Fuel Prices And Emminent Failure

[The Dissident]

Fuel Prices: They Probably Won't Go Down...
But An Airline Failure Won't Fix The Problem

The industry has record load factors. And, record losses.

It's ugly. United is petitioning the bankruptcy court to terminate the carrier's pension funds. It's also asking for yet more employee concessions. More layoffs are being planned. American is getting ready for more reductions in employee headcount. Delta is teetering on the brink of a Chapter 11 filing. US Airways is going for more employee concessions.

Missing The Forest For The Sawmill. With all this going on , standby for the usual media suspects to file a gazillion stories on the ills of legacy carriers, and about how the problems are mostly self-inflicted. They will point out how "low-cost" carriers are making money, supposedly. Some will go into the "bankruptcy keeps cadavers alive" nonsense. Some will "discover" the fact that yields have been falling in real terms since 1978, and conclude that "it's not oil prices" but instead it's a combination of bad management, poor planning, and a "broken model."

The entire article can be read here:

http://www.aviationplanning.com/asrc1.htm

 

[mjk]

I find it funny that you stopped where you did and what you made red for emphasis. You do get points for at least posting the link, however.

The exerpt that follows your "red text" goes like this:

Here's A Flash: By And Large, The Industry Did Fix Itself. Based on the traditional cost and revenue trends, most legacy carriers did in fact accomplish most of the necessary structural adjustments to deal with the new cost and yield environment. Forget the nonsense that this is just more of the same descent into airline hell that started long before 9/11. The truth is that most legacies fixed the fundamentals of that problem. No sooner than that was accomplished, another, separate, disaster struck. Oil nearly doubled. The price of airplane go-juice went up like a Saturn rocket.

Many in the media ignore the fact that had oil stayed even vaguely close to what most people had forecast in late 2003, the airline industry would be well on the way to recovery. Example: if oil prices had been where they were a year ago, American Airlines' third quarter results would have been among the best in its history.

 

[whlinder]

In constant dollars, fuel is less than it was in the early 80s. Of course passenger yields have fallen pretty much every year since then. Today's industry yield is almost half what it was in 1982 in constant dollars.

 

[flyhigh]

...and last but not least...the guy who runs this "consulting company" is a pilot. Not sure how much stock I'd put in his analysis. There is definitely plenty of blame to go around...I'd peg a lot of the legacy carrier problem on the inability to change environments. If you were building an airline today (as most of the LCC's have) would you build what any legacy carrier has? I'm not so sure. We can't want legacy carriers to be the same AND profitable. The model isn't working. However, the changes are largely structural. Is an airline an aircraft overhaul company? The LCC's model would say no...the legacy model says yes. That is just one of many examples where structural issues build before deregulation are hard to remove from the business.

 

[WorldTraveler]

There are some basic inaccuracies in this article. Airlines don’t raise fares because there is too much capacity in the industry to justify increasing them. Since all airlines loathe having unused capacity (and a departed seat with no revenue is far worse than a seat with at least a little revenue), every airline is forced to match the lowest competitor. Consumers don’t really have a say in the pricing of the airline product; airlines do. If capacity disappears from the industry, every other airline will benefit. If the failed airline flew routes that are valuable enough for another carrier to fly, competitors will reposition or acquire aircraft to take advantage of that opportunity. In every case, the least profitable service will disappear.

While it’s nice to argue that small cities will be harmed by a shutdown in the airline system, there really are very few cities that are served by one airline and in most cases that one airline is providing that service under a subsidy of some sort. There certainly are more cities with two airlines but even there the loss of one airline does not necessarily result in a loss of service. In many cases, the remaining carrier adds service based on its expectation of making a profit.

This business cycle is unique in that there is very little additional capacity coming on line in the next couple years by the legacy airlines but there is a considerable amount of capacity coming to low cost carriers. The smart legacy airlines will restructure their business model so that they can compete with LCCs but will use their best advantage – the size of their network - as their advantage rather than their liability.

Regardless of what Boyd thinks, there will be legacy carriers that will fail solely because they cannot adapt to the new business environment. We see two airlines in the US that are so alienating their employees that their ability to continue is questionable in light of the key role employees play in the service industry. Ultimately, it won't be fuel or terrorism that sink airlines but employees. And the employee component includes staffing levels and not just the response of each employee. You simply cannot expect employees to endure the cuts many in the airline industry are enduring and continue to provide service comparable to employees at airlines that have not cut so deeply and still have a great reputation for customer service.

 

[JS]

...
While it’s nice to argue that small cities will be harmed by a shutdown in the airline system, there really are very few cities that are served by one airline and in most cases that one airline is providing that service under a subsidy of some sort. There certainly are more cities with two airlines but even there the loss of one airline does not necessarily result in a loss of service. In many cases, the remaining carrier adds service based on its expectation of making a profit.
...

According to my research, of the 406 airports in the lower 48 with scheduled passenger air service, 176 of them are served by just one airline. USAirways Express flies to 34 of those 176.

That's 43% of the airports, which is in the minority, but far more than "very few".

On the other hand, if USAirways, Inc. liquidates, the contract carriers such as Colgan, Air Midwest, etc., will still be around, so maybe it won't be that big of a deal. And, of course, there's nothing to stop Delta from flying into Piedmont operated airports such as SBY or EWN.

 

[goingboeing]

I find it funny that you stopped where you did and what you made red for emphasis. You do get points for at least posting the link, however.

The exerpt that follows your "red text" goes like this:

Here's A Flash: By And Large, The Industry Did Fix Itself. Based on the traditional cost and revenue trends, most legacy carriers did in fact accomplish most of the necessary structural adjustments to deal with the new cost and yield environment. Forget the nonsense that this is just more of the same descent into airline hell that started long before 9/11. The truth is that most legacies fixed the fundamentals of that problem. No sooner than that was accomplished, another, separate, disaster struck. Oil nearly doubled. The price of airplane go-juice went up like a Saturn rocket.

Many in the media ignore the fact that had oil stayed even vaguely close to what most people had forecast in late 2003, the airline industry would be well on the way to recovery. Example: if oil prices had been where they were a year ago, American Airlines' third quarter results would have been among the best in its history.

[post="200303"][/post]​

If,If,If,whats the excuse next year?

 

[Winglet]

On the other hand, if USAirways, Inc. liquidates, the contract carriers such as Colgan, Air Midwest, etc., will still be around, so maybe it won't be that big of a deal.

[post="202269"][/post]​

These feed carriers often operate under a fee-for-departure scheme where their profitibility is virtually assured. If that artificial subsidy goes away, I think you'll see a lot of smaller cities have their air service terminated. The ticket prices that these commuters would have to charge without the major subsidy would kill traffic.

 

[WorldTraveler]

Now, JS, go back and answer the second part of my sentence and address the number of cities that receive air service because of a subsidy - be it EAS or some sort of private subsidy. The point is that if service is subsidized to keep service by one airline, attempts will likely be made to subsidize it if that one carrier ceases to operate. Looking at it another way, how many of those 176 airports support only one carrier and also depend totally on the free enterprise system to obtain that service? I think you will find that the number is relatively small and even for that group, some other airline is very likely to come in and replace the service.
As for fares, no valid argument can be made as to how many airlines a city must have before the fares are considered competitive. We've had six or more legacy airlines for at least a decade and, on a national level, they succeeded at keeping fares at levels which were mutually beneficial UNTIL a new breed of airline came along and reduced them to levels that suited the new business plan. Arguing about the number of airlines which serve a city is immaterial - if there is demand, there will be service. If there is enough demand, multiple carriers will provide service. And unless you have the right kind of carriers serving a city, there is no assurance that there will be low fares.