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JEFFREY BROWN: If turkey is a Thanksgiving tradition millions look forward to… (baby crying) …travel is the tradition they dread.
At the nation’s airports today, the lines were long. An estimated 21 million people will be flying American carriers this holiday weekend. That’s good news for the airlines, who could use some, as they try to fly through a difficult year.
The industry was particularly hard hit by high jet fuel costs in the wake of Hurricanes Katrina and Rita. United, in bankruptcy since 2002, remains there.
In September, two more of the nation’s largest seven airlines joined it, as Delta and Northwest filed for Chapter 11 protection on the same day. Delta decided to shut down Song, its lowfare carrier. Northwest has been battling with its employees to cut labor costs.
The airlines permanently replaced members of its mechanics union, who’d walked off the job in August over proposed wage and benefit cuts. Northwest also wants to outsource international flight attendant jobs.
Earlier this month, low-fare carrier, Independence Air, also sought bankruptcy protection. One large company, U.S. Airways, came out of bankruptcy this year and merged with America West.
JEFFREY BROWN: Two longtime observers give us a snapshot of the airline industry now. Darryl Jenkins is a visiting professor at Embry-Riddle Aeronautical University, and vice chairman of Portals to the World, an online booking agency. Michael Levine has served as an executive with three airlines in government on aviation matters, and is now at the New York University School of Law. And welcome to both of you.
JEFFREY BROWN: Mr. Levine, starting with you, we have talked with you over the years about the changing airline industry. Broadly speaking, where do things stand now?
MICHAEL E. LEVINE: Well, we’re at the point which Churchill called in a dark day of World War II, the end of the beginning, I think. Airlines that were shaped by regulation and by very restrictive work rules and so on have come up against competitors who aren’t so constrained. They’ve been forced to change. Most of the airlines are being forced to change with the help of the bankruptcy laws. I think that those that haven’t yet used them are likely to use them or will use them again in some cases.
And so we are only beginning to see what competition would look like between historic airlines, which are now free to compete, and new entrant airlines, which are free to compete and take them on.
JEFFREY BROWN: Mr. Jenkins, I wonder, does it even make sense to talk about the airline industry, or should we talk about, as Mr. Levine says, the legacy, so-called legacy, older airlines and then these newer ones that are eager to take them on?
DARRYL JENKINS: Certainly I agree with most of what Mike just said. This is a new era that we’re just getting into. The encouraging things that are going on in the industry right now — it’s in the last year we were able to see fares rise. As a matter of fact, we saw –
JEFFREY BROWN: Encouraging for airlines if not for the rest of us.
DARRYL JENKINS: We saw fares rise more than we’ve ever seen them do in one year. We’re at a very good revenue level right now. If we can maintain this revenue, I think things are going to get better. The bad news last year certainly was the increases in jet fuel. And as the prices of jet fuel went up and up, it really pretty much eradicated all of the give-backs the pilots and all the other employees had given to the airlines.
JEFFREY BROWN: Mr. Levine, did you see the jet fuel increase as a big factor, is that the sort of blip that plays into the big changes you’re talking about?
MICHAEL E. LEVINE: I think it’s just a riff, it’s the kind of thing that pushes — accelerates these changes. I disagree with Darryl in one important respect. I don’t think we’re going to see sustained rising air fares. We have an enormous amount of capacity coming online to the new entrance airlines. The LCC’s all have capacity they could bring back online. Every time it shows any sign of getting a little bit better yourself, going to see more flying, and I think that we’ll go through an extended period of an inflation-adjusted and fuel-cost adjusted terms very low fares.
JEFFREY BROWN: Well, let’s break this down a little bit. When we look at, for example, Delta and Northwest entered bankruptcy fairly recently, what are the issues there? Is it the labor costs? Is it the fuel costs? We’ll start with you, Mr. Jenkins?
DARRYL JENKINS: It’s certainly all of the above. When the airlines were deregulated, the legacy airlines — Delta, American, and United — all had very restrictive labor agreements in place, which really became worse over time. And now it’s really the first we’ve seen of them loosen up. And I think this will be much better for everyone, including the employees, as well. So these things are an important first step in reorganizing airlines.
In terms of Mike’s comment about pricing though, the legacy airlines still have 70 percent of the capacity. With that much capacity, they control an awful lot of the pricing. We’ve seen even the low-cost airlines out there increasing prices in the last year.
So I think these prices are here. They’re going to stick. Nobody’s going to reduce price right now. Even Southwest Airlines in the last two months has raised its fares four or five times.
JEFFREY BROWN: Mr. Levine?
MICHAEL E. LEVINE: Well, you’re going to see fares go up as fuel costs go up and come down when fuel costs come down again, but the trend is going to be downward, and the reason the trend is going to be downward is that the new entrant airlines have 30 percent of the market now. They had 5 percent of the market in 1995.
Who knows what percentage they will have in 1998 or ’9. They have enough equipment on order to keep expanding their share of the market. The legacy airlines, in my opinion, don’t have the option of just letting them expand and giving them a fare umbrella.
Sure they’ll raise their fares when they’re forced to by cost, the low-cost airlines will, but they’re not going to raise them enough to help the legacy airlines who even now, after all this pain and suffering by employees, by everybody, still have costs that are way above what they need to be to compete.
JEFFREY BROWN: Mr. Levine, explain something to us that seems counterintuitive, at least to me, because we read about these airlines that — planes are going up and they seem more filled than they did in recent years. The seats have bodies. Yet we hear about these airlines losing money. Why is that?
MICHAEL E. LEVINE: Well, you know, if everyone on the plane paid five bucks apiece, you could fill it and not even pay for enough gas to taxi to the end of the runway. The people who are on the planes are filling seats, but they are not together providing enough money to keep the airline going. And that’s the nub of the problem. It’s as old as Dickens and older than that. If your income exceeds your expenses, you’re in good shape. And if your expenses exceed your income, you’re in trouble.
JEFFREY BROWN: That’s what it is, you have the bodies, but you need them to pay for more each seat to get your costs down?
MICHAEL E. LEVINE: My point is that you’re not going to get the bodies to pay more than they have to pay the low-cost airlines. They have no particular tenderness toward any particular — toward any airline. What they want is they want to fly, and they want to fly safely and they want to pay the lowest price they can to do it.
JEFFREY BROWN: Mr. Jenkins?
DARRYL JENKINS: We’ve seen revenue levels and fare levels pretty much where they were in 1999. And that was a very good year. We didn’t have all of the excess costs with jet fuel price increases; I think we’d be having a reasonable year for the airlines right now.
The illusion of a low fare is better than a low fare. And many of the lowfare carriers depend on business travelers in order to make money. And those fares are at a very good level right now. There is not a lowfare airline out there that’s going to lower their prices over the next year or so.
So for the next year at least, I think we’re going to see fares at this level. As a matter of fact, next spring we’ll probably see four or five more small air price increases.
JEFFREY BROWN: We just have a minute. So let me just let both of you, very briefly, what’s your advice to consumers as we start this holiday season, starting with you, Mr. Levine?
MICHAEL E. LEVINE: Well, I think they should shop carefully. I think Darryl’s right. Fares will be up this holiday season. They may stay up a bit into the spring. Once airlines find that the fares are staying up you’re going to see more capacity come online and there will be more buying opportunities available.
JEFFREY BROWN: Mr. Jenkins?
DARRYL JENKINS: Well, for this holiday season I think many travelers are going to experience one or two Prozac moments, so when you go to the airport, go with a very good sense of humor and a lot of time.
JEFFREY BROWN: You mean, because of security lines as well?
DARRYL JENKINS: Security lines and as, you know, the airlines have tried to push price up; they’ve reduced the number of planes in the air. So planes that are flying now have more passengers on than they historically have.
In the last year, an airline like Northwest Airlines had 80 percent of its seats sold at any one time. So planes are going to be full. So go early; go with a very good sense of humor.
JEFFREY BROWN: And be very patient. All right. Darryl Jenkins and Michael Levine, thank you both very much.