From this week's Fortune magazine (www.cnnfn.com)

The Future for Airlines: Bust?
Will the entire industry go down?
FORTUNE
Wednesday, March 19, 2003
By Jeremy Kahn


Take a look at airline stocks, and things appear bad enough: Shares of many major carriers have fallen more than 70% this year. But if you look at what the bond market is saying, the entire industry is about to go down.

Bonds from Delta, Continental, and Northwest are trading for pennies on the dollar. American Airlines is reportedly scrambling to arrange bankruptcy financing, a sign it may soon join United and US Airways in Chapter 11. "The bond market is saying that all the major carriers are going bankrupt," says Larry Fink, CEO of money management firm BlackRock. "There's not one survivor."

The bond market has a reputation for predicting disaster. Long before stock market investors got wise, corporate bond gurus realized that heavy debt loads meant big trouble for telecom companies and energy-trading firms. There's good reason to believe the bond market is right about the airlines too.

Fear of terrorism, a weak economy, and soaring fuel costs have ravaged the industry. Since Sept. 11, U.S. carriers have lost $18 billion; they are on course to lose another $6.7 billion this year--even without an attack on Iraq. If there is a war, the Air Transport Association projects that airline losses could climb to $10.7 billion. In a March report the trade group even raised the specter of the "nationalization of the industry as a result of wholesale airline bankruptcies." Shareholders are still betting the airlines will scrape by, but the bond market's message is clear: Grab your parachute and bail.

Uh oh...

A March 19 pre-dated piece is a little old surely? Thanks for sharing. Not sure if someone else posted it "In The News" Forum before but that presumably s where this one is best posted?

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~ Glen ~

Come visit HERE the most ** FRIENDLY FORUM ** on FlyerTalk. No flame wars, no personal abuse, no substance abuse. Not much of anything really!

Maybe a boost to the industry will be one of them going under, like United. IMO UA has the worst service, they are already chapter 11, and are the second biggest carrier. If they went under, their pax would shift to the others. Right now, supply exceeds demand - should an airline go under, that would eliminate a lot of supply, giving the other remaining airlines more revenue.

Obviously a prolonged war in Iraq is also not good news for any of them, I am sure that flights from US to Europe are down, and to the Middle East are way down.

I might argure that supply does not meet demand. That's an easy stement to make in a weak economy. But correct me if I'm wrong, was it not just four years ago that most of us were all flying elbow to elbow as the indistry set new records for passenger loads with some airlines flying their route system at almost 80%. If you look at Southwest or even newcomer JetBlue, you'll find that their load factor is not that much higher if at all. Over capacity? Great idea if comparing ordering too many artichokes for Safeway, but i personally can't but the over capacity story. Nor can I but the stroy that the entire strategy of the bigger airlines is broken. Again, correct me if i'm wrong but did this same system not produce record profits of billions of dollars as recently as four years ago? And while I appreciate all of those that call Southwest the greatest threat and perfect model (i am a fan), I think i need to remind many that Southwest recently celebrated their 30th anniversary. That's right, it's taken 30 years to get where they are and all of a sudden many think they are going to rule the world overnight? Really don't see that in the next 3 years they will accomplish more than they did in all their past 30 years combined? Here's a reality. To a person, every airline analyst now that was doing the same job back in 1990 was wrong. In 1991 - check the public comments - every analyst was quoted as saying that there was too much capacity and the system couldn't support all these airlines and that in 3-5 years there would only be 2-3 airlines left. Well, it's been 12 years since analysts precited the future of the industry with Fortune and other magazines right there with them and guess what - there aren't 2-3 airlines left, there's really the same number with JetBlue or Frontier or AirTran replacing TWA. So while I love to use analysts remarks for what they are.... the record of these types of comments don't seem to be all that great.

These same 'experts' also said that US Airways was toast last August 11 when they entered Chapter 11 and wouldn't last the winter. Well, Spring is here and despite all odds - including the 'experts' predictions - US Airways seems to be surviving. Like stock picking from experts - even the dart board or the monkey can sometimes beat the street.

As a foot note: Not trying to belittle the airline and other analysts profession, just pointing out what seems to be missed sometimes.

Well written, Randy.

Southwest, JetBlue, and AirTran "work" because they have carefully chosen their route structures to cater to the leisure traveller. A route structure, in some cases, a fifth that of what airlines like UA and AA fly domestically.

The Big Six fly to hundreds of domestic destinations that WN/B6 will never touch because the only people who fly to and from there are business travellers or leisure travellers who wish to travel internationally - destinations I expect WN/B6 will never serve (well, B6 with some A330s could use JFK as a springboard to Gatwick and make a deal with EasyJet and Ryanair to then take folks around the continent, but I doubt this will ever happen).

Such large route structures bring with them large fixed (assets, gate rentals, landing fees) and flexible (fuel, labor, financing) charges. Cost-cutting alone will not save any of the Big Six. They must work to both reduce costs and raise revenue / productivity. A WN 737 Captain makes more than a UA 737 Captain, on average, but the WN Captain flies more hours and flights, generating more revenue for WN that exceeds the cost of paying them. They also have a clearly defined fare structure that caters to both the leisure traveller ($99 transcons booked weeks in advance) and the business traveller ($299 transcons booked day of flight).

The Big Six cannot survive charging $300 SFO-JFK, much less $100. But they also cannot survive continuing to charge $3000 when nobody will pay it. At most, there should be five tiers of Economy Cabin fares - 1-3 days out / 7 days out / 14 days out / 21 days out / 30+ days out. The 1-3 day should never be more than three times the WN price ($1000 maximum for SFO-JFK) and the cheapest should be no more than the WN walk-up.

So SFO-JFK would be:
Y - 1-3 Days - (3.0x WN walk-up) - $1000
B - 7-13 Days - (2.5x WN walk-up) - $750
M - 14-20 Days - (2.0x WN walk-up) - $600
H - 21-29 Days - (1.5x WN walk-up) - $450
S - 30+ Days - (1.0x WN walk-up) - $300

The Big Six could then use the Internet to beam "specials" to people when bookings look light. If a weekend flight is running 25% loads, then offer fares at $150.

Yes, some will say "people will wait for the specials". Those that can, may very well do so. Just as they do now. Heck, I often take e-fares if I have some spare time and cash and want to see a city for a day or two.

But if I know I have to be in JFK on a Wednesday, I will book early. The earlier I know I need to be in JFK on that Wednesday the more I can save, but even if I find out 3 days ahead, I can buy a ticket and know I am not getting "soaked".

UA lowered their Y fares from 40-70% in DEN and ORD and evidently saw a boost in people flying them, making more money through enhanced bookings then they would have if they had just left the fares as is and flew less people (people who went to other airlines).

I understand that corporate discounts may very well bring pricing down to, or close to, the levels I have listed. But most leisure travellers do not have access to those fares, and oftentimes employees travelling on leisure do not, either.

Premium Cabin pricing should be 2x Y for 2-Class First or 3-Class Business, with a 3x multiple for 3-Class First to encourage people to buy it instead of upgrading it, but leisure travellers put price first and will only upgrade if they have the miles/certs and feel it is justifiable to spend them.

I am sure that many who flew the Big Six in "the Happy Times" of five years ago would continue to do so if they could afford it. The Frequent Flyer programs pretty much see to that (no snide comments from UA 1Ks, please). But as prices stay high, and service continues to go lower, people are starting to refuse to pay it - either on principle or because their clients and employers will not allow it. This is now revenue lost to the Big Six.

UA could get $2.5 billion in labor cuts, but they lose, what $3.5 billion a year? That's still being in the red $1 billion a year. "Intelligent and honest pricing" could generate that extra $1 billion, and maybe even more, meaning labor cuts would not have to be so deep, helping to improve employee morale.

Randy, do you think UA will stay in business?

I don't find all this excess capacity on UA on their IAD-Europe routes. I was on a MUC-IAD 767 flight that was cancelled. There was no room for us on UA or LH out of AMS, BRU, CDG, LHR, or FRA(all flying) that day and no room out of FRA, MUC, CDG the next day. We got the last two seats out of BRU. We have only had 3 trips since late Nov to Europe, but the UA planes out of IAD have been very full.

The entire airline industry isn't going under, just the American part of it.
American management is not capable of the
type of long-term vision this industry
requires and ,indeed, really doesn't care
what happens unless mega bonuses and
stock options are in the offing for them.

American management? Facts: Did British Airways do such a great job with their version of a low-cost airline? If I recall it was a failure that they eventually sold it. Surely these things aren't related to a particular country. What happened with Ansett in Australia? Why is Varig in South America having tough times and having the merge with a rival?, and shall we also include Swissair? And what necessitated the need for JAL and Japan Air System to have to merge? There's great stories and sad stories throughout the world of airlines. As for the mega-bonuses and stock options, my guess it was only that which landed Gordon Bethune at Continental and he arguably saved that airline from distinction.

I think it would be really hard to pinpoint an exact culture for these failures. Just my opinion.

As an add-on to Randy's reply to bop77's assertions, British Airways announced yesterday that they would shed 3,000 jobs. EasyJet and RyanAir, following the "Southwest Model" are taking huge chunks out of the national European airlines for the same reasons WN/B6 are in the United States - logical and rational pricing.

A lot is said of Southwest's model and why it works, it seems that their model is more of a conservative one that more than likely can assure a profit, but not one that will have the highs (nor the lows) of the models of the big carrier. I have not done the math/research, but in the last, say 20 years, how would you compare their overall profits to those of the majors? They simply choose select routes that they can fill up with domestic cheapie roundtrips, make sure they can make profits and not take chances that could send them into Chapter 11. If all airlines did what they do, though, there would be no international flights and many cities would not have air service. The problem with the big ones seems that they have set up a large model that provides a more complete network fo flights and is very profitable in the big times, but too expensive in the lean times considering the lower revenues. Many have said that the hub and spoke system is outdated and airlines need to shift to systems more like southwest's. What would the industry look like as a whole if that were the case? I don't know, but I think that many smaller cities would have it worse than they have it now. I have a feeling though, that like many things American, because the American consumer likes nothing more than discounts and low prices, eventually they will get what they ask for, and the airline service will get lower and lower until all of them have the same pitiful service. Then when the economy improves again and the war is over and people are flying in droves again, the prices will go up and the service will still be low.

I guess you can compare these times like those in 1978 with the emergence of deregulation. When a big change hits the industry, those that do not adapt quickly enough do not make it.

[QUOTE]Originally posted by SEA_Tigger:
[b]Well written, Randy.

Southwest, JetBlue, and AirTran "work" because they have carefully chosen their route structures to cater to the leisure traveller. A route structure, in some cases, a fifth that of what airlines like UA and AA fly domestically.

75% of Southwest business is business travel,but you are right about the route structure. Southwest route structure is linear instead of hub and spoke which makes better since. All the top 6 for the most part have you go though 2 to 3 hubs to get anywhere and if you have problems such as Denver last week, that can create major problems though out the system.

Randy, do you think UA will stay in business?

Yes, Southwest's logical fare structure is a definite draw to the business traveller tired of paying 10x the cheapest fare just because he booked 3 days out instead of 30.

As for the "linear route structure", it is somewhat debatable if it "makes more sense" than a hub-and-spoke system.

The disadvantage of a point-to-point system is that the two markets have to be able to have sustained traffic between them.

How many people want to fly between Bend, OR and Binghampton, NY? One a week? If that? But maybe 300 people a week each in Bend and Binghampton want to fly to 50 different destinations?

By flying folks from Bend into PDX and then ORD or SFO, they can then branch out to their destination. And Binghampton folks can fly into ORD and IAD and then spread out to their destination.

The problem with a hub-and-spoke system is "feast or famine syndrome". There are "surge times" when maybe one hundred flights come in and go out in a 2-3 hour period, then large "slack times" where maybe a dozen flights are in action. So you need to have maximum staff on hand all the time to serve the "surge" periods, while they hang around during the "slack" times.

Also, this type of H&S system often requires multiple flights within a few minute period from destinations. A few years ago, UA ran something like three SEA-ORD and SEA-DEN flights each morning, often within five minutes of each other, to "sync up" with connections going East, TransAtlantic, or TransPacific.

American has moved to a "rolling" hub system (at least at ORD and maybe other hubs), where aircraft arrivals and departures are "spread out" to allow a smaller ground staff to be stationed, moving from plane to plane. This has evidently saved them tens of millions in labor and airport charges (being able to use less gates).