U.S. Airline Industry Must `Restructure or Die,'' Aviation Week & Space Technology Reports

[chipmunn]

U.S. Airline Industry Must `Restructure or Die,' Aviation Week & Space Technology Reports
NEW YORK (Business Wire) - A collapse in pricing power and a fundamental shift in the buying behavior of business travelers, coupled with fierce competition from low-cost airlines, is forcing U.S. major hub-and-spoke carriers to restructure their operations or face the prospect of eventually going out of business, according to this week's issue of Aviation Week & Space Technology magazine.
In the magazine's cover story, Restructure...or Die, airline executives and industry analysts note that the September 11 attacks, while devastating, are not the root cause of the financial crisis gripping major network carriers. Rather, the crux of the problem is a combination of excessive costs in relation to carriers' current and projected revenues, an imbalance between the supply and demand for available airline seats, and an inability to boost air fares.
In their struggle to survive and restore their operations to financial health, major U.S. airlines have axed more than 70,000 jobs. In addition, some unions representing many of the industry's employees have made a commitment to work with management to help the carriers compete more effectively with low-cost rivals, such as Southwest Airlines, noted AW&ST. However, the magazine also points out that it will take much more than concessions by labor for major U.S. airlines to solve their financial problems.
Based on current trends, the domestic market share held by the six major US airlines (American, Continental, Delta, Northwest, United and US Airways) plus Alaska Airlines will drop from 75% this year to 62% in 2010 -- and 45% by 2020, according to the cover story. Edmund S. Greenslet, who developed the forecast and head of the highly respected ESG Aviation Services, told AW&ST he foresees Southwest passing American to become the largest U.S. airline by 2013, and JetBlue passing Delta to become the third largest by 2020.
Greenslet believes the route networks of low-cost airlines have grown large enough to make alternative service available in almost all of the large business markets. Greenslet's forecasts are used by the US Department of Transportation and the Transportation Research Council among others, the magazine reports.
According to the AW&ST, the fact that low-cost carriers have been able to mature this far says as much about what's wrong with the majors as it does about what's right with their low-cost counterparts, and begs the question: does the underlying strategy or business model employed by the large hub-and-spoke airlines still work? Analysts and other industry observers believe it does, but to function properly carriers must reduce their costs and restore the balance between supply and demand.
When people say the model is broken, they are moving their jaw without putting their brain in gear, responds former American Airlines Chairman and CEO Robert L. Crandall. He told AW&ST he's skeptical that the industry will ever be competitive as long as there are so many carriers selling what has evolved into a commodity product.
In Aviation Week's analysis of the U.S. airline industry's crisis, it points out that severe financial problems carriers are suffering could actually worsen in coming months. The biggest wildcard is whether the U.S. goes to war with Iraq, according to analysts quoted in the cover story. The U.S. airline industry cannot take another hit, one of them declared. A brief war doesn't qualify; a messy, extended war or another significant domestic terrorist attack does.

 

[chipmunn]

There is no question there is significant airline employee pain that is unfortunate, but how can US management be blamed for a collapse of industry fundamentals?

Dave Siegel was dealt a very poor hand and he is trying to save our company.

Either we work together with management to further cut costs in a hyper competitive marketplace or we will simply cease to exist.

The airline industry is not the only market with these problems and we all wish for the good ol' times, but the economic model is broken. Either we adjust and become more productive or the company will fail.

Time is short...

Chip

 

[cavalier]

There is no question there is significant airline employee pain that is unfortunate, but how can US management be blamed for a collapse of industry fundamentals?

Dave Siegel was dealt a very poor hand and he is trying to save our company.

Either we work together with management to further cut costs in a hyper competitive marketplace or we will simply cease to exist.

The airline industry is not the only market with these problems and we all wish for the good ol' times, but the economic model is broken. Either we adjust and become more productive or the company will fail.

Time is short...

Chip


Just an observation from a guy in maintenance who gets around all the hangers in Pit as part of my job. I talk to a lot of people and listen to even more. Not one person who voted to accept the give backs, NOT one single person says they are willing to give again. The general feeling simply is; if it was not enough the first time, then this company was not meant to survive, end it now, get it over quick so I can get on with my life. This is what I am hearing from every corner. If they really need more, I am sorry to report that maintenance is tapped out completely. Preaching on these boards that we MUST give more or cease to exist is one big waste of energy as far as maintenance is concerned, believe me on this. I am simply reporting reality, honest to goodness reality.

 

[UAL777flyer]

We continue to hear ad nauseum about how the airline industry business model is broken and airlines need to restructure or die. That is nothing new. But these articles never seem to include firm ways change and be successful. They're highlighting the biggest problem of them all: right now the airlines don't have a clue what the right formula is. They're all at Point A and realize they need to get to Point Z. But they have no clue how to get from A to Z. Nobody has found the magic bullet yet. History tells us that eventually somebody will, though we don't know how many will be left standing when that happens.

I think by now most of us recognize that the old business model is broken. Lord knows that gets beaten to death by the fish hacks in the press. Finding a new successful business model is now akin to finding the Holy Grail.

 

[chipmunn]

LDKIAM & USAirBoy330:

What is your opinion of the Aviation Week & Space Technology article above?

Chip

 

[chipmunn]

UAL777flyer & Cav:

UAL777flyer, as you know, current economics no longer can support mature carrier cost structures and how the industry restructures is still an open question.

Cav, the company has made significant progress in restructuring, but current fundamentals require more work for the airline to return to profitability. The restructuring agreements give management tools to make changes to the labor agreements and either we work with management to construct consensual changes, or there could more painful changes imposed, which meet the present labor accords.

I do not like this situation any more than any body else, but it appears to be our reality.

Chip

 

[cavalier]

Cav, the company has made significant progress in restructuring, but current fundamentals require more work for the airline to return to profitability. The restructuring agreements give management tools to make changes to the labor agreements and either we work with management to construct consensual changes, or there could more painful changes imposed, which meet the present labor accords.

I do not like this situation any more than any body else, but it appears to be our reality.

NO argument from me Chip...I am just stating fact, just that fact sir

 

[KCFlyer]

[P]
[BLOCKQUOTE][BR]----------------[BR]On 11/19/2002 1:02:08 PM UAL777flyer wrote:
[P]I think by now most of us recognize that the old business model is broken. Lord knows that gets beaten to death by the fish hacks in the press. Finding a new successful business model is now akin to finding the Holy Grail.[/P]----------------[/BLOCKQUOTE]
[P]Yes, but the quest that current airline managment is taking is let's become like Southwest without actually becoming Southwest. Get those costs down. Gotta get those costs down. Our CASM's are 3 cents higher than Southwest and 4 cents higher than Jetblue. The MBA's gather around the boardroom table and cipher out how much they have to cut. Then they go to labor. Labor isn't keen on giving, but they realize that their livlihood's are at stake. So they give. The wizards of the boardroom look at the cuts that were granted and say Oops, we miscalculated - we need more. Does anybody expect that to go over well? And it's labor taking the brunt of it. [BR][BR]Meanwhile on the (yawn) revenue side of the equation, we implement change fees and penalties and have a fare structure that could confound Einstein. We implement fare sales to get butts in seats. Too bad it's still costing you more to fly it than you are bringing in...the calculations in our revenue model show that we can do this by charging a thousand dollars to fly from Cleveland to Philadelphia. But nobody pays that. And we can't implement a simplified fare structure and value pricing until we get these costs under control, because if we do, big bad Northwest or Dr Evil in Atlanta will start a fare war that we just have to match, lest our load factors (full of those money losing fares) will suffer as those flyers lose money for the other airlines. What to do...what to do???? Why, go ask labor for more concessions of course. [BR][BR] Perhaps it would behoove U to build quonset huts on the airport for their employees to live in so that they don't have to worry about little things like mortgages and autos to get to work. ...They'd simply LIVE at work and would be paid a wage that would allow for an occasional movie. [BR][BR]Now that that rant is over, it's not that nobody is suggesting a new business model, it's just that they are told over and over again how it just can't work unless costs are brought down. [/P]

 

[N513AU]

The reality is that even WN and JetBlue can't survive the current market for long. Once their size becomes around the size of say, American or Delta, their costs outpace their revenue. Remember the low-cost darlings of the 1980s? Are any still around? No. The whole thing eventually implodes.

Then there is issue of service. WN and the like have absolutely no interest in serving big cities with congestion problems (ie. BOS, PHL) or small cities with limited marketshare. They only go where they can turn airplanes quickly and fill them. PHL and BOS would be suicide venture for any company even dreaming of on-time performance. If the big hub and spoke carriers fail, most rural air service will cease to exist.

The answer is some form of sensible regulation. Isn't that monopolistic? No, not really. Because of its high barriers to entry and high capital costs, airlines are inherently ologoplistic in nature. Or, in simple terms, the companies tend to put each other out of business (or merge) until there are one or two top dogs left, who then essentially fix the prices. DeBeers and other companies did it in the diamond-export business. Airbus and Boeing did it in the airliner business. Lockheed-Martin, Northrop-Grumman and General Dynamics did it to defense materiel. There are countless more examples.

So, even if the low cost carriers survive, it will end up being just them at the end - somewhat like the Highlander movie series. Then, with little credible competition, they will do as they please when it comes to gouging the consumer. Just like US Airways did while it was the carrier of convienience on the east coast. No options, you pay to play.

So, market forces get signifigantly distorted when you add in the irregular cost structure of operating an airline. With the exception of the regulated era, airlines (foreign and domestic) have bled red ink for most of their existance.

You can't entirely blame greedy labor for this. Should not a mechanic who fixes airplanes be paid higher than the one who fixes your washer and drier? He has a federal license, must go to school for it and is legally responsible for his signoffs for the life of that airplane. Shouldn't pilots be paid more than Greyhound drivers? The 30,000 feet and .75 Mach speeds should make you say yes. However, the high capital costs associated with operating an airline, make labor the one place where managment will do anything (include lie, cheat and steal) to improve the bottom line. So, we see the deflationary trend for airline wages. You do more work for less pay, but have the same responsibility?!

The end result will be two or three carriers, whose service sucks and prices are high. We will see the creation of an Amtrak of the skies, unless something sensible is done. I don't know if old CAB type regulation is needed, but something needs to be done to stop this mess from getting worse.

 

[grndproxwarning]

I hate to say this,but someone has to go.[BR]I think it will be one of the BIG BOYS!![BR]Looks to me like UA may be the one to go first[BR]At some point we have to face reality,IT JUST ISN'T THERE.To many seats not enough people to fill them[BR]..The banks are bailing like rats off the TITANIC. Ramp Agents making $23.00 P/H.come on this[BR]isnt ROCKET SURGERY FOLKS[BR]I have been with a airline through Ch 11 proceedings,The judge is running the show now.[BR]If you want U to survive,you better listen to what Dave is telling you![BR]I would rather give give give and have a chance,than go CH 7[BR]if they do that you all lose everything!![BR]

 

[UAL777flyer]

KCflyer,

You're wrong. The quest is not to get costs down to Southwest levels. The quest is to rationalize costs down to a sustainable level, which is above WN CASM. I can tell you right now, UA has no interest in becoming a WN clone. For years, airlines operated with the mentality that their increasing costs would be subsidized by the business traveler. Well guess what? Business travel ain't what it used to be, as you know. Corporate travel has diminished significantly. And when you add in the airport hassle factor, many companies are simply finding ways to do without business travel. That may not ever change. We may be witnessing a permanent shift in market fundamentals akin to de-regulation of the industry. Making up for that revenue shortfall cannot be done without addressing costs. Airlines have much more control over costs than revenue. And airlines with high cost structures like US, UA and AA simply MUST get them down or they will not survive. Especially US. When their route structure is overwhelmingly short-haul, it only deepens their cost problems. But what allows airlines like Southwest to continue to prosper and offer low (but not always the lowest) fares? Their ability to keep firm control of their costs while maintaining a high degree of efficiency.

 

[Speedbird]

UAL777, et al.:

I'm not sure if you've had the opportunity to read the entire set of articles in AW&ST's November 18th issue, but I would definitely not categorize them as the usual incessant drumbeat of bad news based upon poor research and a modicum of facts. IMO it has some excellent analysis, and the editorial on pg. 82 offers multiple suggestions for helping this industry to heal itself. Some of their suggestions include the following:

1. Major carriers must renegotiate the many expensive union contracts.

Obviously, US & UA have begun this process, but every major carrier must go through the same ordeal. AW&ST's point is that no one will have an exemption from this painful process of change. On a unit cost basis (for the 1Q02) US's labor costs were almost 5.5 cents; UA & AA were 4.2 cents. Meanwhile, WN was 2.6 cents and B6 was 2.2 cents respectively.

2. Majors must retool their fare structures to make them simpler.

Again, we are seeing the intial efforts to accomplish this task by US and now AA with their recent announcement. The current structures are woefully complex, and with the ability for customers to view fare differences among carriers and purchase windows creates angst and a feeling of exploitation among the airlines best customers. The cost benefits of using the internet to sell tickets have always exposed the dark side of yield management excesses to wring the most money from those customers who could not plan their trips in advance. The industry should never expect to see the huge pricing differentials of the late 90's where walkup business fares were routinely four to five times more expensive than the lowest leisure fares.

3. Modify the Railway Labor Act so unions and management, after lengthy contract negotiations, would be required to submit best and final offers, and an arbitrator would pick the most appropriate one. Current practices are detrimental to the industry and have allowed, even encouraged, so-called pattern bargaining. That's the union pattern of explicitly declaring that the sole objective is to win industry-leading agreements, under the threat of shutting down an airline. The results have been unsustainable pressure on labor rates and productivity decline.

4. Picking up the staggering tab for the measures required to protect U.S. airports and airlines from international terrorists.

It is ludicrous to treat this as part of the cost of doing business, in an environment where this absolutly no pricing power to absorb the signicant additional fees and fixed costs. For example, at DL, it will cost $150 million in 2002 to pay its terrorism insurance premiums, compared to $2 million prior to 9/11.

5. Allow further consolidation, and permit failing airlines to go out of business. Opponents argue that a reduction in the number of major carriers would be detrimental to consumers because it would result in less competition. By blocking further consolidation and propping up failing carriers, however, the U.S. has created a weak industry in which there is insufficient business to support six large hub-and-spoke airlines.. They are uneconomic in most years and extraordinarily vulnerable to market downturns.

The government should not be in the business of picking who the winners and losers will be going forward (vias-a-vis the ATSB), but let the existing U.S. bankruptcy laws provide the means for airlines to repair their financial ills and either reorganize to emerge stronger and leaner, or liquidate and be replaced by more capable competitors, a al Darwin's theory of the fittest surviving the longest. That is sufficient government intervention for not only the airlines, but all U.S. businesses which run into trouble.

6. Relax the laws that now restrictairline ownership by non-U.S. citizens to 25% of the vote and 49% of the equity, with the caveat that the carriers must be made available for supplemental lift during national emergencies. With very few exceptions, the large domestic airlines generally have done a poor job of managing their businesses, and most of them need huge infusions of capital to emerge from the deep financial holes they've dug for themselves. For the six large hub-and-spoke airlines, net debt as a percentage of revenues (estimated to be 125% for the first half of 2002) is now higher the last high point of 111% in 1992.

AW editors see these problems as national problem, not just an industry one. Therefore they recommend that Washington form a blue-ribbon commission with buy-in all of the major stakeholders represented. While they acknowledge that commissions do not always lead to material changes and improvements, they do provide a high-profile effort to highlight the industry problems, and develop a comprehensive set of initiatives.

They claim that there is a sea change underway. They believe that the industry as we knew it five, 10, 20 years ago is gone, never to return. The sooner the U.S. faces this fact, the sooner the nation can begin the arduous task of rebuilding a secure, healthy, and efficient air transportation system.

 

[UAL777flyer]

Speedbird,

Forgive me. When mentioning the ad nauseum reporting of the same thing, I really meant mainstream media like the Tribune, WSJ, etc. I wholeheartedly agree that the most hard-hitting and informative industry information is reported in respected pubs like Aviation Week, Aviation Daily, etc. Thanks for clarifying my oversight.

Their articles contain what normal mainstream reporting lacks: solutions to problems. I agree with just about everything their articles suggest. However, I'm not optimistic that we'll see these measures adopted anytime soon. Why? Because the federal government has absolutely no clue how this industry works. They consistently enact legislation that they say is designed to help, but only ends up hamstringing the airlines. The more involvement they have with the airline industry, the more they will foul things up. I agree that the bankruptcy laws exist as a means of giving failing businesses the opportunity to re-organize. I've never been a fan of the ATSB process. I just don't view it as the right approach. There are simply too many airlines in this industry. Too much capacity. I don't buy into the whole oh, no. Fewer airlines means less competition whining that always creeps up when the talk of failing airlines consolidation takes place. The solutions to the problems of this industry have already been identified. But nobody seems that willing to embrace them.

 

[sfb]

N513AU-

How is it a foregone conclusion that Southwest, AirTran, or jetBlue will have costs which outpace their revenue once they're the size of American or Delta? After all, Southwest is now larger than US Airways by ASM's, RPM's, and fleet size, yet Southwest's costs are still below its revenue. Moreover, Southwest has managed to keep tight control over its non-fuel operating costs versus inflation. Their non-fuel CASM in 1993 was 6.14 cents; compare that to a non-fuel CASM of 6.36 cents in 2001 (an increase of under 4% in 8 years). And again, how is it certain that any of these airlines will continue to maintain and/or add service on unprofitable routes?

Don't forget that most of the post-deregulation carriers failed because of dumb business plans and/or poor management. PeoplExpress did a terrible job of managing its growth. Midway I tried to grow too quickly (and so did Midway II, especially given a weak hub). Western Pacific picked a weak hub at COS and then tried a wholesale move to DEN without the financial resources to pull it off. National (the recently departed) tried to build a hub in one of the lowest-fare markets in the U.S. America West declared Chapter 11 the first time because of bright ideas like flying 747's to Japan via Honolulu. Big pre-deregulation carriers like Pan Am, Eastern, Braniff, and TWA have also failed.

WN serves a number of airports with congestion problems -- most notably SEA and LAX. AirTran hubs at ATL, and jetBlue has its primary hub at JFK with its several hours of congestion each afternoon/evening. I think it would be far more accurate to say that Southwest has avoided (for the past ten years or so) adding service to fortress hubs and slot-limited airports. Could they be successful grabbing market share in places like PIT, PHL, MSP, CVG, or CLT? Yes, but it would be a long, expensive fight to gradually build market share against the incumbent hub carrier. It's far more lucrative to pick off the medium-sized spoke cities one by one. Avoiding slot-limited, congested, and facilities-limited airports also fits into the strategy of going after the lowest-hanging fruit first. Do you really think that Southwest or jetBlue could get Massport to give them two or three gates at BOS, let alone the possibility of getting more within just a few years? Nor is it an effective use of resources for WN to have one of their 737's sitting fifteenth in line for take-off during a US hub push at PHL. As for smaller markets -- Southwest serves plenty of 'em. Places like BOI, GEG, CRP, JAN, etc. Yes, it's extremely unlikely that they'll serve a small market within two hours' drive of a larger market, but that's just sensible.

As for rural air service -- the government needs to decide how well it wants to fund service from smaller airports to larger connecting airports. Fact is, though, that most rural air service isn't a terribly effective use of resources.

I doubt that the low-cost carriers will be able to do as they please when it comes to gouging the consumer. Recall that Southwest's business model is built on moving lots of people at a low to moderate cost. For example, they hold a near monopoly on MSY-MCO with 84% of the market. And yet their average fare on that route is less than half of US Airways from CLT to MCO (a slightly shorter distance). They have historically managed their business, especially on short-haul routes, with an eye to the fact that one of their primary competitors is the private automobile. If Southwest or AirTran or jetBlue decided to jack up fares down the line, they'd soon see their traffic numbers fall accordingly. The AUS-DAL/DFW market is bigger than the PIT-NYC market in large part because fares are more reasonable. Without charging low to moderate fares, Southwest's business model fails. When the fares go up, people either stay home or drive. That's what they did before deregulation.

When there's less service (i.e. food, beverage) on American from BOS to MIA than there is on Southwest from PVD to MCO, it's hard to make an argument for the high-quality service of the major network carriers. And there must be some reason why Southwest consistently has the lowest number of complaints per passenger.

I agree that greedy labor isn't entirely to blame for the predicament of most of the major airlines; overexpansion and poor resource planning have hurt most airlines as well. Labor is responsible, though, for many of the inefficient work rules which drive up costs at most of the airlines. And a lack of commitment from BOTH labor and management to help each other out in tough times and share in the good times hurts most of the airlines (Southwest and AirTran are very notable exceptions).

An Amtrak of the skies (assuming it was operated like Amtrak, by the government, with powerful unions and inefficient work rules) would get blown out of the water by the low fare carriers. WN already beats Amtrak on price for comparable routes.

 

[LDKIAM]

Speedbird, you must be management if you want the airlines to adapt baseball arbitration, if that is what they want pay me baseball players' wages then.

The reason why contracts take so long that their is no incentative for the company to settle the contract when they can exhaust the RLA which takes years. From 1995 till the end of 1999 I and my fellow mechanic and related employees did not get a raise because of the company dragging their feet in negotiations, while the prices of consumer goods went up and U made money, my buying power went down. It takes the actual threat of a strike (which W has taken away by creating PEBs) to prod the company to settle.

Simple solution, workers who are covered under the National Labor Relations Act (NLRA) do not have to jump thru hoops to get a contract. Unlike RLA contracts which do not expire, they become amendable. So when GM's workers contract expires on say 12/21/?? GM and the workers know on that drop dead date the workers will strike unless the two parties settle.

Why should we as airline workers covered by the first piece of labor legislation that was enacted before there were airlines, be denied the same rights as other unionized workers? And you forget the RLA was enacted to ensure that interstate commerce would not be interupted therefore protecting the company and not the workers. Even the playing field and it will solve the problems.

And to SFB, since 1992 the mechanic and related employees have given back to the company in order to gain something, back in 1992 we took a paycut. In 1999 we gave them work rules and benefit changes back, and now I just took a $700 a month paycut because of the layoffs I got knocked back down to a lower classification, paying more for medical, paying to rent uniforms, two less sick days, two less holiday, a 30 minute unpaid lunch, one weeks less vacation and various other work rules changes to the company to save their ass because of their lack of knowledge of how to run a company. Last time I checked no rank and file member tells the BOD and the CEO how to run the airline, but we as workers have to suffer for their mistakes. So how can you say labor unreasonable?