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". Fundamental Changes Needed To Transform Legacy Carriers
By Bruce Lakefield, Aviation Daily Departures Op Ed (full text, subscription only)
The new competitive landscape facing the legacy carriers is forcing major structural shifts in the U.S. airline industry. Even in this hyper-competitive industry, where cutthroat competition has been a way of life, there is now a higher level of intensity and a lower tolerance for being uncompetitive. The result: legacy carriers must make deep, fundamental changes in their business models and cost structures, and do it quickly.
There is no longer a low-cost carrier “threat.†There is only the low-cost carrier “reality.†And faced with intense competitive pressure from low-cost carriers, record high fuel prices, the demise of premium fare-paying business travelers and unprecedented levels of government taxation and fees, airlines such as US Airways that have already gone through severe cost cutting and restructuring are finding that deeper and more lasting change is needed.
To that end, we couldn’t agree more with a recent “Arrivals†analysis (DAILY, May 19), which concludes that permanent changes to legacy carriers’ business models, including reductions in both labor and non-labor costs per available seat mile (CASM), must be made if the industry is to return to — and sustain — profitability.
With the core of its route network on the East Coast where low-cost carriers have experienced explosive growth, and a hub in Philadelphia — the epicenter of low-cost activity and a microcosm of airline change — US Airways recognizes the acute need to transform. And while we have exceeded the projected cost savings targets set when we emerged from Chapter 11 in 2003, the industry’s deteriorating revenue outlook requires further change.
The legacy industry was built on a revenue model that extracted premium fares from a minority of passengers. As a result, lowering fares, especially top-end fares, is highly dilutive. As commodity price structures proliferate, customers increasingly can avoid the legacy high fares and so the legacy carriers face a daunting choice: lower fares and lower revenue, or don’t lower fares and lose customers.
Consider this: revenue projections we used for our original 2002 restructuring efforts estimated total 2004 U.S. airline industry revenue of $73 billion. Some labor leaders viewed our estimates as conservative and unrealistic. Yet in reality, total U.S. domestic airline revenue is only expected to be $63 billion this year despite passenger volumes rising from 2003 as traffic rebounds from the Iraq war, recession and SARS.
Consequently, legacy carriers now must find ways to be profitable while playing a volume game through a combination of lower fares and higher aircraft utilization, smarter scheduling, better distribution and competitive costs.
As The DAILY’s analysis pointed out, an airline cannot pin its woes on labor costs alone. That is certainly not our strategy. As we work to lower our annual costs by another $1.5 billion, about half those costs must come from labor, while the other half comes from savings in categories like those listed above. As we have explained to our employees, reducing labor costs does not mean simply looking at wage rates. We must also factor in the advantages of growth and start-of-scale seniority that low-cost carriers hold over legacy airlines that have a senior work force, high pension costs, and other more expensive benefits that our employee groups have fought to secure.
So now the task is to engage our unions in a collaborative dialogue to implement an across-the-board cost reduction strategy that will ensure the airline’s future profitability. Labor costs must be part of the solution. But that must be coupled with a strategy that adjusts to the new world of low fares so that our employees see that their participation and sacrifice will result in success, career opportunities and growth.
We have started talks with our union leaders and are encouraged that there is recognition that change is needed. "
