Airlines Realize It''s Time for a New Flight Plan



Airlines Realize It''s Time for a New Flight Plan
NEW YORK (New York Times) - Who changed the economics of the airline industry, killing its main business model and leaving so many carriers in debt and in disarray? Look to the vanishing business executive and a gang of orange and red jets.
With airline losses likely to exceed $9 billion this year and with the looming bankruptcy of United Airlines, the search for a new industry model has gained speed. Airline management is likely to undertake its most serious battle in years with organized labor. Industry giants like United will try to become more like their nimble low-fare rivals, scheduling their flights more efficiently even if it means less convenience for their customers. Passengers, though faced with few immediate changes, may soon be forced to acknowledge the gap between the level of service they want and the one they are willing to pay for.
The reckoning has begun.
The path to this overhaul winds all the way back to the deregulation of the industry in 1978, when airlines won the right to compete with one another on price. But the inevitable was delayed by the fitful growth of start-up carriers and the willingness of corporate America during the 1990''s bubble to pay almost any price for a seat.
These days, those spendthrift executives have vanished, thanks to corporate cost-cutting and the complications of travel after the terrorist attacks last year. And the orange and red Boeing 737''s of Southwest Airlines have spread to almost every part of the country, bringing price competition to many routes that full-fare carriers once dominated. Imitators of Southwest, like JetBlue Airways, based in New York, have added to the established airlines'' troubles.
Airlines have steadfastly resisted abandoning their business model, and they''re still drowning in a pool of red ink, said Bob Harrell, a travel consultant in New York. Finally, he said, they have concluded that doing nothing is no longer an option.
Even an unexpectedly fast economic rebound, and the new corporate spending it would bring, are unlikely to restore the industry''s old profits. With the rise of the Internet, vacationers and road warriors are on a nearly equal technological footing with the industry itself, and passengers can save hundreds of dollars merely by making minor changes in their travel plans.
These pressures will force United — which is expected to file for bankruptcy protection as early as this weekend — and other big airlines to look for cost savings above all else, executives and analysts say. As if that were not hard enough, the big airlines will need to reduce expenses even as they are cutting last-minute fares — as some have begun to do in recent weeks — to win back business travelers from discount carriers.
Without business travelers to foot the bill, the extensive networks of frequent flights that the airlines have built up over the last decade will probably shrink. More passengers may be left with a choice between the convenience of a nearby airport, say, and the savings made possible by bare-bones efficiency.
The public is not willing to support the levels of airline service that we''ve had in the past, said Alfred E. Kahn, an economist who oversaw much of the industry''s deregulation as a government official in the 1970''s. Airlines are going to have to shrink their operations in some way.

THAT seems clear. US Airways filed for bankruptcy in August. American Airlines, Delta Air Lines and almost all the other large carriers, except Southwest, continue to lose money, as they have for almost two years.
Many industry executives say a Chapter 11 bankruptcy filing by United, which was pushed to the brink last week when the federal government rejected its plea for $1.8 billion in loan guarantees, will give it leverage over its unions that it has not had in years. Government officials called United''s problems too deep to be solved by a cash infusion.
You have powers in a Chapter 11 world you don''t have when you''re outside, said Douglas M. Steenland, the president of Northwest Airlines. You can avoid paying debt, reject leases on airplanes and get collective bargaining agreements restructured.
With the ability to renegotiate labor contracts based on the industry''s new realities, rather than those of the late 90''s, United could try to fulfill airline executives'' longtime dream of cutting the high wages of pilots and some other employees.
It could create a ripple effect, said Jim Corridore, an analyst at Standard & Poor''s. They''ll have a huge competitive advantage over AMR and Delta, who might have to do the same thing — file for Chapter 11 — to get an advantage. It''s in the realm of reality.
Although executives at American, a unit of the AMR Corporation, say they have no plans to file for bankruptcy, they say they will ask their workers to accept a pay cut if United''s workers accept one.
Airline unions still have significant power — because of their long history of success and the fact that many airline workers are hard to replace — and they will fight attempts to cut salaries. Faced with a shrinking industry and little ability to find new jobs at similar pay, however, workers may show less resolve than they have in the past.
While union concessions would put the industry on firmer financial footing, they might also create problems of their own. The concessions would be yet another force weakening the job market, which shows little sign of recovering from the recession last year. Falling wages and disappearing jobs could also create morale problems in an industry in which small errors can produce tragedy.
But all the turmoil also creates an opportunity for airlines, travel experts say.
Even as the price to fly a mile has fallen roughly in half, adjusted for inflation, since deregulation, and even as airlines have built an impressive safety record, travelers have grown frustrated with the irritations of the industry. Pilots and gate agents often underestimate delays when speaking to passengers. Planes sometimes land on time only to sit idle on runways waiting for empty gates. Frequent-flier award tickets to Hawaii or Europe must sometimes be reserved almost a year in advance.
Discounters like Southwest and JetBlue, however, have generally avoided travelers'' anger — and won their loyalty — by clearly explaining what their airlines offer and what they do not. As United and others rethink their own ambitions, they have a chance to offer the public a similarly realistic picture of their business.
When you fly a well-run low-cost airline, said Robert C. Yeager, an international relations consultant based in Oakland who flew to New York on JetBlue last week, you really realize what United is trying to fight.
In recent weeks, American, Continental Airlines and Delta have taken a significant step toward revving up business by lowering some full fares. In the short run, analysts say, the moves may worsen the airlines'' plight by further draining their revenue from business travelers. But the lower fares will succeed if they eventually wean some travelers from advance-purchase tickets and woo them from discount airlines.
They have to change their fare structure, said Hal F. Rosenbluth, the chairman of Rosenbluth International, a large travel agency based in Philadelphia. They''re all losing money.
In its experiment, American has already cut fares on about 25 routes, including Dallas-Los Angeles, Dallas-Cleveland, New York-Albuquerque and Baltimore-Kansas City. Southwest serves many of the cities on American''s list.
In some markets in the airlines'' experiments, last-minute fares have fallen by about one-third. Even though air travel has fallen sharply since the terrorist attacks last year, these reductions are among the first moves to lower business fares officially, rather than by offering bulk discounts to companies.
The days of the $3,000 walk-up fare from New York to L.A. are over, said Holly Hegeman, an aviation industry analyst at in Covington, La.
Of course, relatively few people buy full-fare tickets. The more important changes will probably occur at the price levels between expensive last-minute fares and cheaper advance-purchase fares.
At those levels, airlines are likely to reduce prices and impose stricter rules. A traveler will sometimes receive a discount for buying a ticket at least 10 days in advance, even if the trip does not include a Saturday night, but the traveler will be punished for failing to stick to that schedule.
Starting on Oct. 1, many airlines made so-called nonrefundable tickets true to the term. If travelers miss a flight without rescheduling it — and paying a penalty — on the same day, they often lose the entire value of the ticket. On Jan. 1, passengers who want to take a different flight on the same day as their original trip will sometimes have to pay $100, Rosenbluth International said.
In effect, the industry is offering business travelers a compromise. Airlines will stop charging so much for last-minute tickets, but they will no longer allow passengers to buy inexpensive tickets and then change itineraries.
Leisure travelers are unlikely to benefit from the changes. In recent years, whatever complaints they may have had, travelers have often received the comforts and flight schedules of full-fare service while paying discount prices as the major airlines have tried to match the discounters.
With fewer business travelers on board, airlines have already eliminated some flights and plan to cancel more. To satisfy its creditors, United is likely to make the deepest and quickest cuts. J .P. Morgan Chase predicts that United''s capacity will shrink 10 to 12 percent next year.
That will not be enough to solve the industry''s problems, though, executives say.
We need a system where you can go from anywhere to anywhere with just one stop, said David Neeleman, president of JetBlue. But do we need 10 different hubs with six different airlines to do that? I don''t think so.
Gordon M. Bethune, chief executive of Continental, said he thought that a 15 percent cut in flights across the nation''s air system would allow airlines to become profitable.
Most analysts do not expect airlines to abandon their hub-and-spoke systems, which allow them to route passengers from smaller cities through a few big airports. But American has begun to tinker with a rolling hub operation, which is a step closer to Southwest''s system of keeping planes on the ground for as little time as possible, rather than scheduling flights to meet consumers'' convenience.
By spreading flights more evenly throughout a day, Southwest and other discounters need fewer workers to service each plane and can charge less for tickets. For that reason, among others, Southwest needed to spend less than 8 cents for every mile that one of its seats flew last year. At all of the full-fare carriers, per-seat costs exceeded 10 cents, according to Back Aviation Solutions, a research company based in New Haven.
The discounters do require longer waits between connecting flights, on average, but travelers have generally accepted the trade-off, helping Southwest and others to increase their market share.
As Ron Kuhlmann, vice president of Unisys R2A, a transportation consulting firm in Hayward, Calif., said, If it''s 20 minutes longer, nobody cares.

STILL, the market for better, more expensive service will almost certainly not disappear. For United, American and others whose costs will remain higher than Southwest''s, the key to profitability will depend largely on their ability to persuade passengers that their service is worth the premium price.
Continental, itself a survivor of multiple bankruptcies, offers some reason for hope. After suffering from some of the industry''s worst labor relations and nearly folding, the airline has rebuilt itself in recent years as the favored carrier of many frequent travelers by adopting the most lenient rules for first-class upgrades.
The company loses revenue by selling fewer first-class seats and leaving them open for upgrades. But it has won the loyalty of many travelers, and its revenue has declined less during the last two years than that of most rivals.
They had to have a gimmick, and it served them well, said Randy Petersen, publisher of InsideFlyer, a magazine specializing in travel loyalty programs. Continental would probably not be in existence but for the frequent-flier program.
That example is not a wholly reassuring one for executives at United or US Airways. Continental is still losing millions of dollars today, suggesting that the tinkering of the recent past may not be enough to solve the industry''s current problems.
No one''s ever made a lot of money in this business, said Mr. Neeleman of JetBlue. People think you can''t be both efficient and take care of your customers, but that''s what you have to do to be successful now. As the large airlines can now see, the rivals that are doing that are not only surviving, but are also making money.