Can the major airlines survive?

Great Debates
1

Over in this thread Sua Sponte is ranting about some troubles he had with customer service and information for an American Airlines flight.

That got me to thinking and I posted:

Now I’m thinking that’s actually a damn good question and worthy of debate. At a minimum it beats one more SUV argument, right?

If it’s true, as I postulated, that the major carriers are living ‘life out of balance’ how long will it take them to fold? And will it be clean or messy.

From the Bureau of Labor Statistics we can see that, as of 2000 airlines employed 728,495 full- and part-time people. Of those 650,000 are employed by the ‘majors’. Discounting the 191,000 employed by Southwest, Fedex, UPS and DHL that leaves us with just over 450,000 people with jobs on the line in the industry.

Now clearly, if suddenly the majors folded some of those people who be snapped up by the others. But I’m willing to bet not most of them. That’s a mini-recession waiting to happen.

So is it worth the trouble to continue bailing the major airlines out? Or are they in one of those ‘buggy whip’ situations where the business climate has changed to such an extent that we’re reaching the point of the industry taking its lumps and having to reshuffle to a more feasible business model?

2

Jonathan:

I would bet the gov’t will bail them out at some point.

I keep hearing how thees airlines are critical to the economy and that business would suffer if they went under. But capitalism has a great way of correcting these problems. If they are so critical to busness, then business should be able to absorb added cost (of tickets) to keep the airlines alive. If not, then it’s not so critical to business.

Even as the majors go out of business, new ones are popping up. Adapt or die-- don’t take any of my money to avoid that necessity.

3

I cannot argue substantively, since I have not followed the airlines predicament closely. However, I doubt that deregulation was, in and of itself, a direct cause of their current problems. Likewise, low morale is a symptom of the trouble, not a root cause.

The fact that there is profitable cheaper competition points to the answer.

The major carriers, IMHO, are hamstrung by their established business practices as well as their unions. While the unions have good intentions, you know what they say about the road to hell.

Unions desire to maintain both high employment and high wages within their membership. When an industry experiences a decline in demand, union agreements become a determent to the ability of the company to survive.

Additional government bailouts, except in temporary critical situations, is simply throwing taxpayer money down the drain.

Having lived in Atlanta a long time, I have been a loyal Delta customer. I’ve flown Southwest a few times, and totally hated it. However, I was usually spending my employers money, and when paying my own way, it is hard to justify the higher cost for Delta fares versus Southwest.

I describe my Southwest flight experience much like I suspect the experience of riding an inter-city bus in a third world country would be like. I wouldn’t be surprised if the person sitting next to me had a live chicken in their lap. The experience was a dramatic difference from Delta Business Class. But the price was right.

Let the free market decide. If they collapse under their own weight, so be it. If many are left unemployed, well, they can join those in my industry - telecommunications. And if those former union workers have to accept lower wages in “right to work” jobs without the benefit of collective bargaining agreements, so be it.

Just my $0.02.

4

I addition to both derugulation and unons being a cause. I’d suspect that increased cost of services are another primary cause. Whereas once the Aerospace Idustry had many suppliers, like cable companies, there are fewer and fewer providers for airlines to choose from so cost continue to rise.

5

Thanks for starting this thread, JC.

I see a few things going on here:

  1. The older, more expensive carriers v. the new upstarts. If Southwest can make money, then in the short run, at least, so can other carriers who move in and take the place of the aging majors.

One thing the airline industry has going for it is that it’s comparatively easy to start up a new airline. Just buy a few jets when American or US Airways has its fire sale, hire enough of their old staff to run it (only without the old union contract), pass a few safety checks, and you’re in business. So all those people whose jobs are on the line are (right now) really more in danger of losing a bit of their salary, but going back to work for a new carrier.

  1. An overly competitive industry with low profit margins. Because of the low costs of entry, there will ever be cycles in which new carriers enter the industry and drive down prices, and profit margins, just a bit further. In the good times, that is. Then come the next slump, everybody’s in trouble.

Right now, Southwest’s doing fine because it can still undercut the older, larger carriers and make money. But what happens when it’s an industry full of Southwests? At that point, you’ve got to wonder if anyone will be able to make any money.

  1. Is transportation doomed to lose money? Whether it’s trains, city bus systems, or whatever, it seems that passenger transportation ultimately reaches a point where it can’t make money, but still can’t be done without. Are airlines, like all their predecessors, simply following an inexorable downward curve?

That’s my 2¢, for now.

6

You’re welcome, RT.

Replies:

John Mace, you make my point. The government has already bailed them out at least once.

AZCowboy, I do think de-regulation had something to do with it. All the large carriers that are ‘in trouble’ were in place during the old days of regulated air commerce. By leaving the union gigs intact (along with non-union executive salaries) but placing the price into the market the imbalance was established. Prior to de-regulation prices were set in a way similar to the utilities (prior to the ongoing utility deregulation). Airlines would make a rate case that to make X% profit they needed to charge $Y. This would be approved or not by a regulatory agency.
stuffy, that may be true. But wouldn’t that apply to all carriers equally and therefore be accounted for by a market correction?

RT, I see your point in #1 but I have to point out that the current darling of the industry, Southwest, isn’t a newbie. They’ve been in business for 30 years or so. They go back prior to deregulation. My guess is that they took advantage of the opportunity presented to use their smaller business-model to grow into a major without having the large expenses of the established airlines.

Your #3 raises a larger issue. Are their some industries (transportation in this case) in which the public good exceeds the need to have a free market in place? Should regulation be re-established with the goal of continuing to provide efficient air travel?

7

JC, well, ok, I can certainly acknowledge that companies (or better, utilities) that operate under rate of return regulation are mostly protected from going bankrupt. I wasn’t attempting to argue that.

My point is that, at least in theory, de-regulation should not be considered a root cause for their position of crisis. Clearly, it could be considered a contributing factor, but that really only plays in with 9-11 and the depressed economy. I suspect if the economy had continued steady growth since 2001, the airlines wouldn’t be in the current death spiral.

Further, I don’t think a comparison to city buses or any municipal transportation system is warranted, for the same reason that any rate of return regulated business would be exempt as well.

I am unaware of the arguments that would suggest that the free market system cannot handle public transportation sectors. I’m not a pure libertarian in terms of free markets, I do think there are times and places where the government can play a critical role in enabling certain sectors, particularly ones that feed the overall US economy.

In terms of transportation, I can think of no better example that the Interstate highway system. I don’t see the private sector stepping up to create such a monster, and the Interstate system has paid huge dividends over the years in terms of enabling an efficient free market. However, one could argue that the subsidy offered through the interstate system dramatically undercut the value of the railroad system.

Back to the airlines, I still believe Southwest offers an example of how industry players can be profitable, even in a relatively large scale. But labor costs must be a knob management can use to manage the business. Union contracts have been the equivalent of adding glue to the knob, leaving management much less flexibility when demand suddenly drops.

Is it all that dissimilar to where the major auto manufacturers were in the early 80s?

8

Jonathan Chance:

Not neccesarily. A lot would depend on when/where you bought your planes. For instance Boeings current production of 757’s have I believe a 10 year warrranty if not longer, so you’d save substantially on your maintenance cost. Likewise A320’s like Jet Blue flies are still under warranty. By the same token the average 747 (United and American) has been flying for 20 years. Another factor being just who does your maintenace be it in house (American, United others) or outsource.

Some major repair centers are able to reduce cost by volume purchase or just by being in business long enough. I’ve been recently doing a lot of inventory at my company and if my number are true industry wide, the cost of goods has risen on order of 300 percent and in some cases extremely higher.

You may remember a year ago how the EU (correct me if I have the wrong government body) blocked Honeywell’s purchase of GE. Well that had a lot to do with the shrinking market of providers. Just off the top of my head I can think of at least 15-20 companies, and I’m refereing to producers of components not repair centers, that were swallowed up by larger companies.

9

Stop me if this is oversimplified but doesn’t basic economics take care of all of this?

We have numerous airline companies that are having trouble running profitably. In time the market should wash out the weakest of those companies. Fewer companies remaining means less competition and likely higher fare prices such that the remaining companies can operate profitably. Eventually a stable point should be found between the number of supportable companies at a given airfare.

Problem solves itself.

10

Sounds good, Whack - in theory.

Why did the airlines go to the hub-and-spoke system? Because for them it’s more efficient. But it strands folks outside of the major hubs. There are some sizable cities in the US that just do not have airline travel.

There’s politics - the airlines lobby for the smaller scale charters to have to adhere to the exact same regs they do. But on-demand charter and scheduled airlines are two completely different business environments. All that does is choke off the smaller scale competition for the big guys - who aren’t even serving the markets they’re destroying.

I also notice that no one here has mentioned some of the very simple things Southwest does that holds down costs that the big airlines are NOT doing. For instance, Southwest flies only 737’s. Thus, they need only one collection of spare parts, they’re mechanics only need to be famillar with one type of airplane, their pilots only need to train on just one type of airplane… this holds down costs compared to a carrier that flies several different types of equipment, all requiring their own spare parts, their particular pilot training, etc. Southwest reduces its variables.

There’s also the problem of some airlines trying to be all things to all people. The ones that are succeeding now have found a niche and stuck with it - which might be the way to go in the future. But when United tries to fly long haul AND overseas AND local “regional” jets (whether as United or as a subsidiary) they’re not focusing.

Some of the small regionals are also picking up business in markets long abandoned by the Big Boys - and the smart ones are sizing their planes accordingly. If you’re shuttling folks from Podunk, IA to Chicago or Denver hubs you don’t fly 747’s, you fly something smaller that you can fill on every flight. If these guys weren’t locked out of the big hubs by the big airlines they’d do even better, as it is now, they have to fly to a “near hub” and their passengers cab over.

Me - I think you should let some of these big, moribund airlines go under. But it would NOT be good for too many to go under and wind up with a de facto monopoly.

I also - and I know this is not a popular idea in our political climate - I also think SOME re-regulation might be called for. The free market is great for profits (usually) but doesn’t give a damn about people. It’s quite feasible for the free market to trade off lives (due to accidents) for dollars (costs too much to clean up maintenance, buy new planes, follow procedures, whatever).

Airfares have dropped too low - that’s why so many airlines are in such trouble. They’ve undercut each other to the point of starvation. A more rational approach would be to figure the cost per mile and actually charge that amount but, of course, people aren’t rational.

11

The major airlines may not survive, but as John Mace said (holy shit, I’m actually AGREEING with him!) new ones are appearing. Southwest’s business model is the only one making money right now. JetBlue has a somewhat similar model, but I never hear them included in Southwest’s league, so I don’t know if they’re currently making money or not.

The danger of the free market is that people may tolerate unconscionable business practices in the name of lower prices. For example, the generally unfair treatment received by Wal-Mart workers has gained much greater publicity in recent years (e.g., Barbara Ehrenrich’s book “Nickel and Dimed”), but it hasn’t exactly hurt their sales.

The drawback to the pure capitalist system is that business has no impetus to change it’s practices unless sales plummet, and a lot of people have to get truly screwed before sales plummet enough for a large company to change its ways. In the airline industry, too much corner-cutting results in dead bodies (e.g., Alaska Airlines, ValuJet). so a lot of people are screwed in short order, and the public outcry brings change fast, but the victims are still dead.

Southwest has been able to do what it has done and keep a near perfect safety record (not one fatality in over 30 years of flying, see this site)because of a fanatical devotion to safety. I would just as soon see the behemoth airlines flounder. Demand will quickly generate replacements, hopefully run by a lot of smart people who build on Southwest’s model.

12

I agreed with everything up to this point. The history of common carriers (mostly I am thinking of railroads, but bus lines also) is that there is never stability for long. Eventually all will go bankrupt.

Of course, for ones like Southwest which are well-run, this can take a long time.

I do think that the natural process of birth, maturity, and death these companies go through does not need to be lengthened by government bailouts.

13

In short, there is enough business right now for about 1 less major carrier. It is very possible 1 of them could drop out.

IMO, there is a public need for multiple large carriers so a bailout is not out of the question.

Jet blue was in the right place at the right time, they are currently enjoying their “new car warranty”. I won’t comment on the aircraft they chose.