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Airlines facing survival of fittest
WASHINGTON (Star-Telegram) - The ongoing expansion of discount airlines will continue to put intense pressure on the major carriers, possibly resulting in additional bankruptcies and consolidation over the next few years, industry experts said at an airline conference Wednesday.
But there will be survivors, industry observers said. The airlines that overcome the competitive challenges will be those that can get their costs under control. But some experts argued that other wrenching changes to the industry are needed before the large airlines can reach long-term profitability.
Today, traditional carriers must give passengers a reason to choose them over their low-fare rivals, some of which offer amenities like satellite television and leather seats and have developed loyal followings, said Michael Levine, a law professor at Yale University who is a former executive of Northwest and Continental airlines.
"Most [airline executives] don't seem to understand that you need some kind of strategic advantage," said Levine, who was involved in deregulating the industry in the late 1970s as an official with the U.S. Civil Aeronautics Board. "Just having airplanes isn't enough."
The conference, organized by Embry-Riddle Aeronautical University, featured a slate of industry figures who spoke on the effect that discount airlines like Dallas-based Southwest Airlines are having on larger carriers like American and United Airlines.
Most agreed that the havoc discounters have wreaked on their larger counterparts during the past three years is likely to continue, given ambitious expansion plans announced recently by airlines like JetBlue Airways, Spirit Airlines and AirTran Airways.
That expansion is even having an effect at Dallas/Fort Worth Airport, which is dominated by Fort Worth-based American and does not typically feature deeply discounted fares. AirTran has recently been expanding its D/FW presence, and executives with Spirit and JetBlue have said they hope to begin serving the airport within the next few years.
"The low-cost carriers are now targeting the long-haul markets," said Daniel Kasper, a transportation analyst and managing director of consulting firm LECG. The trend is "ominous" for the major airlines, he said, because they traditionally make more money on longer routes such as coast-to-coast flights.
But it would be a mistake for the large carriers to abandon their traditional hub-and-spoke business model, Kasper said. By funneling passengers from small communities through hub airports, airlines bring in revenue that would otherwise be lost.
"The problem is not the [business] model, the problem is the costs," he said, arguing that airline expenses must be reduced to compensate for cheaper air fares.
All of the major carriers have been working to reduce costs. United and US Airways filed for bankruptcy protection to renegotiate contracts and gain concessions from employees.
American is working to cut $4 billion in annual costs through labor cuts and more efficient operations. It reached a voluntary concessions deal with union employees last year that kept the carrier out of bankruptcy.
And executives at struggling Delta Air Lines, which has some of the highest labor costs in the industry, have recently been hinting that bankruptcy could be the only solution to the airline's woes.
But the cost cuts enacted so far haven't been enough to bring the airlines back to sustained profitability. The industry is projected to lose more than $1 billion this year, in part because of heavy competition and high fuel prices.
Robert Gordon, an economics professor at Northwestern University who studies the airline industry, said airlines should boost international travel, which is one of the industry's most profitable segments. He also suggested increased use of cost-efficient regional jets, preferably flown by affiliate airlines that have lower labor costs.
Several experts said that traditional fare pricing, which often features more than 25 fares for a single flight, must be simplified.
Still, some of the six major carriers may not endure, said Patrick Murphy, a partner with consulting firm Gerchick-Murphy Associates who focuses on aviation and transportation. He expects more mergers.
Levine, the Yale professor, said he can envision more bankruptcies, especially if the economy takes another downturn.
The traditional carriers are "a bunch of folks clinging to an iceberg, drifting south," he said. "Some are lower on the ice than others, but even they will eventually meet the fate of all icebergs that drift south."
WASHINGTON (Star-Telegram) - The ongoing expansion of discount airlines will continue to put intense pressure on the major carriers, possibly resulting in additional bankruptcies and consolidation over the next few years, industry experts said at an airline conference Wednesday.
But there will be survivors, industry observers said. The airlines that overcome the competitive challenges will be those that can get their costs under control. But some experts argued that other wrenching changes to the industry are needed before the large airlines can reach long-term profitability.
Today, traditional carriers must give passengers a reason to choose them over their low-fare rivals, some of which offer amenities like satellite television and leather seats and have developed loyal followings, said Michael Levine, a law professor at Yale University who is a former executive of Northwest and Continental airlines.
"Most [airline executives] don't seem to understand that you need some kind of strategic advantage," said Levine, who was involved in deregulating the industry in the late 1970s as an official with the U.S. Civil Aeronautics Board. "Just having airplanes isn't enough."
The conference, organized by Embry-Riddle Aeronautical University, featured a slate of industry figures who spoke on the effect that discount airlines like Dallas-based Southwest Airlines are having on larger carriers like American and United Airlines.
Most agreed that the havoc discounters have wreaked on their larger counterparts during the past three years is likely to continue, given ambitious expansion plans announced recently by airlines like JetBlue Airways, Spirit Airlines and AirTran Airways.
That expansion is even having an effect at Dallas/Fort Worth Airport, which is dominated by Fort Worth-based American and does not typically feature deeply discounted fares. AirTran has recently been expanding its D/FW presence, and executives with Spirit and JetBlue have said they hope to begin serving the airport within the next few years.
"The low-cost carriers are now targeting the long-haul markets," said Daniel Kasper, a transportation analyst and managing director of consulting firm LECG. The trend is "ominous" for the major airlines, he said, because they traditionally make more money on longer routes such as coast-to-coast flights.
But it would be a mistake for the large carriers to abandon their traditional hub-and-spoke business model, Kasper said. By funneling passengers from small communities through hub airports, airlines bring in revenue that would otherwise be lost.
"The problem is not the [business] model, the problem is the costs," he said, arguing that airline expenses must be reduced to compensate for cheaper air fares.
All of the major carriers have been working to reduce costs. United and US Airways filed for bankruptcy protection to renegotiate contracts and gain concessions from employees.
American is working to cut $4 billion in annual costs through labor cuts and more efficient operations. It reached a voluntary concessions deal with union employees last year that kept the carrier out of bankruptcy.
And executives at struggling Delta Air Lines, which has some of the highest labor costs in the industry, have recently been hinting that bankruptcy could be the only solution to the airline's woes.
But the cost cuts enacted so far haven't been enough to bring the airlines back to sustained profitability. The industry is projected to lose more than $1 billion this year, in part because of heavy competition and high fuel prices.
Robert Gordon, an economics professor at Northwestern University who studies the airline industry, said airlines should boost international travel, which is one of the industry's most profitable segments. He also suggested increased use of cost-efficient regional jets, preferably flown by affiliate airlines that have lower labor costs.
Several experts said that traditional fare pricing, which often features more than 25 fares for a single flight, must be simplified.
Still, some of the six major carriers may not endure, said Patrick Murphy, a partner with consulting firm Gerchick-Murphy Associates who focuses on aviation and transportation. He expects more mergers.
Levine, the Yale professor, said he can envision more bankruptcies, especially if the economy takes another downturn.
The traditional carriers are "a bunch of folks clinging to an iceberg, drifting south," he said. "Some are lower on the ice than others, but even they will eventually meet the fate of all icebergs that drift south."
