AIRLINES TODAY...
Ben Stein Once E-mailed MeHoo-Hah!
Fading Away (1926-2009)While the musical concert fundraiser for Trevor Tredaway continues to develop, I fielded an e-mail for my response to commercial aviation mergers in the news. Long before I became a contributing editor with Airways magazine, I was a financial reporter for Barron's Business & Financial Weekly--neither position has qualified me as an expert. Many people view owning an airline as a sexy business. Nothing could be further from the truth! I've sat down with too many CEO's of airlines around the country for hours and our conversations were quite sobering. So that you might a little sense of today's business news, here's what's going on-- and I'll even add my two cents in for good measure.
Delta Air Lines and US Airways recently announced "two simultaneous asset sales" (although no cash was ever exchanged) for some very hefty route swaps that makes some sense at New York's LaGuardia and Washington's Reagan National airports. Delta's acquisition of substantially all of Pan Am's Atlantic routes and their Boston-New York-Washington Shuttle back in 1991 catapulted that carrier into a major international player. In this deal, Delta, which recently acquired Northwest Airlines, will expand its New York operation with 125 pairs of slots from US Airways' New York's LaGuardia Airport. Those slots are currently flown by smaller US Airways Express regional jets, where Delta will substitute large jets. In return, Delta will swap off 42 pairs of slots at Reagan National Airport to US Airways, along with the rights to fly from Washington to Sao Paulo and Tokyo. This gives US Airways 15 brand new non-stop destinations from their profitable lock hold on Reagan National and Delta gets a chance to ramp up competition head-on with rivals Continental Airlines and JetBlue in New York (no that's not a misspelling--JetBlue is spelled that way).
Few see US Airways as a stand-alone, long-term player. They have been courting United Airlines. Both airlines, unfortunately have a lot of problems, and combining two troubled airlines will not make for one healthy airline. Three years after US Airways was acquired by smaller but well regarded America West Airlines in Tempe, Arizona, a dispute over integrating pilot seniority lists leading the two company pilot groups to abandon their union ALPA, form separate unions and beat the hell out of each other in court.
Then we have Chicago-based United Airlines. Their employees have sought on at least two occasions to have their CEO, former Texaco oil executive Glenn Tilton replaced with a court-appointed trustee to help stem the airline's losses. Not to drop names, but one night in Ohio, I received an e-mail from American actor, political and economic commentator Ben Stein asking me where the hell I came up with the fact that during United's bankruptcy (when they were losing $24 million a day, Tilton leased an $18,000 a month condo in downtown Chicago). I told Ben that I'm also a journalist like him. But like a good neighbor, I backed it up by giving him a public domain source (but not my personal one). I haven't heard from Ben since, but he's still an interesting guy. But I digress. Continental will leave Delta-led Skyteam on Tuesday to join the United-led Star Alliance three days later. Smart move for the healthiest "legacy carrier" in the business!
On one side of this equation: Airlines merge to achieve "critical mass" and achieve "economies of scale and scope". Allow me to use plain language. The name of the game in consolidating airline companies is to become more dominant by capturing market share (achieving critical mass) while reducing operating costs (achieving economies of scale and scope). On the other side of the equation, when mergers of this scale occur, the consumer has less choice because the pricing power is determined by the handful of huge airlines left in business. In other words, they determine "market rates" in a scenario many call a monopoly. Nowhere is this more apparent than in England where Sir Richard Branson, Chairman of Virgin Atlantic Airways has sent a letter to U.S. President Barack Obama encouraging his administration to block the de-facto merger between American Airlines and financially troubled British Airways--the result of which would lock up 80% of the slots (slots, by the way, are landing and takeoff rights) to prestigious London Heathrow Airport. Sir Richard Branson, a shrewd businessman who is bold without overpaying for assets, has offered to take over select routes from ailing rival British Airways, should they elect to stop operating some of them. I see no end in sight with either the formation of new airlines and the consolidation of the current players. While United States airline deregulation has witnessed the collapse of over 200 airlines--including such iconic names as Pan Am, Eastern and Braniff International, consumers have benefited from lower fares. However, the airline business fluctuates so much because of it's high fixed costs and dependency on consumer demand. When competition leads to massive fare cuts and price matching, airlines typically are unable to cover their costs for delivering services. It is the only industry I'm aware of that operates with a negative working capital scenario. And no, this is not a joke.
Now my two cents: So, the question becomes, "How big do we allow our airlines to become?" and "Are we discouraging healthy competition and consumer choice by allowing competition, or should we allow the market place to determine who stays in business and who throws in the towel?" What has always been clear is that the public wants safe, dependable airline service with high frequencies and low costs. Whether airlines can stay ahead of the curve by merging and resorting to charging for baggage, soda pop, sandwiches, plastic headsets and on board in flight entertainment systems remains open to question. While I'm sympathetic to British Airways CEO Willie Walsh and his need to find a solution to stabilize BA, I side with Sir Richard Branson. As has also been evident on this BLOG Page for years, I am a fan of Sir Richard (Virgin Gallactic notwithstanding). He may be one of the richest men in the world, but unlike women who give you their e-mail and never answer you, Branson personally read and answered my letters years ago. He is the personification of Class! British Airways' decision to link up with the arrogant American Airlines (remember, I lived in Dallas for 21 years and know them well) is purely a business deal. British Airways is a fine airline (formed by the merger of BEO and BOAC).
Regarding Delta, I refuse to fly them on the grounds of principle. The way in which they went about acquiring what remained of beleaguered Pan American World Airways was indefensible. I'm sorry people, but I have many friends from Pan Am and there is right in wrong in life and in business. Delta had it's last true leader when Hollis Harris was at the helm, and no, the employees of Delta had nothing to do with Delta's checkered past. It all emanated from their CEO's office from around 1985 forward.
Last point: AirTran (yes, the spelling is correct here too) is a good Low Cost/Low Fare carrier. They operate Boeing 717's and 737's. Truth be told, they took a page out of the playbook of my late friend Marty Shugrue when he was Trustee at Eastern Airlines and attemptied to restart that proud carrier in 1995. Basically, what you are seeing with the success of AirTran was Shugrue's business plan for the "New" Eastern Airlines, in my opinion. I make no apologies for that observation either, it's the truth and I wish AirTran well. They have been a proverbial "thorn in Delta's side" for years. However, unlike TWA's effort to set up a second smaller hub at Atlanta Hartsfield Airport in 1993 and Eastern, who had a formidable hub there (if you're too young to recall, Eastern was once the third-largest airline in America) Delta was unable to run AirTran out of town.
Airlines in America lack marketing differentiation (with the exception of Southwest Airlines). We've become as complacent as the CEO's who run these companies. When we expect little, we get little. I hope this picture changes, because In terms of covering this exciting industry as a journalist, I would have to say that the heartaches far outweigh the joys in the current commodity-driven economy. This is my opinion only and no one elses. And having said that, I wish you all a...
posted by Michael Manning @ 10:15 AM
6 comments
links to this post
6 Comments:
I'm not a fan of Ben Stein. I'll leave it at that.
PM: It was late at night and I had read a column he had written about how ludicrous the atmosphere had become at United Airlines. On a whim, I shot him an email telling him about Tilton's unusual perk in the midst of the company's Chapter 11 filing. After considering this, he asked me what my source was. I deliberated for 15 minutes and provided a source in the public domain to preserve the identity of my personal source. The condo story is absolutely correct. As you know, I am not a politician and don't follow the hue and cry of either party. I think my point about Ben is that no one can deny that he's had an unusual career path.
I often fly Delta, not because I like them but because I'm still using frequent flier miles which I acquired when living in a town served on by Skywest--which is a Delta feeder... That said, AirTrain's connection from Flint, MI to Atlanta makes it worth my while to fly out of there (it's 95 miles away) instead of flying out of a larger airport 25 miles away. Delta has to keep its flights low to match their prices.
Sage: The big boys will do whatever is right for them. That is American, United, Delta, Continental and US Airways. Sad. Because the group used to be called "The Big Six". But we lost Northwest. Southern merged with North Central Airlines to form Republic Airlines who along with Howard Hughes' last carrier, Hughes Airwest were all folded into Northwest Orient (renamed Northwest). Pan Am and Eastern are but a faded memory in this group of survivors. It's brutal and more consolidation is coming. I too prefer the convenience of smaller airports. Many Miami residents will drive to Fort Lauderdale, Florida International simply to avoid hassles of long lines and delays. :) Plus many flights are cheaper out of FTL.
if you take the thing i *don't* like about airplanes (cramped seating), that's the direction airlines are going.
and if you consider what i *do* like when i fly (meals, friendly people, space in the overhead bin), those are areas airlines cut back on.
and why should one person fly for $299 and another person fly for $1,299 for the same class seat?
frankly, i'd rather go back to paying $25 more for a seat and have more legroom, a nice snack/meal, being treated with dignity and a received with a warm smile.
Seraphine: But as I have witnessed with the late Eastern Airlines ("The Corporate Rate") and TWA (More Leg Room in Coach) and American, these expensive retrofits were all canceled because the flying public flies an airline for a 5 letter word P=R-I=C=E. When US Airways' analysts tell senior managers that it would require an average of $450 per one-way ticket to cover their costs and maybe make a profit, it becomes clear that the system is broken. Domestically, Allegiant, Southwest, Spirit, Air Tran and Jet Blue do a decent job getting you from Point A to Point B. The rest is a mess. lol! :)
Post a Comment
Links to this post:
Create a Link
<< Home