JungleClone,
Nice job of trying to convey the reality of the situation in the airline industry.
The root problem for the legacy airlines is that, while fares and market entrance/exit were deregulated in the US in 1978, most costs, including labor costs were not. Airline labor is still covered by the Railway Labor Act which was never designed to operate in a heavily competitive industry. Logic tells you that at some point costs and revenues would diverge enough (losses would become high enough) that airlines would be forced to deal with the cost issues. Labor costs happen to be the biggest differentiating cost item between legacies and LCCs. Pension costs stand out as being particularly troublesome considering that similar jobs in other industries don’t have benefits of that nature. Productivity is a big piece of why LCCs make it and legacies are not; relief will only come to the legacies when they can improve their productivity – perhaps not to the level of the LCCs but at least in a positive direction.
The current problem for the legacy carriers as a group is that there are simply too many hubs in the US. IN reality, the US could be efficiently served by less than 10 strong hubs instead of the dozens that are operated today. As LCCs pick off more and more point to point routes, true hubs will be needed only to carry traffic from the dozens of cities that will only support flights to a large hub to connect that city to the world. LCCs will never serve those kinds of cities but the legacies cannot make money solely on the basis of connecting traffic because it is very expensive to handle and there are few customers who are willing to pay vastly inflated fares to fly from their hometown airport when discount fares are available within a 2-3 hour car ride of most cities in the US. Clearly, several hubs have to go – either through the death of some airlines or as carriers abandon less-profitable hubs and move their assets to point to point flying. While the failure of any legacy carriers will not turn any other carrier around, the legacies are all competing for the same shrinking pool of customers while the LCCs are stealing share from the legacies as well as growing new customer segments. No one can reasonably expect that all six of the current US legacy carriers will survive; given that none of the six are strong enough to acquire each other, hub and spoke capacity reductions are most likely to come through carrier failures.
Despite all the knocking of US management, they do understand the situation their airline is in and are probably doing the right thing from a network strategy perspective. Unfortunately, they have so alienated labor that their chances of survival are very slim. United, on the other hand, is an ideal candidate to transition to being a point to point carrier instead of being a nationwide hub and spoke carrier. Many of United’s costs are related to being a hub and spoke carrier with a very complex set of products even though United’s hubs are in some of the biggest cities in the world and United carries some of the highest percentage of local traffic of any of the legacy carriers. Yet, their operation is designed for connecting traffic which increases the costs even for those passengers who are carried on a point to point basis. United cannot continue to be all things to all people and the domestic connecting market is probably the market it should most consider abandoning.
With all of the legacy carries in a very fragile state, survival will come to those who are best able to adapt to the new revenue and cost environment. Despite many UA employees assertions otherwise, bankruptcy is a huge impediment to UAL. Bankruptcy does provide the opportunity to shed costs easier than can be done outside of bankruptcy but every day spent in bankruptcy increases the risk that UAL will never emerge. While United’s business plan at present is probably no better or worse than any other legacy carrier’s, investors have to be convinced there is some value in investing in a company in a very sick industry. In order to attract financing and emerge from bankruptcy, United has to have a business plan that is BETTER THAN every other legacy airline and has the reasonable expectation of being consistently profitable. Never in the history of aviation have profits been so elusive for so long, making it all the more necessary for United to turn their ship around quickly or face the same extinction that has claimed Braniff, Eastern, TWA, and Pan Am among others.
