David Siegel, CEO, US Airways

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

EXTREME AIRLINE MANAGEMEN T A conversation with … David Siegel, CEO, US Airways

INSID E

Traditional carriers launch low-fare subsidiaries

How airlines weathered "the perfect storm"

Cathay Pacific Airways’ crisis management process

– and a growing percentage in Europe carriers that have started their own five destinations with a fleet of four they also have key differences in the way An and Asia/Pacific as well – traditional car- low-cost airline. Airbus A320 aircraft. And Delta, with they operate. While both have a single riers have been forced to take extreme Despite a checkered history of such Song, and bmi, with bmibaby, have fleet type, Song uses larger 757s com- measures to deal with the growing offshoots, in the past couple of years, sev- used their low-cost subsidiaries pared to bmibaby’s 737s. Song also has Inside threat. The low-cost carriers have put eral airlines have launched, or announced to aggressively compete in their maintained the pay scale of the parent tremendous pressure on traditional plans for, low-cost subsidiaries. Air Canada dominant markets. airline while bmibaby forged complete By B. Scott Hunt and Job network carriers to cut costs in order has launched Tango and Zip. Qantas is Although some consider such new labor agreements. Each also offers Stephani Hawkins | Ascend Editors to compete with the LCCs and match now examining the possibility of launch- endeavors risky, early returns have been different amenities to its customers. their discount fares. ing a domestic low-cost carrier. United positive for Delta and bmi, who show While their approaches to their t may not be a case of “if you can’t beat assets, incorporating elements of the Traditional airlines have fought Airlines recently announced it will that, perhaps, such a new venture is low-cost carrier startup differ somewhat, I’em, join ’em.” But several traditional low-cost model in their own “carrier- back by reducing labor costs, develop- launch a new low-cost operation from not quite the flight of fancy many peo- both Delta and bmi are committed airlines, faced with increasing competi- within-a-carrier” startups. ing “rolling” hubs and simplifying its Denver hub beginning in February. ple once believed. Although they share to using their new subsidiaries to tion from low-cost carriers, have begun With low-cost carriers now control- their fleets. But none of those steps The low-cost operation, currently code- similarities – including drawing upon compete strongly against the low-cost looking at ways to re-deploy their ling nearly a quarter of the U.S. market match the radical approach of those named Starfish, will begin by serving the resources of the parent airline – competition.

Song Reaches You’ve Come a Top of the Charts Long Way, bmibaby!

By Stephani Hawkins | Ascend Editor By Stephani Hawkins and B. Scott Hunt | Ascend Editors

ith 30 percent of its traffic coming own backyard. direct service from the northeast to key ack in 2001, officials with bmi, the low-cost carrier would identify as being Go, announced that December it would Wfrom Florida, Delta Air Lines defi- The carrier looked at several Florida leisure destinations, also Bsecond largest carrier in the United attractive. Really, the decision for us was begin operations at East Midlands. nitely wanted to protect its market share options. It could follow the lead of other recently added service between Atlanta Kingdom, predicted someone would if we as a company had to start setting “Because we had laid a lot of the in a vital area. airlines and pull out of Florida. It could and Las Vegas, Nevada. eventually bring a low-cost carrier to the up our own low-cost carrier mindful of groundwork, we were actually able to Long the state’s dominant carrier, maintain the status quo, continuing to When the concept of a new, low- airline’s East Midlands Airport home base. some of the pitfalls that people like British announce our own low-cost airline within Delta faced the growing presence in lose money and hoping to make it up in cost airline was introduced to Delta So, they thought, why not do it Airways with Go and some of the U.S. three days of Go announcing it was Florida of low-cost carriers such as stronger markets. Or, ideally, it could employees, it was welcomed with themselves? carriers had with their own ‘light brand.’ coming here,” Davis said. “The immedi- Southwest, AirTran and jetBlue. Fending find a way to rejuvenate its Florida tremendous support and cooperation, “It became fairly clear to us that our Could we set up a low-cost airline and ate reaction to Go’s announcement was off the upstarts, however, posed a chal- routes and make money. said John Selvaggio, president of Song. home base here in the Midlands was ripe learn from some of the mistakes before that we would stand and fight.” lenge. Historically, yields in Florida were The third option led to the concept for a low-cost airline,” said Tony Davis, someone actually came into our home Although a radical move by a full- low and, with low-cost carriers entering of Song, Delta’s low-cost “carrier within managing director of bmibaby. “It had base airport and attempted to do that?” service carrier, Davis said the decision the market, were actually spiraling even a carrier.” all the attributes for an airport that a In the summer of 2001, bmi began for bmi to start a low-cost operation further downward. The Atlanta, Georgia- On April 15, Song took to the skies planning its new low-cost operation, but made perfect sense. based carrier knew it had a lot at stake if with its maiden voyage from New York those plans were put on hold after the it didn’t find a radical way to meet the City, New York, to West Palm Beach, events of Sept. 11 of that year. As demands of the changing market in its Florida. The airline, which provides continued on page 32 expected, however, a low-cost airline, continued on page 35

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All of the amenities designed to options that were musical in nature, and environment,” Selvaggio said. “It keeps “The U.K. was at the forefront of benefit passengers make flying enjoy- after sifting through some 600 options, things a little lighter for our employees, the low-cost airline development in able again, Selvaggio said. Song stood out. who we call our talent, by the way, and Europe,” he said. “It became clear to us “The airline business used to be “Everyone has a favorite song,” that transfers to our passengers.” that it was going to become increasingly exciting and romantic,” he said. “We Selvaggio said. “And when you think of With capacity up about 50 percent difficult to compete against low-cost air- have made our planes safe, clean, on your favorite song, you get a smile on year over year in its Florida markets and lines if they started expanding outside Photo courtesy of bmibaby time and affordable, but we’ve kind of your face. That’s how we want our pas- load factors on the rise — between 70 their London hubs. lost the romance along the way. So sengers to come to us and that’s how percent and 77 percent — Song has cer- “If we didn’t adjust our model, we we’ve strived to get that back by intro- we want them to leave … with a smile.” tainly achieved the goal of returning this would effectively end up in a position ducing an airline with a more unique According to Selvaggio, music is a part of Delta’s network to profitability. In where the bmi business at East Midlands universal language that can “calm a lot September, the airline announced it had Airport was unsustainable,” he said. of beasts,” so the carrier plays music carried its one-millionth passenger in In setting up the low-cost carrier, The airline business used to be on its jetways, Web site and airplanes. less than six months of operations. Davis said bmi transferred several 737s “exciting and romantic. We have In keeping with its motif, the carrier asks “We’re taking back our territory, but from its fleet and incorporated traditional made our planes safe, clean, on employees to use musical metaphors we’re not giving (our product) away,” low-cost philosophies, such as a point- time and affordable, but we’ve whenever possible, and even at its Selvaggio said. “Our ticket values are to-point route network, a single cabin, a headquarters, conference rooms are improving every month, and I think it’s single fleet type, half-hour turnarounds, kind of lost the romance along referred to as studios. remarkable that we’ve been able to add distribution nearly exclusively through the way. So we’ve strived to get “In fact, in staying within a musical that much capacity without sacrificing the Internet and foregoing interline that back by introducing an airline lexicon, we ‘auditioned’ our employees,” load factors or ticket value. agreements. with a more unique flavor than he said. “We hired people for attitude — “We have a motto, ‘Song was “We took a very, very, very strict view Tony Davis, the managing director of bmibaby, has seen the airline grow tremendously the ‘traditional’ types. they had to be willing to use their person- founded by optimists and built by believ- of either it was low cost or it wasn’t,” he since it began service in 2002. The airline anticipates carrying 3 million passengers this year. ” ality, have a little fun, make someone’s ers,’” he added. “And the people on my said. “And we resisted the temptation day and simply be there. staff are definitely the optimists, and we to end up with a hybrid. I think some of flavor than the ‘traditional’ types. “We try to keep the spirit of a musical created a nation of believers.” the companies that have struggled are “To some extent Go helped us in growth at a time when the industry is “If we can give our passengers the ones where the hybrid solution is this because Go came into our backyard contracting. choices of things to do while on our preferred because it is perhaps not as and said, ‘We are going to take you “So, it’s really a case of saying, ‘Do

flights, it will make their experience For its single-fleet type, Song chose the Boeing 757, a larger aircraft than the challenging to set up.” on in your home base and effectively you want to be involved in something that much better,” he said. Boeing 737 used by many low-cost carriers. The larger aircraft have a lower unit To further maintain cost controls, all destroy the business you’ve built up that’s growing and has the potential to That mindset is also what led to the new cost because they have 70 percent more seats. employees of bmibaby work under sep- over 35 years at this airport,’” he said. be successful or do you want to take carrier’s identity, a name that “embraced “It was easy for us on that basis, going your chances with the old model, which lots of choices,” Selvaggio said. We’ve tried to adopt the philosophy to our staff (with the idea) that unless in these particular airports is not looking The airline wanted an identity com- “of under-promising and over- we approached this with a radical solu- as strong as it had been historically.’” pletely different from that of any other tion the alternative would be that we The new model has proved to be delivering where historically airline – a light-hearted name with flair could not compete. a success. In June, bmibaby carried a

that was easy to remember yet had Photo courtesy of Song airlines have often over-promised “I think people understood that we record 266,035 passengers, a 153 per- meaning behind it. and under-delivered. as an industry have to change the way cent increase year on year. It broke that “Just about every airline has a name ” we were going to operate in order to record again in July, and in August, the that pretty much ties to geography, such arate contracts with terms and conditions continue to grow our business,” he said. airline broke the 300,000 mark. The carrier as American, United, Continental, more in line with a low-cost operation. “We’re creating jobs because we’re car- also helped the performance of the Eastern, Western, Delta and so on,” The airline also provides different bene- rying a lot more passengers now than group. In July, the bmi group, which Selvaggio said. “We decided that if fits, such as its own profit-sharing plan, we did when the assets were deployed also includes bmi regional, set a record we could get out of that space and not separate from the parent. differently. What we’re trying to do with by carrying 905,000 passengers — be like every other airline, we could go Davis said the current condition of our employee group is manage growth 285,000 of which was carried by anywhere we wanted.” the industry helped convince employees and not manage decline, which would bmibaby — the first time the group While in search for the perfect to “modify the way we work to replicate have been the scenario potentially if exceeded the 900,000 mark. name, the carrier came across many the operating properties of a low-cost we hadn’t created a low-cost carrier. After only 18 months, bmibaby airline.” bmibaby is experiencing significant became the largest airline in the

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Midlands, surpassing British Airways, I think for a long time airlines tried to an extra allowance to bring a laptop from three airplanes in March of 2002 to “Our expectation would have been that which has since slipped to third behind convince themselves that we were a computer on board. 13 today. I don’t believe we could have it would have been quite difficult for us British European. With the phenomenal special case, a special kind of business. “The fares are still low, much lower done that as a complete startup. I don’t as a new company to hold our own. But growth at East Midlands, 300 percent But in reality, when you get back to it, than they historically have been on some know that as a startup in this country we because we’ve got the history and sup- year on year, bmibaby now carries more successful airlines are the ones that come routes,” he said. “But the level of service would have been able to fly 13 aircraft port, and we believe we’re offering a passengers than the parent carrier ever through to the core product. We’re selling you get is perhaps a little bit better than in 18 months.” much better product, we’re finding that Photo courtesy of bmibaby did when it served the airport. a commodity. We no longer view our you are expecting. We’ve tried to adopt Building off the bmi brand has the people who might have migrated “The growth of bmibaby is very business as the ‘Come fly with me’ 1960s the philosophy of under-promising also helped create awareness for the are actually sticking with us.” encouraging,” said Sir Michael Bishop, glamour jet travel. It’s mass transportation.” and over-delivering where historically new airline. Because of the benefits of its asso- chairman of bmi. “We anticipate carry- In setting up a carrier within a car- airlines have often over-promised and “We’ve gone from zero to 3 million ciation with bmi, the low-cost offshoot ing up to 3 million passengers in the rier, bmi officials worked to make sure under-delivered.” passengers a year in an 18-month time incorporated the parent company’s current year, firmly establishing the new low-cost operation would not Davis said there are other benefits scale. And to have penetrated the mar- name into its own to give customers siphon traffic from the full-service or of having ties to a large international the “security and knowledge” that the “We are experiencing 400 percent regional airlines. The three airlines in carrier. The carrier inherited aircraft airline was not a fly-by-night operation the group have been able to differentiate without having to purchase them. It while building a separate identity that “growth year on year because we their product to serve different segments leverages the expertise of the group’s people “felt an affinity to and an under- are part of a group. We’ve gone of the traveling market, Davis said. management, pilots and engineers. It standing of,” he said. from three airplanes in March of Although bmi began at East works with the parent company in areas “I think initially there was quite a lot 2002 to 13 today. I don’t believe Midlands Airport, the parent no longer such as training and safety. It uses the Photo courtesy of bmibaby of surprise within the industry that we’d we could have done that as a com- offers flights there. The parent airline economies of scale from making pur- go with a name like bmibaby,” Davis plete startup. has concentrated on London’s Heathrow chases in conjunction with the parent said. “It was a bold step, which airlines ” Airport, where it is the second largest airline. It also benefits from ties to a are not particularly good at doing — carrier with about 14 percent of the take- strong, well-established brand such as taking a marketing idea, not just trading bmibaby as an important operation in off and landing slots. And bmibaby, bmi, which has received more than 50 on nationality or geographic location, the ‘no-frills’ market and the third which doesn’t even fly to London, has industry awards since 1990, including and trying to come up with something largest operator in the sector.” concentrated on its bases at East repeated recognition as the best domes- that, if nothing else, is memorable.” The key to setting up a successful Midlands, Cardiff and Manchester. tic airline in the United Kingdom. No matter how memorable the low-cost carrier within a carrier, Davis “bmibaby is competing against the bmibaby employees have separate labor Most importantly, Davis said being name, Davis said he knows that contin- contracts from the parent organization, said, was convincing everyone through- traditional charter airlines and the low- part of a larger airline group gives ued success will depend on how well with terms and conditions more in line From its initial three Boeing 737s, out the organization that “this has to be cost airlines, so we go to Spain, Prague, bmibaby the ability to grow at a much the carrier sticks to its low-cost model. with a low-cost carrier. The separate bmibaby in 18 months has expanded a different company.” Belfast — high-volume, leisure markets,” contracts represent one of the methods faster rate than it would have as an to 13 aircraft serving more than 25 “Really, it’s a lean, compact business “You cannot just paint the airplanes he said. “Whereas bmi is focusing on the carrier utilizes to manage costs. independent. With access to trained destinations throughout Europe. model, which is all about volume, high and hope that this will function as a sep- Heathrow, and our regional business is pilots and crew, aircraft, financial occupancy, high utilization and making arate operating model,” he said. “We had developing key business routes from resources and know-how, bmibaby sure every flight is as full as you can to get buy in from the very top that said Scotland, Manchester and Leeds/Bradford. “We are looking to offer a slightly has significant advantages over a pure ket sufficiently against some fairly big possibly make it,” he said. “People talk this is a different airline. It can benefit “The three airlines within bmi each higher level of service than that of some start-up, he said. competitors like easyJet and Ryanair about target load factors. You should from a lot of the history, experience and have a particular cost base, market pres- of our competitors,” Davis said, “partly “We are experiencing 400 percent without at least some awareness of our be aiming to fill every flight, every seat. financial stability of the parent company, ence and a consumer proposition,” he because we are part of a group and growth year on year because we are parent company would have cost a lot There’s no, ‘We’ll accept 65 percent load but it has to conduct itself on a like-to- continued. “Really, we have the best have other companies that use the same part of a group,” he said. “We’ve gone more in advertising spend,” Davis said. factors’ anymore.” like basis with its primary competitor.” opportunity now to make sure we put name. As part of a family, you have to Another key, Davis said, involves the right vehicle into the right market, at least uphold a level of presentation changing the way airlines view them- ensuring we can compete effectively that’s acceptable to the whole family.” selves and their product. against whoever else is incumbent in While offering low fares, Davis said “The biggest thing we have learned those markets.” bmibaby’s enhanced level of service is to stop thinking of ourselves as being Although incorporating many low- includes extras such as assigned seating a special type of business,” Davis said. cost principles, bmibaby’s ties to a rather than asking passengers to “make +count it up 10 — Number of languages spoken 300 — Number of contracts “We’re in the retail business. We sell larger group have caused it to modify a fairly desperate dash toward the airplane by members of the Sabre Airline signed with Sabre Airline Solutions seats. Other people sell books or groceries. some aspects of the low-fare model. to secure a seat” and giving passengers Solutions consulting team. during 2002.

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