The Next Wave Of Airline Bankruptcies

[mweiss]

1) Failure to allow any legacy carrier mergers or acquisitions during the 90's exc. when one is on death's doorstep even though even the architects of deregulation predicted there need not be more than 3 or 4 network airlines serving the US.

While it's true that they didn't see much need for more than three or four network carriers, I can assure you they didn't expect that conclusion to occur through the consolitation of regions of the country into monopolies. I had a conversation with Dr. Bailey on this very topic.

2) Failure to change laws to allow airlines to cut costs and not just fares.

I'm assuming you mean the RLA? If so, I agree, that was (and continues to be) a mistake.

3) Block carrier cooperation until delays became so deplorable that people just quit flying.

This one's a fine line. It's extraordinarily difficult to balance antitrust issues with convenience issues. I don't think they did that bad a job here, all things considered. People didn't stop flying in 2000 because of the delays; they stopped flying because the economy was tanking.

4) Prop up the industry repeatedly in the past 3 years, preventing market forces from weeding out winners and losers and weakening the entire legacy sector.

Well, that was my opinion as well, overall. However, the aftermath of 9/11 was significant, and perhaps needed a modicum of support. But I think the results don't match the goals.

 

[deltawatch]

What I take from this article is that as an investor I should invest in a new upstart airline that’s hiring kids off the street and ride the wave until it matures.

Then when its workers move up the pay scale, reach levels that allow them to successfully raise their families. When they reach an age were annual physicals are necessary to maintain good health, bailout of the stock and watch the company go under sending all of its 40 and 50 year employees to the street.

Reinvest as fast as I can in the next player, continuing the cycle, making sure the employees of the older airline never receive the fruits of their labor. Couldn’t stand for my portfolio being hampered by being involved with a mature company that’s trying to honor the workers that built it. After all they are a bunch of useless ageing Americans!

That’s the American way, screw the hard workers - reward the Wall Street pencil pusher! Long live American greed.

This country’s domed! :down:

 

[mweiss]

What I take from this article is that as an investor I should invest in a new upstart airline that’s hiring kids off the street and ride the wave until it matures.

For the time being, that'd be sage advice...assuming that you wanted to invest in the airline industry in the first place.

 

[jimntx]

What I take from this article is that as an investor I should invest in a new upstart airline that’s hiring kids off the street and ride the wave until it matures... Then when its workers move up the pay scale, That’s the American way, screw the hard workers - reward the Wall Street pencil pusher! Long live American greed.

I think he's got it. By George, he's got it.

 

[sfb]

Actually, if you ask me (and I know, no one did), Jubak's analysis of the parallels between the European industry and the U.S. industry, as well of the positions of the various carriers in the U.S. industry, is really quite weak.

In my view, the current situation in Europe is far more similar to the U.S. industry in the 1980's, not the present. The lowering of many barriers in the EU has presented a playing field not unlike the U.S. market post-1978, when literally hundreds of new entrants took to the skies with virtually all of them failing or being acquired (along with a number of household names) within about 15 years. The number of new upstart carriers in the U.S. in the last ten years is tiny even though some like jetBlue and Virgin America have certainly garnered great attention in the media. The better-managed network carriers in the U.S. prospered and acquired others (like United, American, and Delta) in the 1980's, and even the more poorly-managed larger carriers managed to bump along and merge with others (i.e. Continental, USAir, TWA). Some like Braniff, Pan Am, and Eastern failed entirely, just as Sabena and Swissair did (to be replaced by smaller versions). I think we'll see a similar experience in Europe, though the timeline might be compressed a bit since the market's a bit smaller than the U.S. market. The better-run former flag carriers (BA, LH, AF) with strong home markets will acquire some of the smaller players in a consolidation to three to five larger network carriers. Many of the LCC's will fail with just a few growing to dominate their sector. Down the road, we may see a fight comparable to the U.S. market today, though the European legacy carriers will always enjoy some competitive advantage (absent European commission action) due to slot holdings at the most desirable airports inherited from their days as state-subsidized companies.

Turning to the issue of low-cost startups, it is true that low wages at new entrants do help to give them a competitive advantage, but many fail anyway due largely to poor management, customer loyalty to existing carriers, etc. Western Pacific, Vanguard, National II, Kiwi, and Midway II are all excellent examples of this. America West wouldn't still be here if its wages weren't among the lowest in the industry, and it's been around for over twenty years. Even with relatively limited hiring in the last three years, Southwest has managed to keep its growth in ASM costs relatively close to inflation.

The basic problem is that as labor costs creep up, poorly managed companies are unable to use low labor costs to help conceal inefficiencies in the operation. Southwest, on the other hand, runs a VERY tight ship, pays attention to their corporate culture, and hires people that they think will be a good fit in the company. While I understand that people have greater financial needs as they age, I don't exactly see why a 15-year employee ought to make twice as much as a 2-year employee unless their productivity is twice as high (or close to it).

JetBlue is a triple-threat at this point because they have (1) relatively low-paid employees, (2) good management, and (3) media buzz. It remains to be seen if their management will continue to be as good as Southwest's has been over the long haul and if they will continue to see low wage costs as employees seek a larger part of the profits. The article's author makes a somewhat fallacious comparison between jetBlue's unit cost and Southwest's unit cost given that jetBlue generally flies a far longer average stage length; a more accurate comparison would be to normalize for the differences in stage length at both.

I see Southwest reaching the upper bounds of its ability to grow solely domestically some time around 2025 -- with some variation in that date caused by expansion of other LCC's, failure/consolidation of legacies, restructuring of legacies to be more competitive, etc.

 

[diogenes]

The basic problem is that as labor costs creep up, poorly managed companies are unable to use low labor costs to help conceal inefficiencies in the operation. Southwest, on the other hand, runs a VERY tight ship, pays attention to their corporate culture, and hires people that they think will be a good fit in the company. While I understand that people have greater financial needs as they age, I don't exactly see why a 15-year employee ought to make twice as much as a 2-year employee unless their productivity is twice as high (or close to it).

You may be interested to know today's USA TODAY (money section) agrees with you.

 

[mweiss]

In my view, the current situation in Europe is far more similar to the U.S. industry in the 1980's, not the present.

I agree, though with the caveat that at least the new startups in Europe have the opportunity to glean knowledge from the travails of their 1980s counterparts in the US. Whether they actually learn from it is another question altogether.

I see Southwest reaching the upper bounds of its ability to grow solely domestically some time around 2025

Twenty years? Where'd you come up with that number?

 

[deltawatch]

"While I understand that people have greater financial needs as they age, I don't exactly see why a 15-year employee ought to make twice as much as a 2-year employee unless their productivity is twice as high (or close to it)."

______________________________________________

Do you think any young guy would drag his young butt in everyday and sweat his ba!!s off for $7.00 dollars an hour if he didn't see a decent pay scale that rewards service or a healthcare plan for his tired ass when he reaches 50-55. I agree the young guy IS worth as much as the ole guy maybe more. But by working for $7.00 when he's young is his way of preparing for the inevitable, the aging process. But leave it to Wall Street and corporate greed to find a way to snatch it from him 20 years into the game. h34r:

Another thing, I believe all of you fools that are pumping your life saving into a 401K better watch out because the same slick dics on Wall Street have a plan to screw you out of that too.

If this is the America way, it has no conscience or sole, this nation is doomed!

I had to edit this about 4 times because I can't type while I'm mad ..... :angry:

 

[SVQLBA]

"While I understand that people have greater financial needs as they age, I don't exactly see why a 15-year employee ought to make twice as much as a 2-year employee unless their productivity is twice as high (or close to it)."

______________________________________________

Do you think any young guy would drag his young butt in everyday and sweat his ba!!s off for $7.00 dollars an hour if he didn't see a decent pay scale that rewards service or a healthcare plan for his tired ass when he reaches 50-55. I agree the young guy IS worth as much as the ole guy maybe more. But by working for $7.00 when he's young is his way of preparing for the inevitable, the aging process. But leave it to Wall Street and corporate greed to find a way to snatch it from him 20 years into the game. h34r:

Another thing, I believe all of you fools that are pumping your life saving into a 401K better watch out because the same slick dics on Wall Street have a plan to screw you out of that too.

If this is the America way, it has no conscience or sole, this nation is doomed!

I had to edit this about 4 times because I can't type while I'm mad ..... :angry:

In most industries, pay progression isn't based on being longer in the same role (even if you get better/more productive at it) -- it is based on progression to new, more challenging roles in other areas of the company.

With a few notable exceptions (e.g., Colleen Barrett's rise from secretary to CEO? at SW), airlines have been absolutely appalling at developing and advancing the talent in their ranks across all departments. People are either stuck in a department or role (e.g., FA), or many talented mgt folks just get transferred aimlessly across the company with no sense of career path, capability development, or potential. If there were a career paths for FAs (paths because some may want to see more areas of the airline, some may want to keep close to the flying and keep being an FA) a flatter experience driven scale might be less of an issue.

Unfortunately, it can't be fixed overnight. You need leaders at the top (like Herb K.) who are as focused on the people side of things as the operations.

Given that FA is the prime customer contact role left in what is still a customer service industry, it's disappointing (but not surprising to all of us who know the industry) that more creative thinking and attention isn't going into this group of staff, their knowledge, capabilities, and function/role.

 

[funguy2]

World Traveller, sfb, and SVQLBA... I enjoyed all of your posts and views... I agree with many of your points, but I won't really re-hash them...

Except... sfb... In the recent Unisys study of Southwest posted in these forums, I remember they had a CASM vs. Stage Length Chart for Southwest... I recall that Southwest's CASM was around $0.06 for stage lengths of 1300 miles... JetBlue's average stage, per their published financial data at the time, was 1300 miles and $0.06 CASM.

This would suggest that as JBlue's stage length decreases, a cost structure similar to Southwest's will emerge. By focusing major operations in high-cost cities (JFK, IAD, and LAX), jetBlue may be at a long-term relative disadvantage to Southwest's lower-cost home bases (i.e. PHX, LAS, MCO, HOU). jetBlue, with crews based in NYC, will not be able to have the lowest payscale, simply due to the cost of living in the bases (yes I know crews don't always live where they are based, but I doubt more than 25% of the industry "commutes" on aircraft to work.)

 

[diogenes]

In most industries, pay progression isn't based on being longer in the same role (even if you get better/more productive at it) -- it is based on progression to new, more challenging roles in other areas of the company.

That has been the norm, and is still mostly the case.

However, it flies in the face of the current phenomenom of flattening organizations that are pushing responsibilities down.

Somewhere I've read that some companies are embracing employees that are willing to stay in place, rather than seeking a promotion every few years.

You are dead-on with the sorry job U has done mining the data from its own employees - the Palace makes the grunts feel like they're the enemy.