How long can the big airlines survive?
Competition from low-cost carriers and high oil prices threaten as summer travel nears
The once-friendly skies of the nation's major airlines have gotten a little reserved, even irascible of late. And six months from now, the atmosphere at 30,000 feet could deteriorate even further.
Air travel has been undergoing a steady metamorphosis since 9/11, with carriers shrinking legroom, pulling free meals, and even eliminating complimentary pillows. And thanks to high oil prices and intense competition from upstarts like Jet Blue and Southwest, the process is only accelerating.
That's put the so-called legacy carriers in a position that some analysts say just isn't sustainable. A few, like US Airways or United, may go under in the next few months. Others could suffer a slow, steady decline, while the most successful of the former giants in the sky may simply morph into bigger versions of their low-cost nemeses.
"It's good news for the airlines that they've been able to accomplish what they have in terms of cost-cutting," says Kevin Mitchell, president of the Business Travel Coalition, which represents corporate travel executives. "But the long-term trend is still declining yields, so it's not a pretty picture."
Since deregulation in 1978, the nation's major airlines have thrived in a boom-and-bust cycle, economizing during recessions only to rake in money once economic indicators started looking up again. But in this last economic upturn, the majors continued to lose money. Because of high fuel prices, they're on track to lose an estimated $5.5 billion this year.
That means, as Dave Swierenga of AeroEcon Consulting puts it, "They have not filled up their barns, they haven't prepared themselves to weather the next downturn."
As the economy slows, it's going to become even more difficult for them to borrow money. Without good credit, the legacy carriers will find it difficult to buy the new planes needed to meet growing passenger demand. And because they're not rebuilding their fleets with more efficient planes, they also won't be able to bring their costs down as fast as they need to in order to keep up with the low-cost carriers.
"I see that as a serious threat to the future of the industry, at least when you're talking about the next 10 years or so," says Mr. Swierenga.
But Swierenga isn't ready to write off the majors yet. He contends that they've proved to be "vigorous competitors" by pioneering such cost-saving innovations as check-in kiosks. Some majors are also picking up on the cost-saving strategies employed by the low-cost carriers.
For instance, JetBlue and Southwest fly primarily point to point, in other words, direct from one destination to another. As soon as their planes land, they clean them and fill them back up again. The legacy carriers operate in what's called the hub-and-spoke system. They bring in as many planes from different locations as possible into a central hub location and give them an hour or more to unload so people can make connections. That's good for the consumer who doesn't have to wait around too long to catch a connecting flight, and it gives the airlines a much bigger network and geographic reach. But the downside is that it's inefficient: The planes sit on the tarmac unused, and crews have longer waits between flights.
The legacy carriers premised their hub-and-spoke systems on the notion that business passengers would pay a premium for the convenience of more connecting flights. Some, like Delta, are now scheduling their flights to use their aircraft and personnel more efficiently.
That brings up yet another issue for the large, older carriers - changing expectations. For decades they've focused their advertising on their great service and frequent-flier benefits. Now, the low-cost carriers are touting low prices rather than perks. As the big carriers have had to cut back, service is suffering and passengers can't help noticing, says Clint Oster, an aviation economist at Indiana University in Bloomington.
"You have some nervous and unhappy people on the front lines for the legacy carriers," says Professor Oster. "If your carrier is bankrupt, you've probably already given back wages and benefits and so many people have been laid off that those who are left are the more senior, those who remember the good old days. So it's not too surprising that you see some discontent."
At the same time, more people are flying JetBlue and SouthWest and realizing that in addition to offering lower fares, the low-cost carriers also have cheerful employees and great on-time performance, to say nothing of the free TV on JetBlue.
Indeed, for the first time, five of the top six carriers rated by the annual Airline Quality Rating survey were low-cost carriers.
"The big problem for the legacy carriers is still trying to get their overall costs in line, without sacrificing the quality," says Richard Gritta, an aviation economist at the University of Portland in Oregon. "That's really, really tough when you're inefficient to start with and then you throw in the price of oil, which has pushed $60 a barrel."
In addition, more people are flying now than pre-9/11, but they are also paying far less to do so. According to the Air Transport Association (ATA), the lobbying arm for the nation's largest carriers, passenger revenues used to make up between 0.95 and 1 percent of gross domestic product. This year, they accounted for 0.7 percent. This means that $29.3 billion that used to be spent on airlines, no longer is.
The result is that the nation's aviation system will look very different in five years.
"I see convergence. The low-cost carriers are becoming more like network carriers, and network carriers are becoming more like low-cost carriers," says John Heimlich, an economist at the ATA. "Something that's the best of both worlds is emerging. The real question is how many of each do we end up with?"