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Are Airlines an Historic Relic?

December 02, 2011 – Comments (0)

Location: Sikiliza's CAPS Blog

Author: Sikiliza

A lot has been said about the non-viability of high speed train systems in the United States, even citing China’s teething problems with it. Well, for how long are we going to keep propping up airlines that have failed to figure out a profitable business model?

American Airline’s bankruptcy is just one of a long list of failures that have now become unsustainable. Save for the auto industry (and the inane greed in the banking sector), there is no other sector that has seen the kind of blasé and idiotic leadership that the airline industry has portrayed. Since 1990, 14 airlines have filed for bankruptcies and some even went in twice – PanAm (in 1991 and 1998), TWA (1992, 2001) and US Airways (2002, 2004).  In 2005, Delta, Comair and Northwest all went under.

There is something evidently wrong with an industry where:

The business has become so hopelessly complex - there can be close to twenty price points on a single flight for the same seat in the same class. Overlay that with over hundreds of different trip combinations between any two locations in any given week and you have a classic quant's nightmare

Aging planes increase the risk of accidents, delays and even plain old collapse as was the case a few months ago when a Southwest plane mysteriously developed a hole in the roof

Passengers get charged for checked in luggage while carry-on luggage is free – if they want to free up the passenger cabin, shouldn’t they charge for carry-on?

Since KLM first flew in 1910, airlines have still not figured out the optimal number of bookings, flights and pricing for all the routes they operate – that is 100 years of failure in the making

They still carry defined benefit pension plans in an economy such as the one we have been facing for the last 10 or so years where predictability has totally gone out of the window. AMR has about $10B in unfunded liabilities for which it is looking to the American taxpayer to cover via the Pension Benefit Guaranty Corporation. In 2005, US Airways defaulted on $9.8B in pension obligations

Input costs including oil are only bound to sharply increase in the future while the entire industry tries to apply cost-cutting approaches to managing their challenges

Unions still hold an almost evil sway over the survival of the entire industry – I still do not understand their role in the 21st century

Frequent flier programs so large that they will never be fulfilled – in 2005, there were about 14Trillion unclaimed miles worth about $700B I would wager that that figure is now at 20Trillion worth about $1T. Really? Now, how did that ever happen?

Apart from Southwest (LUV) which has a 1% net Profit Margin and 2.54% ROE, airlines barely break even on the best of days – Only Spirit at 6.12% and Alaska at 5.8%  margins seem to be bucking the trend for some mysterious reason

Off balance sheet obligations such as unfunded pension liabilities and equipment leases eclipse actual net assets on the books of the key industry players

Lastly, if employees are so disgruntled that they would rather fly off the handle as with the case of Steve Slater, a 38-year-old flight attendant, who cursed out an entire aircraft, grabbed a beer and then exited the plane by deploying the emergency slide, then things are really bad.

What to do?

Let them fail or consolidate. Even better, break them up.

Develop viable alternatives to flying – high speed trains, better roads, improve local economies

Devolve the hub and spoke management approach which causes untold delays and unnecessary re-routing of flights

Introduce the practice of modern day management principles, eliminate off-balance liabilities and let go of less-than-productive employees, no matter their tenure

As Southwest and Virgin America has clearly illustrated, point to point, focus on quality rather than size and continuous improvement rather than escalated hostilities are the way forward

It’s time we moved on – adios - silent cinema, the horse and buggy, the gramophone, the steamship, newspapers, desktops, airlines; welcome to the brave new world

  List of airline bankruptcies

Nov. 29, 2011 — American Airlines

Jan 5. 2010 — Mesa Air

Oct. 6, 2008 — Sun Country

April 11, 2008 — Frontier Airlines

March 31, 2008 — Aloha Airlines

Sept. 14, 2005 — Delta Air Lines, Northwest Airlines, Comair

Sept. 12, 2004 — US Airways

Dec. 9, 2002 — United Airlines

Aug. 11, 2002 — US Airways

Jan. 10, 2001 — Trans World Airlines (TWA)

Feb. 26, 1998 — Pan American World Airways (Pan Am)

June 30, 1995 — Trans World Airlines

Sept. 21, 1993 — Hawaiian Airlines

Jan. 31, 1992 — Trans World Airlines

June 27, 1991 — America West Airlines

Jan. 18, 1991 — Eastern Air Lines

Jan. 8 1991 — Pan Am World Airways

Dec. 3, 1990 — Continental Airlines