The Brancatelli File
THE HOUSE (AGAIN)
BY JOE BRANCATELLI
December 5, 2002 -- Let me be as clear and unequivocal as humanly possible: America's air-transportation system, as represented by the nation's Big Six carriers, is irreparably broken. I said it a year ago this week and I'll say it again now: The system as managed by the Sick Six cannot be fixed. There is no choice but to burn down the house.
Start at the top line. Having raided the nation's coffers for $5 billion in taxpayer-funded "grants" last year and billions more in loan guarantees, the airlines are now dysfunctional wards of the state. They went before Congress just before Election Day demanding another bailout. They didn't get it. But they will be back next year. They are whiny corporate welfare junkies.
Move to the bottom line. United Airlines, a basket case long before 9/11, is now burning through as much as $8 million a day, deferring debt payments, hammering employees for concessions and desperately trying to avoid filing for bankruptcy. US Airways is already bankrupt and its previously announced rescue package is now in doubt. American Airlines, the nation's largest carrier, is heading for its second consecutive annual loss of $2 billion. Continental Airlines, which idiotically predicted a profit in the second quarter, is now mum on when it will turn a profit again and its motormouth chief executive is hurling invectives at other carriers in a pathetic attempt to deflect attention from his own arrogant mismanagement. Despite billions in cost cuts, none of the Sick Six has a chance at profitability in 2003 and only the most starry-eyed optimist sees any black ink in 2004.
Consider the operational realities. The prevailing fare structure overcharges the most frequent customers, business travelers, thus depressing profitable demand. It subsidizes the discretionary customers, leisure travelers, thus conditioning them to fly only when prices are unprofitably low. 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.
Creatively, the Big Six is already bankrupt. In the almost 15 months since the September 11th attacks, they have not made a single positive move to win back customers. Their blizzard of new fees and surcharges has driven the nation's flyers into the waiting arms of the low-fare airlines. Their recent fare experiments are a bizarre joke, combining the smug arrogance of the past with a total disregard for the most basic precepts of consumer marketing. Wherever they have chosen to directly compete on new routes with low-fare carriers such as JetBlue Airways, they not only have lost the marketing war, they have also lost customers, who often choose JetBlue even when JetBlue charges more for a ticket.
Finally, weigh the emotional carnage. Passengers loathe the system. Every single one is convinced he or she is overcharged, poorly served or both. They are infuriated by the latest wave of junk fees and defecting to low-fare carriers in droves.
Airline employees hate the system. About 100,000 were laid off immediately following 9/11. Their benefits run out this month and Congress callously reneged on its pledge to address the issue. Tens of thousands more layoffs have been announced in recent weeks. Those rank-and-filers 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. United, selling north of $100 a share five years ago, was trading at about $3 on Wednesday before its loan-guarantee request was denied. Its total market capitalization wouldn't have covered the cost of buying a new wide-body jet. As of noon Wednesday, the entire Big Six had a combined market capitalization of about $4 billion. All by itself, Southwest Airlines is worth three times more than the entire Big Six.
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 have finally recognized 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 understand the lessons of 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 or complications.
And even if Southwest doesn't continue to refine its own model in the years to come--and Southwest, however admirable, has a slew of corporate blind spots--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. WestJet has shown that Canada's longer, thinner routes can be profitably served by a Southwest-type carrier. AirTran has morphed into a practical example of a two-class, mass-transit airline. Other two-class carriers that focus on what travelers want and will pay to buy will surely follow. JetBlue has brought the fantasy of style and the substance of an occasional frill--not to mention assigned seats--to Southwest's commutation model.
In Europe, Ryanair has mastered á la carte air-transportation pricing. People buy as much or as little as they want. 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. Lufthansa is testing an all-business-class scheduled service on its Newark-Dusseldorf route and more such "boutique" services will surely follow.
After we burn down the house, a few of the Big Six may survive, at least in name. Fine. Those 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 creative crop of airlines will develop. The desert is full of new or nearly new jets that can serve as the infrastructure of new carriers. As the Sick Six continue to contract, more and more opportunities will be created for nimble newcomers. Air travel will prosper again because it will focus on getting people where they are going quickly, comfortably, profitably, humanely and at a price that 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. The Big, Sick Six are the Studebakers of the skies. It's long past time to burn down the house and start again.
This column originally appeared at JoeSentMe.com
Copyright © 1993-2004 by Joe Brancatelli. All rights reserved.