Mr. Jubak’s article isn’t particularly insightful due to its lack of any meaningfully new information. It is also not accurate: there are significant differences in the airline industry in Europe and the US. First, the dramatic changes in European aviation right now are due to a complete free for all expansion by LCCs which no one could reasonably expect would be successful for all of the new entrants. Further, the legacies have a much lower percentage of revenue derived from domestic (intra Europe) flights due to their longer haul orientation than do the US legacies. The shakeout that is happening in Europe is affecting LCCs far more than the legacies (flag carriers).
Secondly, Europe, specifically the EU, has been a much stronger advocate of consolidation than has the US gov’t. Consequently, the European legacies (flag carriers) will likely consolidate in a much more orderly fashion than will happen in the US where legacies will likely have to liquidate because no US airline has enough money to buy another legacy carrier. The US government has so mismanaged its policy toward legacy airlines that all are dangerously close to failure making recovery a lengthy and difficult process. Thankfully, European regulators have been much more rational in their handling of the airline industry. Keep in mind also that the US legacy carriers still carry three-fourths of all US airline passengers, even after 25 years of deregulation. While the pace of change is increasing in the industry, there also are signs that at least several US legacies are finally figuring out how to compete with LCCs, including making money and slowing the LCCs share growth.
Mr. Jubak is a bit aggressive in saying that the entire US legacy industry except for Northwest (which isn’t even mentioned for good or bad) is in jeopardy. Much of the current bad press about Delta has been induced by the company; they decided they had dealt with the pilots long enough and have chosen to escalate the cost cutting to threats of bankruptcy in order to move the process along. Since Delta’s pilots have made dramatic changes in their dealings with their company in the past few weeks (thanks in no small part to the ATSB’s denial of UAL’s loan and the third round of cuts at US), I doubt very seriously that DAL will be forced into bankruptcy. Keep in mind also that Delta has long been better able to control costs than most of the other legacy carriers; Delta’s recent problem has been cost control – something which is atypical of that company and one which they seem to know how to address. Northwest is in a similar situation and will probably get what it needs although with a lot less fuss than Delta. His assessment of AA and CO is fairly accurate and both, like DL and NW, are likely to turn their businesses around and control their own destiny.
Given that this is the only downturn in the airline industry since deregulation that has not seen the liquidation of a major carrier, it is very likely that one or two airline failures will be what is needed to help return the other carriers to profitability. While no airline can sit around and wait for a failure in the industry to make things better, history shows that the failure of a major carrier has helped to improve the revenue environment at the remaining carriers. Each airline that will survive has to rework its own business model and reduce costs; failure of another carrier will help improve revenues.
The transformation of the US industry will likely be much more painful for the legacy carriers than it will be in Europe. It is doomsday thinking to think that all, or even a majority of the US legacies will fail although it is certain that at least one and probably two will not be here in 3 years.
