventures was a promotional fare type. Now the airline is back for a third helping.

    The dynamics are somewhat different, if the rhetoric is to be believed, and interestingly Air Canada this time is using Asia’s foray in the LCC market as a springboard for its new venture, with CEO Calin Rovinescu claiming the rash of new subsidiaries is “a movement” that cannot be ignored.

    Regardless of Asia’s current business practices—and there is sufficient warning in the annals of North America’s airline industry to avoid the sheep mentality—Air Canada is again attempting to hold onto leisure passengers attracted to low fares and sun during the long winter months. But Tango tried that and ultimately failed. This time, Rovinescu is hoping his new subsidiary will be without a major fixed cost: defined-benefit pensions. Air Canada’s unions, though, are unimpressed, and while Canada’s labor regulators may ultimately push through a deal, no business has ever succeeded with a disaffected workforce.

    American Airlines, meanwhile, is choosing a different tactic. While details are still sparse, it appears the airline is contemplating a sizable fleet of Airbus A319s operating within the mainline network but crewed by pilots working with different pay rates and work rules than their mainline colleagues. The payoff, says American, is the retention of a stringent scope clause that will guarantee it does not follow Delta and United into outsourcing large segments of its domestic network.

    It is too early to say if either concept will work, although American’s pilots are not completely adverse to the idea as long as the A319 fleet remains small and under the auspices of their mainline contract. But it appears we are again witnessing an experiment with LCC in North America; maybe this time it will bear fruit.

    Tags: TW99, AWCOL

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