Turbulent Times for the Airline Industry
[Sorry, the video for this story has expired, but you can still read the transcript below. ]
MARGARET WARNER: In Chicago today, United Airlines asked a bankruptcy court to nullify its labor contracts. United’s management is pressing its unions to renegotiate those wage contracts to help keep the airline alive. As Tom Bearden reports, United’s bankruptcy is only part of a larger problem facing much of the airline industry.
SPOKESPERSON: How are you? This is my airline. Thanks for flying it. I appreciate it.
TOM BEARDEN: United Airlines’ boss was very upbeat the day the company filed for Chapter 11 bankruptcy. He said he was optimistic about the company’s short-term performance.
GLENN TILTON, CEO, United Airlines: Service can only get better now that we’re in chapter 11. We have an absolute, unequivocal focus on the customer.
TOM BEARDEN: But under further questioning he acknowledged the company was going to have to change the way it does business.
GLENN TILTON: United is going to have to address the issue of the competition from low-cost carriers, and another way of looking at that is I think United is going to have to broaden its appeal to more customers than simply the high- end customer.
TOM BEARDEN: Low-cost airlines are one of the big reasons for United’s troubles. Today the competition isn’t coming only from long-time discounter Southwest Airlines, which has grown from its former upstart status to become a big business itself; a whole slew of smaller discount airlines have emerged in recent years. In August, when U.S. Airways filed for bankruptcy, discount carrier Southwest was serving Fort Lauderdale’s airport with 36 crowded flights a day. A few hundred yards down the ramp, a smaller discount carrier, Air Tran, was checking people in for some of its 12 daily flights. Low-cost service has made Fort Lauderdale the busiest domestic airport in south Florida today, surpassing mighty Miami. Jet Blue, a two-year-old carrier headquartered in New York, has increased traffic so much that there are now more people flying between Fort Lauderdale and New York than there are between New York and Los Angeles. Ed Nelson is the airport’s marketing chief.
ED NELSON: When I first came here in 1989, there were 600 people a day looking to fly between Fort Lauderdale and Atlanta, and at the time it was Eastern and Delta. Now that Air Tran is in the market, and they have got low fares that Delta, of course, has matched, the local marketplace is 1800 a day. So along came this little upstart that kind of brought, brought quite a few people, over a thousand people more, to the marketplace.
TOM BEARDEN: But more is going on here than just more passengers. The discounters, which used to specialize in leisure travelers, are now carrying more and more business fliers.
JOHN BILLACORTA: I’m in business for myself. That’s the only way that I can travel, that I can afford to travel.
TOM BEARDEN: So price is the determining factor?
JOHN BILLACORTA: Price is the determining factor, yes.
J.C. PHILLIPS: I used to fly Delta, and I’ve had Delta’s sky miles program, and I won’t be getting that with this, but the tradeoff, again, is the convenience and the price.
TOM BEARDEN: That critical shift of business fliers is the real reason for the major carriers’ troubles. It’s now transforming the shape and direction of the whole industry. The low-fare segment of the airline business has been more profitable post 9/11 than the majors. The Business Travel Coalition, an alliance of corporate travelers, surveyed 182 travel managers and found they had cut their spending on air travel 16 percent last year. 68 percent said they planned to fly the low-fare airlines more. Kevin Mitchell, who heads the coalition, says the big airlines weren’t prepared for the shift.
KEVIN MITCHELL: The airlines have believed a lot of their own rhetoric over the years, that the business traveler is inelastic, will pay anything to go anywhere at anytime, and there is something different going on this time, and it took the airlines a long time during this winter and during the first two earnings reports to really get an integrated and fuller picture that much of the premium business travel is gone forever. The $1,800 fare from Syracuse to Phoenix– there are going to be fewer and fewer people willing and able to pay that fare going forward.
TOM BEARDEN: The major carriers make nearly all their profits from business travelers. That’s why losing them has an impact far beyond the actual numbers of passengers they’ve lost. Leisure travelers who buy in advance pay relatively low fares; business travelers, who often have to fly at the last minute, often pay three or four times as much. Bill Swelbar is an economic consultant to the airline industry.
WILLIAM SWELBAR: And they have always built their system around that high-yield business passenger, and certainly, you know, losing that, that $2,200 Transcon flier to an alternative airport or to a low-cost carrier, you know, paying $400 or $500 for the same piece, you know, the value in that service is less.
TOM BEARDEN: I’ve read the difference between profit and loss on a given flight is a couple people?
WILLIAM SWELBAR: Oh, I think it’s, over time, it’s been three people per airplane, is the difference between profit and loss.
SPOKESPERSON: Thank you for calling Spirit Airline. Have a great day, sir.
TOM BEARDEN: The low fares that are killing the major airlines are profitable for the discounters because they have much lower costs. Many, such as Spirit, have simple route structures that only go from point A to point B. Network carriers such as United have banks of flights converging on expensive hubs. The hubs work efficiently when the planes are in, but burn money in the off hours when all the planes are in the air. Another reason is that some fly only one type of aircraft, like Jet Blue with Airbus 320s or Southwest with the Boeing 737. That dramatically reduces training and maintenance costs. Post-9/11, the low-fare carriers have moved aggressively. When the big carriers cut flights, they ramped up service, even moved into new markets. The Baltimore-Washington Airport is a good example. When U.S. Airways shut down its own low-fare division, called Metrojet, Air Tran jumped in. They now have 23 flights a day. Joe Leonard is Air Tran’s chairman.
JOE LEONARD, CEO AIR TRAN AIRLINES: We keep our systems very, very simple, and as a result we… and we’re also very flexible. So we can spool up or spool down rapidly, as we did after 9/11. We took capacity out real fast, but with the cooperation of our unions and our employees, we kept everybody on the payroll, but reduced our costs at the same time. That gave us the ability to ramp back up and start expanding as soon as we saw the opportunity to do so.
TOM BEARDEN: Southwest was already at BWI with its 138 flights a day, it had moved the airport past longtime rival Dulles in domestic passengers. The discounters are also finding success going head to head with the majors, something that was considered impossible not long ago. Air Tran is competing directly with Delta at Atlanta. Delta is matching fares, and losing money, while Air Tran’s cost structure allows it to remain profitable.
TOM BEARDEN: Are you in any way involved in a war of attrition with Delta?
JOE LEONARD: Uh, we… (laughs) Delta competes with us vigorously. We are competed against more– stronger– by Delta than the other low-fare carriers seem to experience, but having said that, we’ve done very well. We’ve demonstrated that we can take what Delta throws at us and still be profitable.
TOM BEARDEN: A few weeks before United filed for Chapter 11, Delta announced plans to launch a new low-fare airline with a new brand name to compete head to head with carriers like Air Tran. Delta has also experimented with lower fares for last-minute business travelers on its existing routes. American Airlines, whose CEO Has said he fears the low-cost carriers, has also cut fares in some markets. American lost almost $3 billion in the first nine months of 2002, and is now in discussions with its workforce on how to cut $4 billion in annual costs. USAir, which filed for bankruptcy in August, has gotten one round of concessions from its workers, and is now trying to win a second. The airline’s primary creditor has threatened to liquidate the company if the targeted pay cuts aren’t reached.
KEVIN MITCHELL: The airlines need to look at every single point where they can, you know, reduce costs, improve productivity, or differentiate themselves, so that at the end of the day, if the price on a major network carrier, with amenities and network ubiquity and so on, is, you know, 10 percent or 15 percent or 20 percent more, many business travelers will be able and willing to pay that; but if it continues to be 60 percent and 70 percent more, they haven’t succeeded.
TOM BEARDEN: That is the task facing all the major carriers, but none more urgently than United. United’s immediate plans include substantial reductions in the overall size of the system, with consequent cuts in service to some cities. It’s also planning to start a low-fare subsidiary similar to the one planned by Delta to compete with the discount carriers.