US Airways chief says airline industry needs to get smaller to get profitable, improve service http://bit.ly/KtQD6 .
This is something I agree totally with, the industry needs to get smaller in order to grow and definitely improve service to match those in Europe, the Far East and MENA.
The Majors have slowly moved towards LCC practices to improve their cash flow with ancillary charges such as baggage, Wi-Fi and others in addition to stopping beverage and food services on shorter sectors in order to keep their tickets as low and competitive as possible.
What I disagree with is the means the industry should become smaller. He advocates consolidation and mergers and acquisitions as means to improve efficiencies. Definitely, a good merger will improve efficiencies but not necessarily services and definitely will not make the industry smaller. Consolidation and Chapter 11 were used in the last decades as means to improve the industry but unfortunately without any success, the industry has failed to reinvent itself or transform its markets in spite of several opportunities such as 9/11, SARS, Avian Flu, 150 USD barrel of oil, the worst recession since the 1930s and now H1N1.
As the recession deepens and traffic figure take a nose dive, measures put in place last year during the oil price crisis are losing steam. The recession and the rising oil prices (70 USD a barrel) will start a new spiral of ailing and failing airlines. No Chapter 11 please, allow them to fail, this is the only means of removing capacity from the market. The effect of a failing Major Airline will not be as catastrophic as we all think.
Unemployment is the primary concern, however we are starting to hear about impending layoffs. The net effect on unemployment will be minimal as carriers pick up capacity in the affected hubs in order to capitalise on available traffic. The other issue would be aircraft availability and prices, as traffic nosedived, carriers as usual brought in their older, less efficient, less green but smaller aircraft in order to reduce capacity to match demand. The plans to retire these older aircraft get shelved every time traffic slows down. It is about time MD80s and older B737s get retired, and newer and more efficient greener aircraft come into service. That will bolster sagging aircraft lease rates and reduce carbon dioxide footprints and hopefully the Emission Trading System (ETS) charges that will be added to our tickets in the near future.
It has been said often, that we should not waste a good crisis, so far we have wasted every crisis, let us not waste this one to reinvent the industry.
The current situation notwithstanding, I continue to disagree with the proposition that there is overcapacity. Load factors have been at record highs for nearly a decade and remain far above the 60% that once was taken as the level at which passengers were being turned away.
ReplyDeleteThe problem has been, and remains one of cost. Passengers are not in short supply, they are simply paying less than the carriers need to cover cost. While Southwest is hurting right now, they have, over the past decades, steadily increased their market presence and done so profitably. At the same time their legacy competition has cut and slashed, both service and staff, and still is unable to eek out a regular profit.
As a result, what they have done is to increase the percentage of premium seats and jack up those fares so that a very small percentage of the traffic base contributed an inordinately large part of the revenue. That worked for a while but the same revenue problem is now taking to those beds as $10000 seats go for $2000 or less. BA today asked for its employees to work for free which again demonstrates that they reduced costs less than they simply added premium fares--a great solution in flush times but one that collapses rapidly if the customer base shrinks.
We have seen over the past few years that people will travel if they can afford it. Unfortunately, most carriers have costs that prohibit profitability at the fare levels travellers most respond to. And especially in the US, that gap has been filled with charges for everything but the air folks breathe and if it were feasible, they'd charge for that too.
As in math, if the equation is out of balance, you'll get a bad result.
Well, here we go again! Another capacity crunch - too many seats for the available bottoms.
ReplyDeleteIn other industries this is called supply chain management. The idea is to match capacity to the emerging demand. Simple right? No, we have those fixed schedules to deal with.
Wait a minute - what if those fixed schedules weren't fixed? OK, dream with me for a moment.
So I want to fly with my family from Boise, Idaho to Dubai, UAE for a family vacation of about 10 days. (we've done this several times). I research the schedules and based on the fares and availability I fix my dates (not the dates I really wanted mind you - I met what the airline had, and what my wallet had, when I purchased). Now I fly Boise, Seattle, wait 5 hours, fly to London, wait seven hours, fly to Dubai. Some of the flights are full, some not. I'm treated well on this route because the carriers in question look after me well (SW and BA). The trip takes 32 hours.
Now, it's ten years hence. I call on a travel consolidator of choice - let's call them Solutionocity for instance. I am a regular with them and they give me great service. I tell them I want to take four people from Boise to Dubai on x date. In 24 hours, they get back to me- they have a trip out taking 14 hours, one back at 16 hours. The fare is reasonable.
I look closer - the flight out is Boise - Atlanta. It's a Gulfstream V to Atlanta and then an A340 from there. It's a private charter owner for the Gulfstream and it's a QANTAS A340. What do I care? I get my FF mileage from Solutionocity, not a specific airline. Coming back its an Emirates 777 to Houston, then an Alaska 737 to Boise. Again, what do I care - I still got my mileage and all of these carriers are top quality because now they focus only on flying and service, not selling. They would not operate the flight unless it was profitable.
OK, back to Earth. I was dreaming. But can you image this with me for a moment. I have seen software that already can aggregate demand like this and match capacity to it. The models are fully developed, the software needs to be developed to be more like SABRE. What if airlines only operated flights that were profitable? What if flights never flew empty or nearly empty? What are the benefits to people, to the environment and to the success of aviation companies?
Let's think about matching demand to capacity and not the other way around. It's worth a discussion next time you speak to a colleague in the industry. I challenge you - make the idea yours!