Why can't airlines in the USA stay (financially) aloft?

Factual Questions
1

Very much inspired by this MPSIMS thread.

What’s the deal? NWA* and Delta are both practically in receivership as we speak, and AA isn’t looking at the rosiest of futures, either. (If I’m wrong about any of this, smack me down.) What is it with running an airline in the USA that makes our normally skilled MBAs and such unable to turn a good profit?

*(Only airline with regular service straight outta Compton! ;))

It isn’t like we have credible alternatives to air travel. Amtrak has been a basket case for decades and our bus lines are generally highly unpleasant, especially for long trips. In fact, ground transportation is pretty much completely out if you need to conduct cross-country business.

And they have been cutting back very consistently in terms of customer service and perks. If fuel is a problem, they could easily charge more because, as I’ve said, there isn’t any other option if you need to do certain things.

The US has never had a nationalized airline, and private airlines have held on since the 1920s (in some markets) proving that if you go back far enough historically, someone somewhere was capable of making money by moving people around in planes. What happened?

2

Airlines were actually all doing fairly well in the 90’s, air travel was up due to the tech boom, buisnesses were willing to pay inflated fares, technology made dollars per mile cheaper than ever and the market was divvyed up between a few, big players.

A number of things changed in the 21st century:

  1. Oil went from $10 a gallon to $70 a gallon
  2. Several smaller airlines like Southwestern started that emphasized rock bottom prices and lean, efficient operation.
  3. The major airlines were largely inefficient because there was no pressure for them to become efficient. They had a large, heterogeneous fleet which required expensive servicing, they were very unionised and had large pension obligations which the smaller airlines didn’t have
  4. 9/11 happened, drastically reducing air travel in the short term
  5. security requirements made air travel more onerous in the longer term
  6. businesses became sick of paying exorbiant amounts of money and either switched to the low cost airlines or did more teleconferencing (which was becoming more practical). Since businesses represented only a small amount of volume but a large proportion of the profit, this hurt the big airlines rather badly.
  7. Websites like orbitz made finding cheaper fares easier for the common person
  8. The economic downturn made businesses less likely to fly.
3

Shalmanese: All of that sounds very reasonable.

(As an aside, how many airlines are currently operating in the US? I can only think of Delta, NWA, AA, TWA (maybe), USAir (maybe), Northwest, Southwest, ValuJet (maybe), and one or two puddle-jump outfits I missed. Pan-Am and Braniff died decades ago, and I think USAir and TWA might have bit it more recently.)

4

While Shalmanese lists the usual “management excuses”, the #1 reason by far is management itself. I have had a ring side seat on Delta’s decline into utter failure. (And I also saw Eastern go under.)

These are just your typical horribly run companies. Management is unbelievably incompetent and greedy beyond words. E.g., after the US Congress handed out Big Bucks Of Our Tax Money Without Debate after 9/11 “in order to prevent layoffs at US airlines”, Delta promptly gave all the top management huge bonuses, pay raises, and golden parachute retirement packages and then fired a large number of workers.

Another e.g., an ex-CEO was given a tens of million dollar $/year for 5 years severence package for “consulting” which apparently he never did.

Delta has also had severe ad problems. They have changed agencies many times and they still produce ads that are legendarily bad.

Also, forget the baloney about high pilot pay and such. Delta wanted a $1 billion concession. The pilots offered $800 million. Delta stalled a long time on it. Meanwhile, they were losing billions per year. The $200 million difference is chump change by comparison. If they had made the deal earlier, they could have stalled bankruptcy for at least another 2-3 weeks! Wow! (OTOH, they had to file now because of the change in bankruptcy laws.)

Delta, NW, United, USAir, etc. are all corporate dinosaurs that need to go away. Unfortunately, they will “magically” avoid having to pay into their pension systems so us US taxpayers will be stuck with that.

But at least all those Delta ex-execs got huge retention packages to stay with the airline for a couple years after 9/11.

5

It may seem like that, but a chart in today’s paper showed that “other” airlines had a huge 15.9% of domestic boardings in May 2005, more than the two biggest carriers - Southwest and Delta - combined. There are lots of smaller or regional airlines in the country.

And of the larger lines, you missed Continental, America West, American Eagle, and AirTran, each with over 1.4% of the market. TWA and ValuJet weren’t listed.

6

Warren BuffetT 2002:

I made the comment that if a capitalist had been present at Kittyhawk back in the early 1900s, he should have shot Orville Wright. He would have saved his progeny money.

But seriously, the airline business has been extraordinary. It has eaten up capital over the past century like almost no other business because people seem to keep coming back to it and putting fresh money in.

You’ve got huge fixed costs, you’ve got strong labor unions and you’ve got commodity pricing. That is not a great recipe for success.

7

Back in the days of regulation, the airlines didn’t care about costs. They tossed the unions pretty much anything they wanted, since the consumer had no choice in the matter - it was their rate or no rate.

In the end, this bit on the butt big time, as they couldn’t keep up the high union-negotiated contracts. Still, this would have been managable had the upper management at the majors basically been competent at their jobs. They appear not to be, rarely making any serious effort to change their business.

On the bright side, we’re getting many more airlines run by feisty types, with a wide array of services. The old hub model may be in decline, because it’s not nearly as economical for smaller airlines. The downside is that you may have to transfer planes more often.

8

I believe you meant to say “per barrel” (42 gallons). Otherwise, seems like a reasonable list.

9

One thing that Derleth touched on is that the market has gotten very top-heavy. The Air Transport Association lists 19 “major” carriers in the U.S., which they define as annual revenues greater than $1 billion, and 35 “national” airlines. With so many companies competing for the same passengers and the same airspace, some are just not going to stay in operation forever. The biggest ones like United and American were so used to being “fat, dumb, and happy” that they didn’t adapt to changes in the market. I seriously doubt that the current market can sustain so many huge companies, and the inefficient ones will fall by the wayside.

Another thing Shalmanese didn’t mention is a result of the airlines becoming a victim of their own success: Delays. The airlines expanded into different markets, saying they were responding to consumer pressure to offer flights to more destinations, more often. As a result, the air traffic system became overtaxed, and the delays rippled through the system. So people are fed up with the interminable delays and are finding alternate means of transportation.

10

Interesting post script: The ATA maintains a list of airline bankruptcies, sorted by year. Several airlines have filed for bankruptcy several times:
[ul][li]Braniff in '82 and '89.[/li][li]Pan American in '91 and '98.[/li][li]Eastern in '89 and '91.[/li][li]Trans World Airlines (TWA) has filed three times, in '92, '95, and '01.[/li][li]Midway Airlines has filed four times, in '91 twice (chap. 11 and 7), '01, and '03.[/li]USAirways in '02 and '04.[/ul]

11

Airlines have historically been politically well-connected and nationally prestigious companies. They grew up in an environment of subsidies, government-approved price fixing and monopolies (and still operate that way on most international routes).
When they had to actually earn a living, they couldn’t. And because they are too big to fail, they don’t die.
Instead they have an endless round of bankruptcies, restructurings, cash injections and so forth that temprorarily return them to profit. And each time one of them does this, it pushes one of the competitors over the edge into zombiedom. Chapter 11 is what has made the US airline business what it is today.

12

I don’t have a cite at the moment but from the beginning airlines were subsidized in the US by various means. One of the main methods of the subsidy was through contracts to carry mail. Airlines were along the line of a public utility; given exclusive routes and with fares regulated so that the combined income from fares and various subsidies allowed them to make a profit.

I believe that the problem arises because the public was accustomed to fares that were smaller than those required for airline solvency and when the airlines were deregulated it was really not possible to suddenly raise fares to a profitable level. This would have been political death for the idea of deregulation which was touted as a way of making the airlines efficient like all businesses are (HA).

And so here we are.

13

TWA was bought out several years ago by American. Not long after the buyout I flew on one of the TWA planes in transistional livery and it still had TWA printed on the windowshade.

Personally, I blame two things. One is that the legacy carriers have all these pension and other structures that they have to deal with. The other is that the government simply won’t allow these companies to die but prop them up again and again with subsidies. So that means that there are still too many carriers out there, causing overcapacity and delays.

For a while, I made it a policy to only fly two airlines–Southwest and American. Southwest because they were the cheapest (not always the case now) and American, because at the time they had their “More Room in Coach” program, and those extra few inches made a big difference. Plus, Southwest is always profitable and at the time American wasn’t in too bad a shape (compared to United, USAir, and some others) and I generally make it a point only to fly on airlines not currently in or near bankruptcy. Now, though I’m not likely to fly again anytime soon, I’m probably going to go first with Southwest, since the few things American did that got me on the plane are no longer there.

14

Well, yes there is an option. Don’t travel at all.

As it happens I am an MBA and I also did some consulting for an airline last year in their purchasing group. While this does not make me an expert on all things airline, I did notice a couple of things:

  1. It is a very low margin business. That is to say when it comes to picking a supplier for things like engine parts, reliability is far more important than cost. An airplane getting serviced in the hanger is far more expensive in terms of lost revenue than any savings you would get by going with a lower priced supplier.

  2. It is expensive. Fuel and maintenance are huge costs.

  3. It is wasteful. Our particular client realized millions of dollars of savings by having us in there helping them put together contracts with their suppliers.

  4. Not all aircraft are created equal. During a casual tour of the hanger, the mechanics were telling me how much more fuel efficient the current generation of engines are relative to some of the older ones. The older ones are still in service in a lot of aircraft though.

  5. Not all routes are profitable. Southwest, Song and Jetblue do well because they only fly a limited number of routes.

15

and

There’s another you both forgot, although given its marginal status, that’s completely understandable.

United.

:slight_smile:

16

T.W.A. merged into American Airlines about five years ago.

AirTran Airways used to be ValuJet.

USAir is now called U.S. Airways, which was its legal name anyway ever since it stopped being Allegheny Airlines.

America West and U.S. Airways are in the process of merging.

The current Continental is the result of a 1980s merger between Continental and Texas Air (which I think is still the name of its parent company)

For a long time, Northwest went by the name Northwest Orient.

The currently “hot” airlines are Southwest, Jet Blue, and AirTran, none of them legacy carriers.

17

We use Alaska Airlines up here in the Pac NW a lot and they seem to be doing pretty well. Of course this may be because they have a stranglehold on the market in Alaska and can charge whatever they darn well please.

18

Does anyone have figures on what % of an airline’s expenses are union contracts? I suspect this is a piddling sum compared to executive salaries and bonuses and even less compared to equipment and fuel.

Airlines are pretty heavily subsidized by the taxpayer in the end through, if nothing else (and I’m sure there’s a laundry list), airports funded by the public.

19

Northwest Airlines
– founded in 1926 as Northwest Airways
– changed to Northwest Airlines in 1934
– branded as Northwest Orient Airlines from 1947 to 1986 (but never changed legal name)
– acquired Republic Airlines in 1986

Republic Airlines
– formed in 1979 by the merger of North Central Airlines and Southern Airways
– when acquired by Northwest in 1986, it was the largest U.S. airline according to passengers served

United Airlines
– founded in 1927 as Boeing Air Transport
– 1929 renamed United Aircraft-Transport Corp.
– United Air Lines formed in 1934 by the breakup of the Boeing group into separate parts manufacturing (Pratt and Whitney), airplane manufacturing (Boeing Co.), and air service (United Air Lines) entities
– acquired Capital Airlines in 1961
– in 1968 reorganized as a subsidiary of UAL Inc.
– began trans-Atlantic service in 1991 by purchasing London routes from Pan Am
– world’s largest commercial airline from 1961 until the American-T.W.A. merger

U.S. Airways
– founded in 1931 as All American Aviation
– in 1939, renamed All American Airways
– in 1952, renamed Allegheny Airlines
– acquired Lake Central Airlines (founded in 1951) in 1968
– acquired Mohawk Airlines (founded as Robinson Airlines in 1945) in 1972
– In 1979, renamed USAir
– In 1987, acquired Pacific Southwest Airlines (founded in 1949) and Piedmont Airlines (founded in 1948)
– In 1996 renamed U.S. Airways (already its legal name)
– In 2005, announced planned merger with America West Airlines

AirTran Airways
– founded in 1993 as ValuJet
– acquired AirTran Airways in 1997 (founded in 1993 as Conquest Sun Airlines and renamed AirTran Airways in 1994) and adopted the AirTran name

American Airlines
– In 1934, American Airlines formed from the ailing American Airways Co. (one of several unrelated companies using the name)
– In 1948, sold its European subsidiary, American Overseas Airways to Pan Am
– In 1982, reorganized as a subsidiary of AMR Corp.
– In 1986, acquired Air California
– In 2001, acquired TWA, becoming the world’s largest airline

Continental Airlines
– founded in 1934 as Varney Speed LInes
– renamed Continental in 1937
– acquired Pioneer Airlines in 1953
– In the 1960s spun off Air Micronesia (now known as Continental Micronesia)
– acquired by Texas International in 1982, which adopted the Continental name as its public brand

Delta Air Lines
– founded in 1924 as Huff Daland Dusters
– in 1928, renamed Delta Air Services
– in 1972 acquired Northeast Airlines
– in 1987, acquired Western Airlines (which had been spun off by TWA in 1934)
– in 1991, acquired Pan Am’s European routes

Capital Airlines
– founded as Clifford Ball Airlines in 1927
– in 1930, acquired by Pittsburgh Aviation Industries Copr. and renamed Pennsylvania Air Lines (later Pennsylvania Airlines)
– in 1936, merged with Central Airlines (founded in 1934) to form Pennsylvania Central Airlines
– in 1948 renamed Capital Airlines
– in 1961, acquired by United

Braniff International Airways
– founded in 1928 as Paul R. Braniff Inc.
– re-established in 1930 as Braniff Airways Inc.
– ceased operations in 1982
– relaunched by a Hyatt executive in 1984 as Braniff Inc., a subsidiary of Dalfort Corp.
– ceased operations again in 1990, assets bought by America West Airlines
– failed relaunch again in 1991

Eastern Airlines
– founded in 1926 as Pitcain Aviation
– in 1930 renamed Eastern Air Transport
– in 1938, acquired by Eddie Rickenbacker
– headed by astronaut Frank Borman in the 1980s
– In 1986, acquired by Frank Lorenzo, who sold the shuttle service to Donald Trump and other assets to Texas Air and Continental, also owned by Lorenzo
– In 1990, sold Latin American routes to American and European routes to Continental
– ceased operations in 1991

Pan American World Airways
– founded in 1926
– sold to Aviation Corporation of America
– In 1930, acquired the New York, Rio, and Buenos Aires Line
– In 1980, acquired National Airlines (founded in 1934)
– In 1991, suffering financially following the 1988 Lockerbie disaster, sold its London routes to United and remaining European routes to Delta and then ceased operations
– relaunched in 1996 as a Caribbean service
– merged with Carnival Airlines
– ceased operations again in 1998
– launched a third time by Guilford Transportation, a Mellon company, in 1998, flying between small cities in New England and Florida
– acquired by Boston-Maine Airways, which ran into financial and legal trouble in 2005

Trans World Airlines
– founded in 1925 as Western Air Express
– in 1930 merged with Transcontinental Air Transport and renamed Transcontinental and Western Air (T.W.A.)
– In 1934, spun off Western Air, which became General Airlines and then Western Airlines
– in 1939 acquired by Howard Hughes
– in 1950, renamed Trans World Airlines
– Spun off by its parent company, Trans World Corp., after airline deregulation in 1979
– acquired by Carl Icahn in 1985
– In 1986, acquired Ozark Airlines (founded in 1950)
– In 1998, reorganized as a domestic airline
– acquired by American in 2001

People Express Airlines
– founded in 1981
– In 1985, acquired Frontier Airlines
– acquired Britt Airways and Provincetown-Boston Airlines
– acquired by Texas Air in 1987 and merged into Continental Airlines

20

  1. Oil is the biggest short term problem, but it isn’t the whole story. While an airline like Southwest will see its profit decline, careful hedging of fuel costs will keep Southwest at least profitable, I believe.

  2. Efficiency seems to me to be one of the biggest issues. The discounters keep their planes in the air (and therefore making money) as much as possible. The legacy carriers will have a jet land at a hub airport and it might sit for 1-2 hours while the connecting passengers come in. I know Southwest’s turnaround goal is 20 minutes. Some of them have flight attendants tidy cabins on the ground rather than special crews for that.

  3. Labor costs at the larger airlines. I don’t want to make this into a big pro-union/anti-union thing. But the costs for all employees are generally higher at the legacy carriers in terms of salary, benefits and pensions. The lgacy carriers have a long history of labor strife usually resulting in more salary for employees whether the airline made money or not. Discounters offer more in terms of stock, profit sharing, and other incentives. Some functions are outsourced by discounters such as maintenance. The big guys can’t get that unless their regular staff in on strike.

Lots of things go into it. In the end, I don’t know if bankruptcy will necessarily stave off the eventual shrinking of the industry. Some carriers (US Airways, US Airways and US Airways) just haven’t been very well run and may yet vanish. We hope. Hopefully the legacy carriers can figure out what they are doing. But as long as the discounters are out there putting pressure on them, they can forget about the good old days of charging $1,500 for domestic economy tickets.