Airline Bankruptcy Facts V Myths
Cutting Through The Lore
It's understandable how many folks get the wrong idea when they hear the term "airline bankruptcy" - especially in light of the number we've seen over the past five years. But some of the immediate conclusions coming from various media sectors have done nothing to really inform the public about the real nature of this situation, particularly the Delta and Northwest filings.
Somehow, several "unquestioned truths" have been promulgated in the wake of the DL and NW bankruptcy filings, many of which have no basis in fact, only in accepted lore. The accepted "facts" often are nothing more than "everybody knows" opinion. Yet they seem to be stated over and over, with nobody daring to question them, lest the questioner be burned at the stake as a heretic.
Let's note a couple of them:
WN's Profitable. That Means Other Airlines Should Be Just Like Them
Fact: The current Southwest model is really not profitable. It's living on very cheap fuel. It's a tribute to its management that it made a bet - a hedge - that fuel would go up, and it's now enjoying fuel at well below market rates. But its fundamental model, on an all-up cost basis is losing money. (More below on this)
Chapter 11 Is Just keeping Sick Carriers Alive
No, it's buying time for Delta and Northwest. Neither have a sick route system, although Delta needs to address its over-reliance on RJs. As noted below, Northwest has a route system that is geared for the future.
There's only so many people who can be convinced to chuck their plans for a new refrigerator and use the dough to take a low-fare LCC airline to Florida instead. But the current and future revenue streams between the fast-growing US centers of Asian investment on one hand - most of which are too small to support LCCs - and points in China on the other, are huge. Chapter 11 is allowing these carriers to adjust to what are immediate crises in fuel costs. (And, by the way, LCCs are suffering this too.)
If We Let'em Die, LCCs Will Take Their Place
Get real. Ask the folks in places like ROA, LYH, and BPT about the flood of LCCs that rushed in to replace service lost when a mega-carrier pulled down a hub.
The LCC model, not to mention investment capital, chases big markets, not small and medium size ones. Southwest and AirTran have made that quite clear - they're not interested in expanding at small or medium markets any longer. Flint is a great place for AirTran, but economics point to future expansion in Southeast Michigan being at Detroit.
The same windbag politicians who call for letting airlines fail will be the very ones who will rant and rave when East Upchuck loses all scheduled air service, and Southwest declines the opportunity to operate there.
LCC's Are The Future
Fact: It's here where the next shake-out is coming. First, they are not by and large really profitable, and the picture looks worse going forward. Second, there is an ultimately finite number of places where 100-seat to 150-seat airliners can be placed to make money with the LCC model. Third, take a look at the airplanes coming on line just at AirTran, jetBlue, and Southwest. Hundreds and hundreds. From a marketing point of view, they're already beginning to bump into each other. And for the folks ascribing to the "over-capacity" theory, these new aircraft offer no hope for getting a good night's rest.
The Reasons For C-11 Filings Are Essentially All The Same
Again, wrong. The causes for Continental to file in the 1990s, for TWA to file more than once, and United's filing, are very different than the reasons for DL and NW going the C-11 route. Again, look at the specifics of each incident, and there are few common threads beyond them all being airlines.
Letting A Couple Go Down Will Reduce "Over-Capacity"
Fact: we've already lost essentially the equivalent of one airline on the East Coast. US Airways dumped over 100 airplanes in the last three years. And, indeed, we have seen capacity reductions. In places like Roanoke. But where the huge passenger numbers are, airlines are still fighting for share.
It's lunacy to believe that in these "over-served" markets the failure of say, a United, would permanently reduce capacity allowing fares to go up. Just for starters, again, take a gander at the fleet plans for jetBlue, Southwest, Spirit, and AirTran. It's going to be a capacity free-for-all, and a major airline failure will only zap mid-size communities. Ask the ones who got the short end of the US PIT pull-down, or the DL DFW pull-down.
The Regionals Are Profitable, So Let Them Take Over
This is a statement often heard, but one that can only come from somebody who literally is on another planet from airline industry reality.
Fact: "regional airlines" are vendors, not airlines. They get their revenues based on selling services to mega carriers, not from passenger tickets. For example, Delta pays Comair on a cost-plus basis to provide it with feed traffic. Without that cost-plus deal, Comair would instantly be transformed into Independence Air, Phase II.
Consolidation Will Fix Everything
Sounds good. Gee! Look at the great synergies that would come from a combination of say, Northwest and Delta!
Unfortunately, there are some very expensive things that would have to come about to merge the two airlines and get operating synergies. Like, fleet commonalities. Taking a Boeing-operator and putting it together with a predominantly Airbus operator would require enormous amounts of expensive pilot training, maintenance training and the like. Just bridging maintenance programs between two fleets of 757s can be hugely expensive, even assuming they have the same engines, systems, and cockpit configurations. The bid-and-bump routine for pilots and other staff (which would be necessary if there were to be a combination of disparate fleets) would entail possibly hundreds of millions in costs to train and shift crews around.
Sorry, it looks good, but the results would not be as grandly positive as some seem to think.
Other Common Myths
Myth: The Legacies Are Dead, The LCCs Are The Future: Lots of the alleged "experts" are telling the world that legacy carriers simply cannot compete anymore with the likes of Southwest and jetBlue, which, they point out, are consistently profitable.
Fact: This is a sure sign that whoever makes the statement doesn't know any more about the fundamentals of today's airline industry beyond what they just read someplace else.
Note: Last quarter, American and Continental reported profits, and they were essentially paying "retail" for their jet fuel.
Note: Last quarter, if Southwest had been paying retail for their fuel, they'd have reported a big loss. True, they have hedged fuel, but that was a bet they made long ago - a bet that, fortunately, they won big-time. But it does not change the fact that on an apples-to-apples basis, AA's cost restructuring over the past three years gave it an all-up quarterly profit, and on an all-up basis, Southwest's system isn't making money.
It's great that whoever lost the hedge bet is bearing much of the cost of WN's fuel, but without that, the basic model Southwest operates today isn't a money-making one with high fuel prices.
Myth: NW & DL Are In Bankruptcy Because They're "Legacy" Carriers.
Wrong. It's not the "system." It's not the "legacy" problems from the 1970s that pundits try to point out through the haze of over 25 years since deregulation.
Their problems were that they got caught in the headlights by fuel prices that went up a lot faster than they could adjust to quickly. True, both were in the process of getting their labor costs down - something that American, Continental, and United have already done. When jet-A went to over $2 a gallon, the immediate need was to conserve cash while labor and other cost reductions were achieved.
Lots of "experts" go into diatribes about how these legacy carriers have unsupportable cost structures and route systems, dating from the days of regulation in the 1970s. Sounds great, but it is more nonsense. It's missed by these grand prognosticators - most of whom have never worked within the airline industry - that if oil had stayed right where it was at the beginning of last year, as most of us expected, these filings would not have taken place.
The fact is that many of these alleged dead-man-walking legacies have addressed most of those structural problems. The fact is that most of these legacies - Northwest being at the top of the list - have revenue systems that will make them in the long run (and even in the short-run) the carriers to bet on.
But when fuel cost doubles in a period of only a few months, and a hurricane flummoxes both the price and the distribution of the stuff, the cash positions of airlines can get zapped quick. It's just that NW and DL had not gotten their labor costs down fast enough. In the case of DL, you could make an argument that the pre-Grinstein regime sat on its hands. In the case of NW, you could argue that the strategy taken didn't address labor soon enough.
But what you cannot argue is that the basics of these two airlines - particularly Northwest - are fundamentally flawed. They are not.
If fuel had stayed where it was projected to in early 2004, we would not be now bombarded by the dogmatic idiocy being spit out by a whole circus of sudden experts on the airline industry.
It's Management Decisions. Not A Fundamentally Faulty Model. It is arguable - and true - that Delta, an essentially non-union company, waited too long to get things in order, and was caught right in the cost cross-hairs when fuel went for the moon. Northwest had the apparent strategy to get other costs down first and go to labor later, if necessary. (Continental had the same approach.) When fuel went up, NW, too, got caught, even though they already had de facto concessions from two of their four main unions. (Pilots, and, by virtue of bringing in replacements, their mechanics.)
But these are hindsight calls by the usual suspects of the school of veneer reporting. If oil had stayed in the mid-$30s, as expected, they'd all be singing a very different tune.
There's A Revenue Side, Too. Then let's talk revenue streams. To hear the "let'em die" analysts tell it, Northwest and Delta simply don't have route systems that work.
Wrong.
Northwest in particular has one of the strongest route systems and revenue flows in the industry. The mantra-chanters have no knowledge about things like where current and future revenue growth will be. Hint: the future is not in trying to get more families to take trips from the Northeast to Florida, which is a mainstay of LCC operations. It's not relying on the potential for stimulating new demand with low fares between Boston and Lincoln. It's not just cherry-picking heavy markets like transcons.
Sorry to disappoint them, but as we'll note below, the new, growth revenue flows are between places like Montgomery and Seoul. Tokyo and Grand Rapids. Charleston to Osaka. Shreveport to Lansing. Greenville-Spartanburg to Milwaukee.
These, and dozens of other destination pairs, are where the future is. And where the LCC model mostly can't go.
Myth: The Hub-And-Spoke System Is Inefficient. There are the usual parrots that are spouting the "fact" that it's the "point to point" airlines that are making money, therefore the legacy carriers' hub systems are obsolete.
Depending on the source, the story is sometimes accessorized by babble about fleet utilization, assuming that just flying an airplane makes money. In another twist, they sometimes point to the number of airplane types legacy systems operate, and note that Southwest only has "one" type of aircraft in its system.
Fact: This is another badge of ignorance from people who get their airline knowledge from the cocktail party circuit.
Note: The most successful new low fare carriers are indeed primarily hub-and-spoke. Guess Frontier didn't attend the same cocktail parties. Nor did AirTran. Even Southwest, contrary to the cognoscenti, operates substantial connecting operations, and over half of their passengers connect to other WN flights. Phoenix, Nashville, Houston, and Las Vegas all represent operations where Southwest interconnects passengers.
Note: Southwest doesn't operate just one type of aircraft. There are fundamental differences in their fleets of 737-300/500s and their fleet of 737-700s. Until the end of last year, they actually operated a third type, the 737-200. It is a fact, however, that Southwest does focus on fleets of airliners between 124 and 140 seats, which is the general template for the LCCs that some of these "analysts" predict can and will replace Northwest and Delta, both of which have sinned greatly according to some "experts" and must go out of business.
Note: Airplanes are operated to generate revenue. These "one airplane type is better" people know nothing about the airline industry. They hear somebody say something about higher efficiencies in maintenance, pilot training, and parts inventory in having a much simplified fleet, and assume that if "fewer" is better, well then, just one type must be the ultimate. Noting that this is another accepted mantra they read all the time, it's safe for them to repeat it as gospel. It's also el toro doo-doo.
Fact: A Varied Fleet Is Necessary To Generate Revenues. Rather than go into trying to explain the obvious about revenue generation, let's point out Shreveport.
It's a major auto center that provides a lot of traffic to American's hub at DFW and to Northwest's hub at DTW. Lots of revenue that goes on to other points on existing AA and NW flights - including ones where they must compete with an LCC. To capture this revenue, they use 50-seat jets, and they pay an operator for the lift. These communities are too small to support the high-frequency LCC model operating 100 to 150 seat jets.
But AA can access these revenue streams. True, they do it with a small jet provider, but it's system revenue that Southwest can't access. The same for the strong yield flows that AA and CO are gaining from places like Saltillo, Chihuahua, and other points in Northern Mexico.
AA and Northwest also operate their own 100 to 150 seat jets. Like the RJs, these provide lift into their hubs from points such as New York, Tampa, and Los Angeles. Guess what these airplanes feed? Widebodies carrying passengers going to and from places like Shanghai, Tokyo, and Hong Kong.
Point: The LCC model is fine. But it cannot access much of the emerging revenue streams, particularly those where the future growth is. Montgomery, Shreveport, Charleston, and other gateways to regions that are targets for huge foreign investment. Southwest, AirTran, Spirit, Frontier, et al, are great airlines. But their chosen model focuses on specific consumer targets. Legacy carrier systems have much stronger and more fundamental route systems.
The Southwest model can't support service at SHV, or at MGM, or at BGR, or at TRI, or at TPE, or at SHA, or at BJS - places where huge growth in revenue will be generated in the future.
Author unknown.
