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Danny Hood's New Year's Res Solution
JANUARY 17, 2005 -- Let's focus on my biggest concern and the only problem
that wakes me up at 3 a.m.-the health of the airlines. My father taught me
to never bring up a problem unless I had recommendations for a solution. So,
let's talk about solutions to the financial health of the "Big Six" network
airlines: American, Continental, Delta, Northwest, United, US Airways, the
U.S. travel industry's biggest problem. Our domestic economy and most global
economies are highly dependent on an efficient and safe public air
transportation system. Travel agencies, hotels, car rental and limousine
companies and many other businesses are dependent on a healthy public air
transportation system.
To find a few possible solutions, first let's talk about areas where the
airlines can help themselves:
1. Negotiate the ability to right-size labor costs quickly
Most other travel industry suppliers (including us) had a horrific fourth
quarter of 2001 both economically and emotionally. American, United and
others lost great employees and customers-not just money. We were forced to
lay off hundreds of employees, pay $0 bonuses, and tighten our belts
significantly. Our senior management took temporary pay cuts even when we
had contracts. We acquired a very good regional agency (McCord Travel) in
the first quarter that "right-sized revenue" due to 20 percent reductions in
trips by our client base. This was aggressive action and tough to do.
However, there is no way an industry can survive that waits two to three
years to right-size and has to threaten bankruptcy at the courthouse steps
to get salary concessions. Most companies, other than airlines, have lower
base salaries and pay flexible compensation (bonuses, stock options, etc.)
during good financial years. If you think about it, airline employees get
stock in exchange for salary reductions during the near bankrupt years. This
works just the opposite of Corporate America.
2. Finalize three global airline joint ventures with anti-trust immunity
We need a little help from the Justice Department in this area. However, the
airlines need to build strategic plans that are true joint ventures and not
soft marketing alliances that just focus on such traveler perks as frequent
flyer benefits and airport club access. If the airlines presented a
comprehensive plan to DOJ, it would help DOJ to act.
3. Choose three distribution channels and/or models and shut down the
alternatives
I believe the three "keepers" are the airline Web site, the airline
reservation center (insource or outsource; fee or no fee), and fewer large
distributors with contracts. All independent travel agencies could become
affiliates of the large global networks. We have fewer travel agency home
offices in 2004-about 1,100. This is roughly a 50 percent reduction of the
home office locations before commission cuts and caps started in 1994. The
third-party distribution system model would have significant changes. There
would be no more terminology that speaks of fragmentation/segmentation, such
as GDS, TMC, ITMC, etc. The true distributors would have one acronym, GAD,
for Global Airline Distributors. GADs would charge the airline one simple
fixed fee per transaction. I think the fee should be $5 cheaper to the
network airlines than it is today, which is essentially what American and
Northwest have tried to finesse. This fee would consolidate GDS fees,
overrides, soft dollars and promotional fees as one simple fee. I believe
that offset savings in the distribution system can be achieved by synergies
of convergence of the GDS/TMC/ITMCs, volume/scale, and reasonable fees from
independent agencies to be a part of the global airline distributors. Much
of this consolidation is happening right now.
4. Simplify fare structures
Converge and minimize the fare bands and options to approximately 10 fares
or less as Delta, American and others have just announced. Finally, we have
airline pricing that makes business sense from network airlines.
Keep creative corporate discounts that are win-win deals.
Charge the right long-term premium for business travel (30-50 percent and
not the long-gone days of 400 percent, when we had $800 business fares and
$200 leisure fares).
5. Simplify fleet to no more than five types of aircraft
Southwest has one type of aircraft (737) and has the least complexity and
lowest cost. They are the prototype to benchmark if you added advance seat
assignments like JetBlue. However, in order to fly globally as a true
network airline, five aircraft types is a reasonable goal. It can be done,
as Continental has demonstrated by their reduction from 10 to four fleet
types over the past three years.
6. Lobby, lobby, lobby for some government help
Now that we have the airline's list, let's talk about external solutions
that I call government action:
A. Either fully deregulate the airlines or fully re-regulate (no more
in-between!)
Let's face it, this is a quasi-utility that is governed by The National
Railroad Act written in the 1930s. I would work on some updated legislation
for the U.S. airline industry for this century. I would let airlines truly
succeed and fail and let market forces determine who survives and who
doesn't.
B. Fast track anti-trust immunity for the three global alliances
C. Reduce airline taxation by 50 percent
The average tax on an airline ticket is 26 percent or $53. This is higher
than 11 to 21 percent "sin tax" on alcohol and tobacco products and we are
trying to reduce consumption of those products. I would make up the lost
revenue by increasing occupancy/hotel taxes and implement car rental taxes.
These segments of our industry are dependent on a healthy airline industry
and they are healthy. The corporation and passengers are still paying all of
these taxes. It should be roughly the same amount paid by the consumer. All
of these types of relief need alternative funding, as we have to think about
the deficit.
4. Hedge or cap uncontrollable fuel costs with government subsidies
I would not pay out any more taxpayer dollars in general bailout funds.
However, I would implement a subsidized cap on crude oil of $33 a barrel.
This is the airlines' break-even point. Remember, they have to pay
approximately $7 additional per barrel for refining before it goes to the
tarmac fuel trucks. This is the only government subsidy that I would keep
implemented on a long-term basis. I would ask for payments on this subsidy
when fuel costs go below the break-even point.
5. Fast-track labor disputes
The tough Delta pilot negotiation incurred $3 billion in cost to the airline
over three years of negotiations for $1 billion of annual savings. My ROI on
this broken model shows six years to break even versus getting those
concessions within two quarters. The airlines need a model that includes
bonuses and equity during the good years in exchange for the salary
concessions, which is where they ended up.
The bottom line is that I would love to see a plan of hope for stressed out
airline employees who are doing more for less money right now. My plan for
hope may be way off base. But, my father would be proud that I mentioned a
solution to the problem that wakes me up a 3 a.m.
Danny Hood is the President of WorldTravel
Danny Hood's New Year's Res Solution
JANUARY 17, 2005 -- Let's focus on my biggest concern and the only problem
that wakes me up at 3 a.m.-the health of the airlines. My father taught me
to never bring up a problem unless I had recommendations for a solution. So,
let's talk about solutions to the financial health of the "Big Six" network
airlines: American, Continental, Delta, Northwest, United, US Airways, the
U.S. travel industry's biggest problem. Our domestic economy and most global
economies are highly dependent on an efficient and safe public air
transportation system. Travel agencies, hotels, car rental and limousine
companies and many other businesses are dependent on a healthy public air
transportation system.
To find a few possible solutions, first let's talk about areas where the
airlines can help themselves:
1. Negotiate the ability to right-size labor costs quickly
Most other travel industry suppliers (including us) had a horrific fourth
quarter of 2001 both economically and emotionally. American, United and
others lost great employees and customers-not just money. We were forced to
lay off hundreds of employees, pay $0 bonuses, and tighten our belts
significantly. Our senior management took temporary pay cuts even when we
had contracts. We acquired a very good regional agency (McCord Travel) in
the first quarter that "right-sized revenue" due to 20 percent reductions in
trips by our client base. This was aggressive action and tough to do.
However, there is no way an industry can survive that waits two to three
years to right-size and has to threaten bankruptcy at the courthouse steps
to get salary concessions. Most companies, other than airlines, have lower
base salaries and pay flexible compensation (bonuses, stock options, etc.)
during good financial years. If you think about it, airline employees get
stock in exchange for salary reductions during the near bankrupt years. This
works just the opposite of Corporate America.
2. Finalize three global airline joint ventures with anti-trust immunity
We need a little help from the Justice Department in this area. However, the
airlines need to build strategic plans that are true joint ventures and not
soft marketing alliances that just focus on such traveler perks as frequent
flyer benefits and airport club access. If the airlines presented a
comprehensive plan to DOJ, it would help DOJ to act.
3. Choose three distribution channels and/or models and shut down the
alternatives
I believe the three "keepers" are the airline Web site, the airline
reservation center (insource or outsource; fee or no fee), and fewer large
distributors with contracts. All independent travel agencies could become
affiliates of the large global networks. We have fewer travel agency home
offices in 2004-about 1,100. This is roughly a 50 percent reduction of the
home office locations before commission cuts and caps started in 1994. The
third-party distribution system model would have significant changes. There
would be no more terminology that speaks of fragmentation/segmentation, such
as GDS, TMC, ITMC, etc. The true distributors would have one acronym, GAD,
for Global Airline Distributors. GADs would charge the airline one simple
fixed fee per transaction. I think the fee should be $5 cheaper to the
network airlines than it is today, which is essentially what American and
Northwest have tried to finesse. This fee would consolidate GDS fees,
overrides, soft dollars and promotional fees as one simple fee. I believe
that offset savings in the distribution system can be achieved by synergies
of convergence of the GDS/TMC/ITMCs, volume/scale, and reasonable fees from
independent agencies to be a part of the global airline distributors. Much
of this consolidation is happening right now.
4. Simplify fare structures
Converge and minimize the fare bands and options to approximately 10 fares
or less as Delta, American and others have just announced. Finally, we have
airline pricing that makes business sense from network airlines.
Keep creative corporate discounts that are win-win deals.
Charge the right long-term premium for business travel (30-50 percent and
not the long-gone days of 400 percent, when we had $800 business fares and
$200 leisure fares).
5. Simplify fleet to no more than five types of aircraft
Southwest has one type of aircraft (737) and has the least complexity and
lowest cost. They are the prototype to benchmark if you added advance seat
assignments like JetBlue. However, in order to fly globally as a true
network airline, five aircraft types is a reasonable goal. It can be done,
as Continental has demonstrated by their reduction from 10 to four fleet
types over the past three years.
6. Lobby, lobby, lobby for some government help
Now that we have the airline's list, let's talk about external solutions
that I call government action:
A. Either fully deregulate the airlines or fully re-regulate (no more
in-between!)
Let's face it, this is a quasi-utility that is governed by The National
Railroad Act written in the 1930s. I would work on some updated legislation
for the U.S. airline industry for this century. I would let airlines truly
succeed and fail and let market forces determine who survives and who
doesn't.
B. Fast track anti-trust immunity for the three global alliances
C. Reduce airline taxation by 50 percent
The average tax on an airline ticket is 26 percent or $53. This is higher
than 11 to 21 percent "sin tax" on alcohol and tobacco products and we are
trying to reduce consumption of those products. I would make up the lost
revenue by increasing occupancy/hotel taxes and implement car rental taxes.
These segments of our industry are dependent on a healthy airline industry
and they are healthy. The corporation and passengers are still paying all of
these taxes. It should be roughly the same amount paid by the consumer. All
of these types of relief need alternative funding, as we have to think about
the deficit.
4. Hedge or cap uncontrollable fuel costs with government subsidies
I would not pay out any more taxpayer dollars in general bailout funds.
However, I would implement a subsidized cap on crude oil of $33 a barrel.
This is the airlines' break-even point. Remember, they have to pay
approximately $7 additional per barrel for refining before it goes to the
tarmac fuel trucks. This is the only government subsidy that I would keep
implemented on a long-term basis. I would ask for payments on this subsidy
when fuel costs go below the break-even point.
5. Fast-track labor disputes
The tough Delta pilot negotiation incurred $3 billion in cost to the airline
over three years of negotiations for $1 billion of annual savings. My ROI on
this broken model shows six years to break even versus getting those
concessions within two quarters. The airlines need a model that includes
bonuses and equity during the good years in exchange for the salary
concessions, which is where they ended up.
The bottom line is that I would love to see a plan of hope for stressed out
airline employees who are doing more for less money right now. My plan for
hope may be way off base. But, my father would be proud that I mentioned a
solution to the problem that wakes me up a 3 a.m.
Danny Hood is the President of WorldTravel
