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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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