The high fare airlines spend about 10 cents
to fly you a mile, the lower fare airlines (Southwest is the best example)
spend about 7 cents to fly you a mile. Thus American, Continental,
Delta, Northwest, United, US Air and others spend $400 to fly you from New
York to Los Angeles (longer flights cost less per mile). Add taxes and
fees to that and if a round trip ticket is sold to you for less than $500,
they are losing money. Southwest can make money on a $400 ticket.
Why the 30% difference in the cost of a seat-mile? Senior captains at
Delta earn over $250,000 per year, the President of US Air took home over
$25,000,000 in 2000, United mechanics negotiated an "industry leading
contract" or they would strike yet the airline is owned by the employees,
pilot 'scope' clauses in their union contract limit the number of regional
jet aircraft (flown by lower paid employees) that an airline can have and
they must fly to the hub. With these fixed costs, neither Boeing nor
Airbus make a plane big enough for the full-service airlines to make money
when filled with passengers paying $250 to fly across the country.
Until high fare business travelers (paying $2,000 for NY to LA) return to
the skies, the more the airlines fly, the more money they will lose and no
one believes that fares will go back to that range. You've heard how
to become a millionaire in the airline industry? Start with 10
million. I don't believe that the government will (or should) provide
financial support for any airline nor should they support airline service to
any city (sorry Scottsbluff). Don't expect any other airline to buy a
weak airline. Most of the others already have too many employees and
planes. That also means that your bank account of frequent flyer miles
on a bankrupt airline will be worthless.
What will happen.
If you live in an airline hub city and the
airline which controls most of the traffic goes out of business, other
airlines will move more flights to that city from their hubs. You may
not have as many (or any) non-stops as you had before thus it may not be as
convenient to travel. They may use regional jets rather than full size
jets. Let's take an example: US Air had hubs in Pittsburgh, Philadelphia
and Charlotte. They were operating under Chapter 11. They were
purchased by America West but the consolidated airline retained the US Air
name. Other airlines
moved into their hubs with more service. They smelled "blood
in the water" and are going after their market.
If you live in a non-hub city, in many cases, you
must travel via a hub and most cities have service from multiple
carriers. Quite often the service is provided by a commuter connector
flying under the colors of the major carrier. If an airline goes out of business,
another carrier
will probably continue to serve those cities but under a different partner
and to different hubs. At the most, surviving airlines will offer to
waive advance purchase requirements for those passengers holding tickets on
the failed airline. However, prices may still be high and there is no
guarantee of seats.
Over time, the result will be that the prices
paid for leisure travel will rise. The prices that business travelers
pay will drop.
What should you do?
Always buy tickets with a credit card.
If you're going on a cruise, you should know that airlines don't pay
commissions to travel agents or cruise lines anymore. That's the reason
you are told to buy your own airfare when you book a cruise. However
some cruise lines buy airline seats in bulk so they can offer "free" airfare
with their cruise packages. If the travel agency through which you
bought a cruise package included the "free" airfare, you stand a pretty good
chance of having the cruise line and/or travel agency protect you if the
airline they selected goes under.
If you are buying your own airline tickets,
don't use a weak airline. Weak does not mean low cost. Some the
most financially sound include Southwest, AirTran, JetBlue and Frontier.
If you hold lots of frequent flyer miles on a
weak airline, see if you can move them to another partner airline or spend
them in the short term. An excellent web site is
FlyerTalk with lots of great info about each airline.
A little history lesson.
If you look at the airline business, it was
born and matured in an era of governmental protection. Prices were set
by the Civil Aeronautics Board (CAB). There was no motivation to
become efficient. Like the banking and telecom industries, airlines
have entered the arena of competition and deregulation. Some failed
and new entrants take their chances. The failures of the old line
airlines include PanAm (twice), Eastern, Branniff as well as mergers of
Western, MorrisAir, Texas Air and many more. Failures of new entrants
include PeopleExpress, Midway (the original), ProAir, Legend, Ozark,
Carnival and many others. There is now a third reincarnation of PanAm.
There are lots of internationally based foreign government owned flag
carriers that suffer from huge inefficiencies. The world market will
force these airlines to change unless their government owners (taxpayers)
continue to put money into them. Otherwise they will fail.
When there is no motivation to become
efficient, both management and employees lose site of the customer and focus
on "me." I've never seen an industry where the management, employees and
customers hate each other so vehemently. The only airlines which would
be fun to be an employee are the new start-ups. A very interesting
contrast can be seen at the various Yahoo message boards that cover the
airlines. Most of the comments are complaints and full of nastiness.
The Southwest Airlines message board is full of optimism and pleads to "serve
our city." An excellent book about Southwest is called "NUTS!" and
written by Kevin and Jackie Freiberg. You can see the reviews at Amazon.
I enjoyed it (plus I have a personally autographed first edition).
