Has Delta Started the Clock Ticking for a "Legacy" Airline to Fail?

Great Debates
1

As many posters doubtless know, Delta Air Lines Inc., one of the six “legacy” U.S. carriers, last week introduced a simplified fare structure that lowers ticket prices by as much as 50% in some cases. This *Washington Post * article notes that American Airlines tried something similar in 1992. The result? “Within months, American abandoned the plan, citing huge financial losses ($251 million in two quarters) and ‘intense competition’ that drove fares down to as low as $99 for a one-way ticket from New York to Los Angeles.” The article also quotes a Merrill Lynch analyst as saying that matching moves industrywide could cut airlines’ annual revenue by up to $3 billion.

It is not exactly news that the “legacy” airlines – Delta, American, United, Northwest, Continental and US Airways – are on a somewhat delicate financial footing, to say the least. United and US Airways are operating under bankruptcy protecton, and four of the companies lost money in 2003, the most recent year for which figures are available. The question before the house, then, is whether Delta’s action – which the other “legacy” carriers have matched on routes where they compete – will have an effect similar to American’s move 13 years ago and, if so, whether that may be enough to tip one of the group’s members over the edge.

Delta hopes to make up for the initial loss of revenue by winning passengers from other airlines and reducing operating costs further, according to the Post. It seems self-evident to me that the “legacy” carriers cannot all succeed in cannibalizing each others’ business, and while I’m no airline industry expert, it’s difficult for me to imagine the “legacy” carriers taking market share away from the budget operators. In addition, further cost cuts will to some degree be coming out of the hides of workforces that have already suffered multiple rounds of pay reductions and erosion of benefits – will there come a point when someone says “enough”?

By what I fully concede is a very rough and ready calculation using sales data for 2003, the most recent annual numbers available, I figure that an industrywide drop of $3 billion in revenue would equate to a decline of as much as 2.8% for each of the “legacy” airlines. Not a catastrophic thing, one might think, but in an industry whose finances are as precarious as this one’s, every dollar counts. I don’t know whether the group will be shrinking as a result of Delta’s action, but if someone does go under, I’d have to say US Airways looks like the laggard.

Here’s how I made my calculation of the possible impact of Delta’s move: I used the figures in tables 1 and 3 of this press release to determine each of the “legacy” carriers’ market share by number of passengers in the first nine months of 2004. (Together they had 52% of the market.) On that basis, the effect on each company of a drop of $3 billion in industry sales would be as follows, in the format company/2003 sales/decline in raw terms/decline in percent terms: Delta/$13.30 billion/-$378 million/-2.8%; American/$14.33 billion/-$345 million/-2.4%; United/$11.13 billion/-$291 million/-2.6%; Northwest/$9.51 billion/-$219 million/-2.3%; US Airways/$6.84 billion/-$180 million/-2.6%; Continental/$8.87 billion/-$150 million/-1.7%. A rough measure, as I have conceded, but better than nothing, I’d argue.

The sales figures for American and United are for the named carriers only and do not include other airlines owned by their parents, AMR Corp. and UAL Corp. The figure for US Airways includes the full calendar year 2003, for the first three months of which the company was operating under bankruptcy protection. It should be kept in mind that the above, in addition to being only a rough estimate, is based on the analyst’s worst-case scenario.

2

At least one, US Airways, and that’s a matter of not much time no matter what any of the others do. But if you’re asking if sacrificing US will save DL or UA, I doubt it - their route systems don’t overlap all that much.

Right - people used to flying SWA, for instance, won’t go to another carrier that simply matches fares, there being nothing that the other guys can offer that SWA won’t.

I doubt it. The industry suffers from overcapacity, in part, so any legacy employee who’s left after his carrier’s failure has little chance of getting another job in the industry he loves and probably the only one he knows. Further, he’d be starting over from the bottom of the pay scale. The industry is heavily unionized, with very inflexible seniority rules. For the most part, as well, the legacy carriers have gone through so many rounds of layoffs that their remaining personnel are fairly senior, near or even at retirement age. When you get into your fifties, the security of your pension takes prime position on your priority list. No, they’ll keep doing what they’ve been doing - taking the cuts and hoping to hold on.

That, btw, may be the primary feature defining a legacy carrier - the older airlines have a lot of pensioners to support, and the newer ones don’t. Even if all other costs were identical, a newer carrier could be profitable with the same fares that would lose money for an older one, simply because of its age. Bankruptcy courts have let other bankrupt carriers blow off their pension plans, laying them on the taxpayer instead, but you have to go bankrupt first in order to do that.

There are plenty of other stories out there about US having no liquidity left, all properties used as collateral, they’re in Chapter 11 (again) this time *without * Debtor In Possession financing, their route structure is disintegrating under attack from Southwest and others, and in short they’re doomed. US is the Monopoly player who is out of cash, has mortgaged all of his properties, is still collecting rent when other players hit his houses, but can’t pay the next Chance card - and his marker will hit Chance any moment now.

3

IMHO all “legacy” airlines will be gone soon. They will all start low price spinoff and the mother company will cease to be.

What did Delta say? Their highest coast to coast fare would be $499?

Why pay that when you can get it much cheaper?

4

Is it true that the entire ailine industry has been a NET LOSER of capital? I readonce that the total investment (in all of the US airlines) from 1920 to the present, has yielded a total loss of working capital!
If true, why does anybody invest in airlines?

5

For the same reason people buy sports teams: they’re crazy.

I don’t think Delta’s move has started the clock ticking; that’s been going on for years, and it’s probably the only thing that Delta can do to keep market share.

Thanks to travel websites, it’s a piece of cake to sort through flights from multiple airlines by cost, and consumer loyalty means very little. In the past two years I’ve taken flights on Cathay Pacific, Continental, SouthWest, NorthWest, Delta, American Airlines and British Airlines. I don’t care who gets me there (since I know I’m not going to get anything onboard anyway anymore), just get me there faster and cheaper and at a better time than anyone else.

6

Yes, but that ignores inflation. It may be true even if you don’t.

Not every airline is a loser. JetBlue and Southwest have been able to scrape out a profit even during what has been the Great Depression for the industry as a whole, for instance. Virtually every other one of the post-deregulation startups, something like a hundred of them, is gone, though. The startup capital required is tremendous even if you’re just leasing some other dead airline’s planes, and it’s easy to run out too soon especially if your expansion plans are overaggressive. The legacy carriers’ stock is mostly worthless, though - if the company files Chapter 11, there’s usually no stockholder’s equity left.

Why do people invest in the legacies that still have some value? The thought that things have to get better, or maybe just bottom-feeding arbitrage. Why invest in a startup? The idea that this one is somehow different from most, they won’t make the same mistakes, they won’t get forced out by predatory pricing by the majors (SCOTUS has confirmed that’s legal), the simple romance of the industry.

7

Since when could you get rent on morgatged property? :dubious:

But I agree, the pension plans are eventually going to be the downfall of virtually all of the giant corps. It seems the employees would rather kill the goose than collect the eggs.

8

ELVIS1LIVES is stuck in the 1950’s! I agree, back in the days of people like Juan Trippe (PANAM) and Howard Hughes (TWA)…and even crochety old Capt. Eddie Rickenbacker (the late lamented EASTERN), airlines were indeed romantic. Those were the days when elegantly dressed men and women flew off to Buenos Aires and Hawaii , and had drinks in the planes lounge! THOSE were the days. Now running an airline is like running a bus line-you deal with the lowest rungs of society-I even saw GRAFFITI at an airport once-these are the kind of slime airlines now haul around! So it ain’t 1950 anymore-the CEOs of airlines now busy themselves about how to make pennies, while hauling english football yobs to Brussels, and Joe Sixpack to his $799 vacation in Cancun//blecchh! Juan Trippe would be spinning in his grave!

9

Well, although your ARGUMENT is made much more CONVINCING by your repeated and bizarre use of CAPITAL LETTERS, you missed his point. For investors, investing in airlines is still a “romantic” investment, e.g. an investment that has an unmeasurable utility in the coolness of the investment. Irrespective of your apparent disdain for anyone who isn’t rich, it’s cool to own big airplanes. Why do you think Richard Branson started his own airline?

10

Yes, and thanks for getting my back, RickJay. You could add Donald Trump in there too, although he lost his airline in bankruptcy.

Yes, the old days are gone, and so, since you mention them, are Pan Am, TWA, and Eastern. That doesn’t mean the romance is all gone, though, it’s just different now. Airline people are still emotionally involved with their work to a degree you rarely see elsewhere. They socialize together, even marry other airline people, and share a culture that is still almost uniquely intense. An unemployed airline person at any level wants to get another airline job at any level rather than leave it. Union seniority is only part of it, voluntary attrition at an airline is typically negligible. Even airline CEO’s will bounce from airline to airline, and if one can’t get another airline CEO job he’ll make one by founding a new startup somewhere. It may not last long, but for that period there will be a new province of the airline world for him and a bunch of other airline people to live in.

Just watch “Airline” (US) or “Airport” (BBC) for an illustration of that culture. How many other industries could have comparable entire TV series made of their operations and employees?

shalmanese, you must not play Monopoly by my house rules. :slight_smile:

11

Trump had an airline? When? (I bet it was named Air Trump or TrumpAir or TrumpJet.)

As to the subject of airlines…

I fly a lot, and I fly pretty much every major airline at least a dozen times a year. I avoid Delta like the plague now, and on the rare occasions I have to fly them (usu. when I have to connect in Atlanta) the planes are frequently two thirds empty, so I’m apparently not the only one.

I avoid Delta because they’re always late. ALWAYS late. I don’t mean sometimes, or “always late by 10 minutes.” I mean they are late, every single time without exception, by an hour or more. I have flown then maybe 20 times, and they have never been less than an hour late; well, actually, once I think they got out in just under an hour, like 57 minutes; I was watching my watch because I was amused to see if they could pull it off. The usual wait time is more like an hour and a half to two and a half hours.

I tried US Air a few times. Even later, and horrifying service.

Conversely, I fly Air Canada a lot out of the USA, and for Air Canada to be an hour late is quite unusual (except in bad weather but everyone’s late in bad weather.) I’ve flown them probably 100 times and they might have been an hour late ten times. American’s usually on time, too. Southwest is very punctual. I’ve also never had a problem with America West but that’s a small data sample, maybe 4, 5 flights.

There IS a difference in service quality, and it can’t be helping the dying carriers if other regular travellers like myself perceive that.

12

Although I have a few hundred thousand Delta frequent flier miles, my current job doesn’t require travel, so I have only flown once in the last two years. Along that line, I can’t comment much on the current state of travel.

However, I can’t help but point out what appears to be some flaws in the analysis proposed by the OP. First, and perhaps most significant, is the concept of price elasticity. The OP appears to assume that demand remains constant despite the significant decrease in average prices. I can’t help with any estimates on the price elasticity of airline travel, but I would presume that a dramatic decrease in ticket prices would generate more air travelers (and represent some competitive loss to other modes of transportation, but also cause more travel than otherwise would have occurred).

Assuming that the price elasticity is positive, the next factor to consider is current utilization. If, as RickJay reports, Delta is currently operating at something less than 50% capacity, incremental ticket sales (up toward 100% of seats filled) can be accomplished with very little incremental cost. Another airline, perhaps United for example, that may be operating closer to 80%, suffers a greater revenue loss from seats they otherwise would have sold at higher prices. And they won’t have any significant cost savings to offset the revenue loss. In that sense, the carrier operating at the lowest current utilization stands the most to gain from a price war.

As an aside, I will note my hope and desire that Delta improves their ontime performance, because I now plan to consume as many of those FF miles as possible within the next six months, including some international travel. And I won’t have the luxury of chosing other carriers. Of course, traveling out of Hartsfield-Jackson, there isn’t a whole lot of choice anyway…

13

I flew Delta’s Comair before and after Xmas (avoiding the flight-cancellation day due to bad weather) and my planes were both packed, and on time.

Of course, I was only puddle-jumping, but the planes were coming from elsewhere in thecountry, since they like to park them in Cleveland.

14

The Trump Shuttle, previously the Eastern Shuttle, now the US Airways Shuttle, next who knows. I amaze the gate agents at Continental when I show them my CO FF card with the Trump Shuttle sticker on it.