Doug sees consolidation

[700UW]

story

 

[Dog Wonder]

Talking and doing are very different things.

 

[CallawayGolf]

Not much new here. Doug has been advocating consolidation of the majors since before he took the CFO job at AWA. The message has always been: too many hubs and too much market fragmentation leading to irrational pricing. For decades the airlines have barely been able to cover operating costs in the “goodâ€￾ years and then generate massive losses and shareholder devaluation in the not so good years. The Big Five must become the Big Three if profits, shareholder returns on investment, and employee wages are to enter the healthy range for the first time since deregulation. The only way to accomplish this is to leverage higher fares through reduced competition. Consolidation reduces competition so it is the single best hope of the industry.

In most industries the free market forces would sort out the winners and losers so that there isn’t a sustained period of overcapacity and price discounting below operating costs. However, the major airlines have taken numerous trips into bankruptcy court which is incapable of solving the real problem of irrational fares. Since the majors are “too big to failâ€￾, the courts force creditor and labor concessions and put the reorganized bankrupt carrier back into the same oversaturated market that was the root cause of their financial woes in the first place. Because the root cause issue is never resolved, groups such as labor, suppliers and shareholders all continue to take a financial beating so the customers can enjoy a subsidized ride to the destinations of their choice. If the bankruptcy court would have let UA, DL, NW, or US fail (liquidate) over the past decade, then consolidation would have already happened through natural market forces and rational fares would be much more likely, even in the recession.

 

[Black Magic]

Its no secret that consolidation would be good for business and airline employees. Less competition equals being able to raise fares. As a customer it would be very bad as ticket prices will be driven triple what they are now. Thats something that Doug won't be mentioning in his interviews.

 

[700UW]

consolidation is bad for employees

 

[CallawayGolf]

Its no secret that consolidation would be good for business and airline employees. Less competition equals being able to raise fares. As a customer it would be very bad as ticket prices will be driven triple what they are now. Thats something that Doug won't be mentioning in his interviews.

Within the bounds of legality, decency, and prudency I think Doug is a fairly straight-talking CEO. Fares must go up for the industry to be healthy. I doubt many rational individuals would question that when looking at the facts. However we now live in society that abhors hearing a valid truth that society in general doesn’t like. Society collectively says “Lie to me or keep silent, but never, ever tell me the truth.â€￾ So Doug, like every successful public figure, can be expected to use innocuous terms like “fragmentationâ€￾ and “irrational route networksâ€￾ unless pushed to give a plain-spoken answer. It’s this truth-hating culture that managed to elect the least experienced president in history who never told us what his political beliefs were other than “change we can believe inâ€￾.

 

[cynic]

Not much new here. Doug has been advocating consolidation of the majors since before he took the CFO job at AWA. The message has always been: too many hubs and too much market fragmentation leading to irrational pricing. For decades the airlines have barely been able to cover operating costs in the “goodâ€￾ years and then generate massive losses and shareholder devaluation in the not so good years. The Big Five must become the Big Three if profits, shareholder returns on investment, and employee wages are to enter the healthy range for the first time since deregulation. The only way to accomplish this is to leverage higher fares through reduced competition. Consolidation reduces competition so it is the single best hope of the industry.

In most industries the free market forces would sort out the winners and losers so that there isn’t a sustained period of overcapacity and price discounting below operating costs. However, the major airlines have taken numerous trips into bankruptcy court which is incapable of solving the real problem of irrational fares. Since the majors are “too big to failâ€￾, the courts force creditor and labor concessions and put the reorganized bankrupt carrier back into the same oversaturated market that was the root cause of their financial woes in the first place. Because the root cause issue is never resolved, groups such as labor, suppliers and shareholders all continue to take a financial beating so the customers can enjoy a subsidized ride to the destinations of their choice. If the bankruptcy court would have let UA, DL, NW, or US fail (liquidate) over the past decade, then consolidation would have already happened through natural market forces and rational fares would be much more likely, even in the recession.

That's a great theory but any time there is consolidation and rationalization, someone decides to expand or start a new airline.

 

[CallawayGolf]

That's a great theory but any time there is consolidation and rationalization, someone decides to expand or start a new airline.

I wouldn't disagree. But for every mildly successful Virgin America or Spirit startup there is a SkyBus or MaxJet ceasing operations. The total number of new entrants is nearly equal to the number of failed airlines every year. I don't think a startup airline would take a healthy $30B airline to its knees. Go! tried to undercut both Aloha and Hawaiian airlines by selling seats below cost. They took out the weaker of the two through cut throat competition but then paid the price for it later (in addition to their corporate espionage actions).

 

[CallawayGolf]

consolidation is bad for employees

Sure, just like an appendectomy offers no benefit to a healthy person, but it can be life-saving for a person with an appendix which is about to burst. The airline industry needs to regain health through consolidation or employees will continue to suffer with low wages, furloughs, and underfunded working environments. Perhaps a healthy, robust airline industry will add jobs and increase wages rather than the same old story employees are accustomed to. It's all but certain an unhealthy one will not.

 

[700UW]

Have you ever been part of a merger? The end result is ALWAYS jobs lost, maybe not right at first, but when they dont cut the overlap right away it still does happen down the road.

 

[SS255]

I don't entirely agree that fares are "too low." The cheap fares are too low, but for every dirt cheap fare there is an equal and opposite extortion fare at the other end of the spectrum that clearly delivers far less than what the customer paid. And the customer service at both ends of the spectrum is usually lousy.

WN is a perfect example of how to run a profitable airline. The "legacies" are not losing money because of WN. They are losing money because their business model is fundamentally flawed, and their customer service stinks. The first legacy to rationalize fares and make good customer service a priority will come out ahead.

 

[SparrowHawk]

OK so what is Doug Parker now the Punxatawney Phil of commercial aviation?

What happened did Doug see his shadow? Now we're going to have another year of mediocrity at US Airways while he tries to engineer a merger that will allow him to cash out BIG TIME??

Is that the new Grand Plan?

 

[Black Magic]

consolidation is bad for employees

This is a double edge sword. When you have less competition enabling a company to raise fares to make good profits you are able to pay all employee groups more. The downside is to get to that point certain employee groups will get cut because of downsizing or elimination of airline hubs. After all the smoke clears everyone should be making more money though in theory.

Doug has used the example of UPS and Fedex often, how there employees make substantially more money than the "big 5 airline employees" because they only compete with eachother instead of 5 helping them turn nice profits.

 

[luvthe9]

I guess we need to consolidate, we all know Parker and is team are to stupid to actually run an airline, one with even the lowest labor costs.

 

[Black Magic]

Within the bounds of legality, decency, and prudency I think Doug is a fairly straight-talking CEO. Fares must go up for the industry to be healthy. I doubt many rational individuals would question that when looking at the facts. However we now live in society that abhors hearing a valid truth that society in general doesn’t like. Society collectively says “Lie to me or keep silent, but never, ever tell me the truth.†So Doug, like every successful public figure, can be expected to use innocuous terms like “fragmentation†and “irrational route networks†unless pushed to give a plain-spoken answer. It’s this truth-hating culture that managed to elect the least experienced president in history who never told us what his political beliefs were other than “change we can believe inâ€.

I think its the opposite. People want to hear the truth. But Doug is not going to flat out say airline fares are going to rise dramatically after consolidation because the public won't be supportive to the idea and cry foul.