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Legacy Airlines: Woolly Mammoths Or Their Own Saviors?
Aviation Week & Space Technology
03/22/2004, page 66
Julius Maldutis
New York
Even before the enactment of the Airline Deregulation Act in 1978, the U.S. airline industry experienced a profound technological change as carriers converted from piston to jet aircraft in the late 1950s and early 1960s.
Since then, for more than three decades, the U.S. industry has repeated a boom-and-bust cycle with startling regularity. In the early 1970s, the industry suffered its first fuel crisis when oil prices doubled. A decade later, another fuel crisis and a near economic depression produced profound financial distress and the bankruptcy of Continental Airlines. Labor concessions enabled network or legacy carriers to enjoy rapid expansion using two-tiered wage structures to effectively compete against Continental and the new airlines. The 1980s witnessed the creation of 152 airlines. All except one failed.
At the start of the 1990s, another fuel price escalation and a financial cycle occurred, ending in 1993 with a net loss of $12.5 billion for the major U.S. carriers. The industry's accumulated net profits since the Wright brothers' flight were obliterated. Again, concessions by labor and the liquidation of three famous airlines--Braniff, Eastern and Pan Am--enabled the legacy carriers to enjoy financial prosperity through the 1990s. Helping the cause were a strong economy and a roaring stock market that drove a boom in business travel.
The new century opened with another crisis. In the fall of 2000--a year before the tragedy of Sept. 11, 2001--erosion of business travel began to be widespread. Disintegration of the industry's pricing structure had become permanent and management again turned to labor for help. The financial losses for the three-year period ended in 2003 total $24.1 billion. Today, the optimists predict a small loss of less than $1 billion for 2004 and a return to profitability in 2005; the pessimists look for Armageddon. The only difference is that only two airlines have entered Chapter 11 bankruptcy protection--US Airways and United--and no liquidations have occurred. We may shortly see the beginning of such a liquidation cycle. With the first quarter of 2004 almost complete, the optimists are already in retreat, with worse than expected financial results becoming ever more likely. Last year's $5.8-billion loss could well be repeated in the current year.
Thus, today a vast debate is underway, not so much as to whether several legacy carriers will be liquidated and provide the solution for the survivors, but rather whether we will see a titanic transformation of the U.S. aviation industry with few, if any, legacy carriers remaining and new startups dominating the U.S. aviation industry for decades.
Unlike the 1980s, when all but one startup failed, the current crop--with the likes of AirTran, JetBlue and a slate of new airlines in the wings--represents a profound and perhaps a permanent challenge to the legacy carriers. Is there a solution or is that group, as some analysts have suggested, destined to go the way of the woolly mammoths?
There is a solution, but so far only the current management of Continental seems to have recognized it. The solution is simple, yet requires more than just token approaches. Aircraft fleet simplification, work rule changes and spares elimination comprise the answer. Any legacy carrier operating in domestic and international arenas cannot and must not think it can survive with more than three different aircraft types. Some continue to delude themselves that 10 or more types still make for an acceptable operational strategy.
Southwest's Herb Kelleher has shown that a purely domestic airline only needs one aircraft type. New entrants such as JetBlue in the U.S., Ryanair in Europe, WestJet in Canada and Virgin Blue in Australia all follow the Southwest model. More new entrants are waiting to demonstrate this principle to the legacy airlines, even more forcefully.
It is almost absurd to seek large wage reductions as a single solution, while hoping to provide high-quality service and maintain employee loyalty and commitment. Even more absurd has been the attempt by legacy airlines to start low- fare airlines on their own as a means of competing against the Southwests, AirTrans, WestJets and JetBlues. The failure of Continental's Cal Lite, Shuttle by United, US Airways' Metrojet and Delta Express showed it can't be done. United with Ted and Delta with Song are trying again, having learned nothing from the first attempts; the latter is already showing signs of financial pain.
Why have they failed? That remains an intriguing question. It's probably because those legacy carriers were unable to create distinct corporate cultures and simply transferred their baggage to new airlines. A clean sheet of paper with a blank checkbook and a new management, as well as new employees, probably would have given them a good chance of succeeding. At least the senior managements of American and Northwest airlines were not so foolish, but rather have spent their financial resources on rebuilding existing operations. An even better indication that legacy airline managements are floundering is that some are changing the style of employees' uniforms while others are repainting their aircraft as if these acts alone would solve their problems.
Today, the legacy carriers have drawn a line in the sand and embarked on increasing domestic capacity by 7% to challenge the low-fare point-to-point airlines. That might be too little or too late since the low-fare providers are estimated to increase capacity by 11% or more. The established airlines are again pleading with organized labor for massive wage concessions and work rule changes and repeat history of the early 1980s, when they stemmed the attack from startups. Not much time is left.
Julius Maldutis, Ph.D., is president of Aviation Dynamics Inc. of New York, a transportation consulting firm.
Legacy Airlines: Woolly Mammoths Or Their Own Saviors?
Aviation Week & Space Technology
03/22/2004, page 66
Julius Maldutis
New York
Even before the enactment of the Airline Deregulation Act in 1978, the U.S. airline industry experienced a profound technological change as carriers converted from piston to jet aircraft in the late 1950s and early 1960s.
Since then, for more than three decades, the U.S. industry has repeated a boom-and-bust cycle with startling regularity. In the early 1970s, the industry suffered its first fuel crisis when oil prices doubled. A decade later, another fuel crisis and a near economic depression produced profound financial distress and the bankruptcy of Continental Airlines. Labor concessions enabled network or legacy carriers to enjoy rapid expansion using two-tiered wage structures to effectively compete against Continental and the new airlines. The 1980s witnessed the creation of 152 airlines. All except one failed.
At the start of the 1990s, another fuel price escalation and a financial cycle occurred, ending in 1993 with a net loss of $12.5 billion for the major U.S. carriers. The industry's accumulated net profits since the Wright brothers' flight were obliterated. Again, concessions by labor and the liquidation of three famous airlines--Braniff, Eastern and Pan Am--enabled the legacy carriers to enjoy financial prosperity through the 1990s. Helping the cause were a strong economy and a roaring stock market that drove a boom in business travel.
The new century opened with another crisis. In the fall of 2000--a year before the tragedy of Sept. 11, 2001--erosion of business travel began to be widespread. Disintegration of the industry's pricing structure had become permanent and management again turned to labor for help. The financial losses for the three-year period ended in 2003 total $24.1 billion. Today, the optimists predict a small loss of less than $1 billion for 2004 and a return to profitability in 2005; the pessimists look for Armageddon. The only difference is that only two airlines have entered Chapter 11 bankruptcy protection--US Airways and United--and no liquidations have occurred. We may shortly see the beginning of such a liquidation cycle. With the first quarter of 2004 almost complete, the optimists are already in retreat, with worse than expected financial results becoming ever more likely. Last year's $5.8-billion loss could well be repeated in the current year.
Thus, today a vast debate is underway, not so much as to whether several legacy carriers will be liquidated and provide the solution for the survivors, but rather whether we will see a titanic transformation of the U.S. aviation industry with few, if any, legacy carriers remaining and new startups dominating the U.S. aviation industry for decades.
Unlike the 1980s, when all but one startup failed, the current crop--with the likes of AirTran, JetBlue and a slate of new airlines in the wings--represents a profound and perhaps a permanent challenge to the legacy carriers. Is there a solution or is that group, as some analysts have suggested, destined to go the way of the woolly mammoths?
There is a solution, but so far only the current management of Continental seems to have recognized it. The solution is simple, yet requires more than just token approaches. Aircraft fleet simplification, work rule changes and spares elimination comprise the answer. Any legacy carrier operating in domestic and international arenas cannot and must not think it can survive with more than three different aircraft types. Some continue to delude themselves that 10 or more types still make for an acceptable operational strategy.
Southwest's Herb Kelleher has shown that a purely domestic airline only needs one aircraft type. New entrants such as JetBlue in the U.S., Ryanair in Europe, WestJet in Canada and Virgin Blue in Australia all follow the Southwest model. More new entrants are waiting to demonstrate this principle to the legacy airlines, even more forcefully.
It is almost absurd to seek large wage reductions as a single solution, while hoping to provide high-quality service and maintain employee loyalty and commitment. Even more absurd has been the attempt by legacy airlines to start low- fare airlines on their own as a means of competing against the Southwests, AirTrans, WestJets and JetBlues. The failure of Continental's Cal Lite, Shuttle by United, US Airways' Metrojet and Delta Express showed it can't be done. United with Ted and Delta with Song are trying again, having learned nothing from the first attempts; the latter is already showing signs of financial pain.
Why have they failed? That remains an intriguing question. It's probably because those legacy carriers were unable to create distinct corporate cultures and simply transferred their baggage to new airlines. A clean sheet of paper with a blank checkbook and a new management, as well as new employees, probably would have given them a good chance of succeeding. At least the senior managements of American and Northwest airlines were not so foolish, but rather have spent their financial resources on rebuilding existing operations. An even better indication that legacy airline managements are floundering is that some are changing the style of employees' uniforms while others are repainting their aircraft as if these acts alone would solve their problems.
Today, the legacy carriers have drawn a line in the sand and embarked on increasing domestic capacity by 7% to challenge the low-fare point-to-point airlines. That might be too little or too late since the low-fare providers are estimated to increase capacity by 11% or more. The established airlines are again pleading with organized labor for massive wage concessions and work rule changes and repeat history of the early 1980s, when they stemmed the attack from startups. Not much time is left.
Julius Maldutis, Ph.D., is president of Aviation Dynamics Inc. of New York, a transportation consulting firm.
