The Brancatelli File
BY JOE BRANCATELLI
December 6, 2001 -- Let me be as clear and unequivocal as humanly possible: America's air-transportation system, as represented by the nation's supposedly full-service carriers, is broken. It cannot be fixed.
There is no choice but to burn down the house.
Start at the top line. Having raided the nation's tax coffers for $5 billion in "grants" and as much as $10 billion more in loan guarantees, the airlines are now dysfunctional wards of the state. They are corporate welfare junkies.
Move to the bottom line. Continental Airlines, one of the industry's best-managed companies, says it is losing $4 million a day. United Airlines, one of the nation's worst-run carriers, says it filled 90 percent of its seats over the Thanksgiving weekend, yet didn't reach the break-even point. If this year's cumulative industry loss, estimated to be as high as $15 billion, is duplicated in 2002, the airlines will lose more money during the first two years of the 21st Century than they earned during the entire 20th Century.
Consider the operational realities. The fare structure overcharges the most frequent customers, business travelers, thus depressing profitable demand. It subsidizes the discretionary customers, leisure travelers, thus conditioning them to book only when prices are unprofitable. And the fares confuse everyone, including airline executives. In boom times, the hub-and-spoke system taxes the nation's limited infrastructure and creates massive delays that cost billions in lost productivity. In bust times, it is impossible to eliminate spoke flights without destroying the economic imperative of the hubs. At all times, the hub-and-spoke system is frighteningly expensive to operate and prone to frequent mechanical and meteorological meltdown.
Finally, weigh the emotional carnage. Passengers hate the system. Every single one is convinced he or she is overcharged, poorly served or both. Airline employees hate the system. About 100,000 have been laid off and those who remain face punitive givebacks or haven't had a raise since the early 1990s. The markets hate the system, too. Standard & Poor's now officially rates most airline debt as junk and investors have reduced the industry's market capitalization by about 50 percent during the last 52 weeks. Even the airline poohbahs, most of whom have been forced to forgo their obscenely high salaries in recent months, suddenly have reason to despise the status quo.
So what are we protecting? What constituency is being served? Does a business model that profits no one and offends everyone deserve to survive?
Let's just burn down the house and start again. Don't even bother assessing blame because there's too much to go around. Burn down the house.
When the smoke from the conflagration clears, we'll see a future that looks a lot like Southwest Airlines and its aeronautic progeny. And that makes social, operational and financial sense.
Financially, Southwest has been consistently profitable for a generation. Alone among the world's carriers, Southwest's model has made money during good times and bad, in boom times and bust, through war and peace. Recession doesn't stop its ability to throw off profits. Fare wars don't slow it. And investors will eventually recognize the elephant at the airport: Southwest makes money, all the time. No "full-service" airline on the planet does. Going forward, who would invest in any airline that doesn't resemble Southwest?
Operationally, Southwest's much analyzed model has proven remarkably resilient. It works for short hauls and long, in smaller towns and in gigantic urban "catchment" areas, with lower frequency schedules and with shuttle routes. Its fare structure is understandable, practical and defendable. It explains exactly what it will deliver and delivers exactly what it promises.
Perhaps most importantly, Southwest long ago realized that air travel was not about glamour or power or prestige or status. It was about nationwide, universal, rapid air transit. Calling Southwest a flying bus isn't criticism. It is recognition that Southwest alone understood what a huge, affluent, increasingly fragmented and incessantly mobile nation wanted: reliable commutation from place to place without fuss or bother or ego.
And even if Southwest doesn't continue to refine its own model in the years to come, other entrepreneurs have shown that the basic concept is flexible and scalable. Frontier is a one-class airline that business travelers are happy to fly. AirTran has morphed into a practical example of a two-class, mass-transit airline. WestJet has shown Canada's longer, thinner routes can be profitably served by a Southwest-type carrier. JetBlue has brought the fantasy of style and the substance of an occasional frill to the commutation model.
In Europe, Ryanair has mastered a la carte air-transportation pricing. People buy as much or as little as they want. Those who desire only transportation pay the base price, while those who want meals or checked baggage can buy the optional services, too. Easyjet has accomplished the impossible: It is an airline brand with positive consumer awareness and marketing legs. And it is only a matter of time before a viable transatlantic and transpacific mass-transit model will evolve and replace the archaic regimen of today's state-sponsored flying dinosaurs.
After we burn down the house, the corporate and social elite may flee to private jets. So what? They are already defecting in droves from the existing system.
After we burn down the house, a few old airline names may survive. Fine. The carriers with comparatively nimble leadership will eventually see that there is nothing salvageable from the hub-and-spoke/boom-and-bust system they created and they will adapt.
After we burn down the house, a newer, smarter, fairer, more nimble crop of airlines will develop. Air travel will prosper again because it will focus on getting people where they are going quickly, comfortably, profitably, humanely and at a price the business- and leisure-travel markets will understand and support. That is the imperative of a free-market system.
Embrace the fire that's coming, fellow travelers. It's long past time to burn down the house.
This column originally appeared at JoeSentMe.com.
Copyright © 1993-2004 by Joe Brancatelli. All rights reserved.