Like Icebergs?
Airline experts say major carriers face bleak future without big cost reductions
ARLINGTON (US Airways Update) – Traditional airlines have a bleak future unless they are able to radically transform themselves to deal with the relentless competition from low-cost carriers whose growth is capturing an increasing share of revenue, experts at a recent airline conference concluded.
A number of them predicted additional bankruptcies among the legacy carriers. Including the possibility of liquidation, and consolidation over the next several years.
“They (traditional airlines) are icebergs drifting south,: said Michael Levine, a former executive with Northwest Airlines and now an adjunct professor at Yale law School. “It’s inevitable what’s going to happen to them – we all know what happens to icebergs moving south,†he said.
Levine was one of the speakers at an April 7 conference in Washington organized by Embry-Riddle Aeronautical University attended by more than 100 industry observers and reporters. The them was “Survival of the Fittest: The impact of low-cost carriers on competition.â€
Three options
To survive, legacy carriers have three options, said Darryl Jenkins, a visiting professor at Embry-Riddle. They will either innovate, consolidate, or liquidate, he said.
“To innovate, network carriers will need to continue to cut costs. High costs, along with current debt levels, may ultimately force many of the major network carriers to go through Chapter 11 restructuring, which may become the most innovative means to cut costs,†he said.
Jenkins said the issue of consolidation will surely arise again after the current round of restructuring is more complete. “Many will advocate a regulatory policy that will favor consolidation of the industry, not just among U.S. carriers, but on a global scale,†he said.
The third option – liquidation – is one that unsettles government regulators. But Jenkins said continual government assistance has done little to restrain capacity, which is nearly as great as it was during the “runaway times†of the late 1990s. “I favor liquidation over bailing our management and labor unions who refuse to respond to the realities of the marketplace,†he said.
Hub model “not broken’
The hub-and-spoke model itself is not broken, but its application may need to be changed, several of the experts said. Even Southwest Airlines, which many consider strictly a point-to-point carrier, is now supporting its own flying by one stops and connections through at least nine airports, and for that carrier’s build-up at Baltimore/Washington, connections are essential, said Robert Gordon, a Northwestern University professor.
The difference is, at Southwest planes are turned in 25 minutes. Its passengers wait for the connection, the planes don’t wait for the passengers, some of whom may wait for two plus hours for their next flight, he said.
Gordon said part of the solution for legacy carriers is to network where the low-cost carriers are not flying, such as more international routes, and making increased use of regional jets flown by affiliate airlines that have lower costs.
“The major carriers’ problem is not a reliance on hubbing,†said Daniel Kasper, managing director of consulting group LECG. “Rather, their costs have simply become too high to be competitive with the low-cost carriers.â€
Pension cost overhang
One cost item that the traditional carriers have that new entrant, low-cost carriers don’t are pensions. Vaughn Cordle, a chartered financial analyst for AirlineForecasts LLC and a United pilot, said overhanging costs of defined benefit pension plans, could eventually choke the cash flow of traditional airlines.
Even with the recent federal legislation that pushed catch-up payments back for two years, the legacy carriers will continue to have obligations that will require millions of dollars in cash flow that those airlines could use to pay off other debt, he said. In 2003, the top seven traditional carriers had pension plan assets totaling approximately $28 billion with pension liability of nearly $49 billion.
Airline experts say major carriers face bleak future without big cost reductions
ARLINGTON (US Airways Update) – Traditional airlines have a bleak future unless they are able to radically transform themselves to deal with the relentless competition from low-cost carriers whose growth is capturing an increasing share of revenue, experts at a recent airline conference concluded.
A number of them predicted additional bankruptcies among the legacy carriers. Including the possibility of liquidation, and consolidation over the next several years.
“They (traditional airlines) are icebergs drifting south,: said Michael Levine, a former executive with Northwest Airlines and now an adjunct professor at Yale law School. “It’s inevitable what’s going to happen to them – we all know what happens to icebergs moving south,†he said.
Levine was one of the speakers at an April 7 conference in Washington organized by Embry-Riddle Aeronautical University attended by more than 100 industry observers and reporters. The them was “Survival of the Fittest: The impact of low-cost carriers on competition.â€
Three options
To survive, legacy carriers have three options, said Darryl Jenkins, a visiting professor at Embry-Riddle. They will either innovate, consolidate, or liquidate, he said.
“To innovate, network carriers will need to continue to cut costs. High costs, along with current debt levels, may ultimately force many of the major network carriers to go through Chapter 11 restructuring, which may become the most innovative means to cut costs,†he said.
Jenkins said the issue of consolidation will surely arise again after the current round of restructuring is more complete. “Many will advocate a regulatory policy that will favor consolidation of the industry, not just among U.S. carriers, but on a global scale,†he said.
The third option – liquidation – is one that unsettles government regulators. But Jenkins said continual government assistance has done little to restrain capacity, which is nearly as great as it was during the “runaway times†of the late 1990s. “I favor liquidation over bailing our management and labor unions who refuse to respond to the realities of the marketplace,†he said.
Hub model “not broken’
The hub-and-spoke model itself is not broken, but its application may need to be changed, several of the experts said. Even Southwest Airlines, which many consider strictly a point-to-point carrier, is now supporting its own flying by one stops and connections through at least nine airports, and for that carrier’s build-up at Baltimore/Washington, connections are essential, said Robert Gordon, a Northwestern University professor.
The difference is, at Southwest planes are turned in 25 minutes. Its passengers wait for the connection, the planes don’t wait for the passengers, some of whom may wait for two plus hours for their next flight, he said.
Gordon said part of the solution for legacy carriers is to network where the low-cost carriers are not flying, such as more international routes, and making increased use of regional jets flown by affiliate airlines that have lower costs.
“The major carriers’ problem is not a reliance on hubbing,†said Daniel Kasper, managing director of consulting group LECG. “Rather, their costs have simply become too high to be competitive with the low-cost carriers.â€
Pension cost overhang
One cost item that the traditional carriers have that new entrant, low-cost carriers don’t are pensions. Vaughn Cordle, a chartered financial analyst for AirlineForecasts LLC and a United pilot, said overhanging costs of defined benefit pension plans, could eventually choke the cash flow of traditional airlines.
Even with the recent federal legislation that pushed catch-up payments back for two years, the legacy carriers will continue to have obligations that will require millions of dollars in cash flow that those airlines could use to pay off other debt, he said. In 2003, the top seven traditional carriers had pension plan assets totaling approximately $28 billion with pension liability of nearly $49 billion.
