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USA: State of the Airlines

Contributed by Captain Anup Murthy

Monday, 16 January 2006

Let’s start with what we know so far with respect to the U.S. Airline industry. Several Airlines are operating under bankruptcy protection. One airlines has announced closure, Independence Air, and ATA is on the brink. Employees of those Airlines are out on the streets with their résumé’s. The consumers fear higher air fares.

I have traveled on ATA and I felt that the in-flight service was good and the Airline, looked to an outsider as being well run, good staff, nice new Airplanes with the cabin having drop down screens for entertainment (I flew on some of their B737-800 with winglets). I did not fly Independence but the information from some persons who flew this carrier had good impressions that the service and staff were excellent.

It is important to note that both these carriers were Low Fare Carriers. I have not looked at their business plan, so I would hesitate to call them genuine Low Cost Carriers. The normal assumption is that Legacy carriers have seen their good old days and they would find it hard to keep up with genuine LCC’s such as SouthWest. Here, the ones that went into Bankruptcy and then closure were not legacy carriers at all.

So, is there a signal here? Perhaps success of an Airline is not whether a carrier is Legacy or an LCC, and it actually means that tightly run companies with a proper business plan (read: solid availability of “deep pockets” funding) would be the ones that survive. Some would argue, and maybe they are right, that there is overcapacity in the market. That’s the reason the fares are generally lower across the board. With fuel prices looking less likely to come down dramatically this year, there is more pressure on the Airlines to keep costs low in order to continue lower fares.

If overcapacity was the case, why would leading LCC’s including JetBlue expand at the rate that they are doing now? Why would there be new investment available for the Airline sector and why would new carriers such as Virgin America try to come into this type of market? Perhaps, I can go back to the point where I write about “deep pockets” funding. Adding new capacity would put more pressure on existing carriers especially Legacy ones. United has managed to reduce employee costs and other costs greatly, but still mention that a return to profitability will depend on fuel price going down in 2006.

The American consumer wants low fares. The Airlines cannot run on such fares unless fuel and other costs such as labor can be brought down to developing country levels. That’s never going to happen because there are always airlines that are expanding and coming in new, who need to fill seats as much as possible. That’s why it is important for the U.S. policy makers to decide on changing current practices and bankruptcy protection laws that allow some carriers to fly untouched by creditors. This looks to me as an unnatural and unethical contest between a healthy company and one that is under protection. Free enterprise? Make it so. Really. The fittest will survive.

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Written by Guest on 2006-08-25 12:59:58

I agree Capt.Martin, I am sorry that my comment about pilot wage was misunderstood. I meant that the costs can be brought down (not should be) by reducing fuel and wage costs to developing country levels, thats right for sure but what I mean is that we can't obviously pay those wages and make a decent living in the US. I am actually asking the consumer here to pay more. You mention that you should be paid what the consumer is willing to pay for. Well, the American consumer is looking at rock bottom prices and is not willing to pay for your skils I am afraid. Thats what needs to change and the Airlines must operate efficiently while being able to charge feasible fares. Also, when I mention wage costs, I mean particularly the top executives of the company who get realfat salaries, many many times more than any pilot makes for very less productivity. I would like the executives to be paid for their performance rather than link their pay to the type of MBA degrees they hold. I am all for better pay package for all workers but when you see the salary levels of pre de-regulation era, that was because Airlines charged high fares. Thats another debate. Thanks again for your kind comment Capt. Martin.

Capt Martin
Written by Guest on 2006-08-20 18:14:47

Are you saying you would volunteer to take a wage at developing country levels? I do not know what airline you fly for but I will be looking for you to lead the charge for this to happen. Obviously you do not have any pride in what you do for a living. As for me flying the line as a pilot is to be held as a valuable skill one that the paying customer will pay for. And by the way now that the legacy carriers have restructured the per pilot costs are now lower than the so called LCC's. Southwest now has the highest pilot costs in the industry.

Update
Written by Guest on 2006-03-24 01:40:32

IATA latest forecast halves it's loss estimates for the World Airlines from $4.3 Billion to $2.2 bil. The US carriers are exepected to lose $5.4 bil as opposed to $10.4 Bil in 2005.

The good news is that the a 3% reduction of seat capacity in the US is likely to provide for double digit revenue growth there, helping reduce the losses.

The bad news, as my note, is that these are estimates and a lot of things depends on oil prices. At the time of writing this, March 23rd, oil was at $64 per barrel.

Captain Don Pritchard
Written by Guest on 2006-01-16 15:17:04

Captain Murthy seems to have a good indepth concept of the problems facing the air carriers in the USA today. United's operations under bankruptcy protection certainly does'nt reflect the true spirit of the American free enterprise system and certainly does not represent a level playing field.m