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

30 ascend october 2003 31 industry continued from page 30

Every department assisted in setting up Because it is an offshoot of a well- resource, and at the same time, you’re “If you feel you can make the rev- said. “Our passengers have access to the new operation. established brand, the carrier wasn’t getting better utilization of your people enue side of the equation work, you’ll live, all-digital satellite television pro- “I think people were in the mood to burdened with a large capital outlay or and your airports. come out ahead,” said Selvaggio. “True, gramming, digitally streamed MP3 do something different and build a win- the need to purchase or lease several “It doesn’t cost more to lease the you’re going to have about a 30 percent audio programming, pay-per-view pro- ner, and everybody wanted to be part of new aircraft and bid on new airport aircraft or the gates,” he added. “And higher operating cost, but you’ve got gramming and an array of video games. the team,” Selvaggio said. “So while it in most cases, you don’t need additional an opportunity to make 70 percent And to top it off, we offer buy-on-board was a challenge in that we were always staff. It’s just that they have less down- more revenue.” snacks and meals.” up against the media and Wall Street time in between flights. So we found we The structural savings allowed Song Passengers can purchase meals saying it couldn’t be done, we found could do this at very low marginal costs to maintain the same employee pay scales onboard, including freshly made sand- that there were more optimists in the while putting more seats into the market as its parent company, from where it wiches, salads and wraps; healthy

world, and fortunately, a lot of them Photo courtesy of Song place, and that’s how we drove our cost drew the majority of its employees. snacks such as yogurt, breakfast bars work for Delta.” structure down — we simply optimize “Many of our flight attendants and juices; old standards such as chips In creating a new low-cost carrier, the use of our assets. make more money now than they did and candy; and top-shelf cocktails — Delta learned from its experience with “We knew that to get the utilization when they flew for the mother airline, Cosmopolitans, Martinis and Mimosas. its earlier carrier within a carrier, Delta we needed, we had to turn them (air- but they’re working more flights and “People hate airline food, but they Express, which started in the late ’90s planes) faster, which meant we wouldn’t more hours,” Selvaggio said. “We’ve still love to eat,” Selvaggio said. “And connecting airports in the northeast be able to offer some of the amenities, changed the methodology in the struc- people will eat no matter what the airline United States to Florida. such as pre-departure cocktails or special ture of how people get paid, but it “We had a pretty strong position in boarding privileges, that Delta’s frequent encourages them to fly more. And the We have a motto, ‘Song was Florida, and we weren’t making money flyers were getting,” Selvaggio said. “We same thing with our ground employees “founded by optimists and built the way it was being served, so we needed to be different from our mother — they’re paid the same, but they’re by believers.’ And the people decided to find a way to lower costs,” company. That was very important since working more flights in their eight-hour Under the leadership of President John said Selvaggio. we were going to offer an all-coach shift, so there’s potential to earn more on my staff are definitely the Selvaggio, Song has helped Delta Air “Our costs kept going up,” he product on a bigger airplane.” money. Our pilots are on the same pay optimists, and we created a Lines reassert its dominance in the added. “Delta Express had been serving Florida market. As a member of the Delta family, scale as Delta pilots as well, but the pay nation of believers. our Florida markets since 1996, well the new airline had to maintain a certain rates are just a byproduct of the way we ” before low-cost carriers moved in there. level of service to keep the overall com- schedule the airplanes; they’ll (pilots) Over time, the cost structure had really slots. Those were all advantages the pany’s reputation intact. Initially, many have more productive flying.” offers them. So we said, ‘Suppose we increased. Cabin crew and ground labor parent airline passed down. people thought Song would be a “less-than- In addition to its fleet and pay struc- offered food our passengers would costs increased and maintenance costs “That’s why we are flying 36 aircraft Delta” product, which, Selvaggio said, is ture, Song has incorporated other changes actually enjoy.’ With that, we decided to

on its 737-200s rose dramatically.” rather than a handful or less,” Selvaggio what most offshoot carriers have been. Illustration courtesy of Song to the traditional low-cost model. stock brands people recognize and like, said. “We’ve moved very quickly. We “It’s always been less than the Unlike many independent low-cost and we give our customers the option We had to create an entirely new have airport facilities. We have trained mother brand,” Selvaggio said. “And Song employees sport stylish uniforms airlines, Song offers its passengers to buy on board if they so desire. and accessories created by designers “ staff. We have all those things available to we decided that our new operation was SkyMiles from its parent company’s Selling brand-name food products airline with a brand of its own. Kate and Andy Spade. Female flight ” us. We didn’t have to start from scratch, going to be different from, but not less frequent flyer program. on its flights meets the needs of Song’s attendants take to the skies in Kate Spade get a certificate and try to launch this than, our parent operation.” uniforms while male employees “That’s a big advantage over our core customers — females between the Forming Song, therefore, “wasn’t airline without all the necessities.” In starting the new airline, Delta wear “Jack Spade” created by Andy. competition,” Selvaggio said. “We’ll ages of 34 and 56 — who typically want a matter of swapping a few aircraft and Yet, Song also needed to become a replaced the 737-200s on many of its meet the competitive fares of anybody, a better quality of food, especially for calling it Delta Express version 2.0,” completely different product than its Florida routes with Song’s 757s, which and on top of that, we offer rewards for their kids. Selvaggio said. “We had to create an parent company, Selvaggio said. have a lower unit cost but also have only work on a bigger plane if we were flying with us.” “We realize that women are a very entirely new airline with a brand of its “You get the lower cost structure more seats to fill. able to fill the seats.” Song also offers other amenities fast growing component of all travel,” own.” by reducing ground time and getting “Changing out aircraft types was Although the 757s cost about 30 to differentiate itself from its low-cost Selvaggio said. “In terms of leisure Starting a carrier within a carrier full utilization out of your fleet by sched- part of a strategy to create a low-cost percent more to operate than the 737- competitors. travel, they book about 75 percent, and was much simpler in many ways than uling more flights per day on the same airline,” Selvaggio said. “And we knew 200s, they have nearly 70 percent more “We have a minimum pitch of 33 they book about 90 percent of Internet it would have been for an independent, airplane,” said Selvaggio. “If you can if we were going to do this, we better seats. If Song could fill the extra seats, inches between our all-leather seats that and family vacation travel as well. Selvaggio said, in large part due to the get four flights a day rather than three have a pretty good brand because we it would more than offset the additional are equipped with personal video moni- Having a strong presence in Florida — resources available from the parent out of a single aircraft, you’re generat- were going to have to drive a lot more operating costs, and Song would come tors incorporating touch-screen technology a high vacation destination — we chose company. ing additional revenue with that revenue, and the low-cost model would out on top. and credit card ‘swipe’ capability,” he to target females in that age group.”

32 ascend october 2003 33 industry continued from page 30

32 ascend october 2003 33 industry continued from page 31

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

october 2003 35