Flying the turbulent skies

btlogo1These are dark days for US airlines. Record-high fuel prices have put unprecedented financial pressure on carriers just starting to recover from years of losses. Flight delays are worse than ever, and passengers have been hit with a rash of new fees and surcharges. What’s gone wrong, and can be done? Four industry experts weigh in.

GET THE GOVERNMENT INVOLVED – Robert Crandall, former Chairman and CEO, American Airlines During his long tenure as CEO of American Airlines (1982-1998), Robert Crandall launched the first frequent flier program, the hub-and-spoke system, and other innovations that revolutionized the industry.

“This business has always been cyclical, but today’s high fuel prices are changing the economics of the industry. Oil will continue to have a profound impact on every part the flying experience – from the availability of service to the pricing structure.”

“But the problem is bigger than just oil. The US government doesn’t have a cohesive energy policy, and we need one. The lack of a policy is impacting not just aviation, but the economy as a whole. Things can’t continue the way they are now – the government must develop a plan for the challenges we are facing.”

“What else needs to be done? Our bankruptcy laws must be changed. In other countries, when a company files for bankruptcy, it’s likely to fail. If bankruptcy in the United States led to liquidation rather than reorganization, you can bet management would take more responsibility.”

“Labor laws also need to change. You need to outlaw strikes by the unions and require that disputes be settled by binding arbitration instead. With the threat of arbitration hanging over them, you’d see both labor and management come to the table with much more moderate positions.”

“We also need to admit that market solutions don’t work in every industry, and that airline deregulation has been a colossal failure. After 30 years of deregulation, US carriers are behind by almost any measure: our fleets our older, our service quality is unacceptable, and we have a poor reputation internationally. The government needs to create a regulatory agency that requires airlines to establish minimum fares that both cover costs but also deliver a decent return.”

“It looks like our government is choosing consolidation over re-regulation, and that’s a mistake. If we’re down to three carriers in this country and the union at one decides to strike, a third of the country’s flights are suddenly grounded. And that’s not good for anyone.”

FOCUS ON THE PASSENGER – Mike Boyd, founder, the Boyd Group The Boyd Group works with airlines, airports, and their suppliers – providing strategic planning, forecasting, and industry analysis. Mike Boyd has worked in the industry since 1971.

“Running an airline is a brutal business in the best of times – a porta-a-potty operation has better margins. And now you’re dealing with a situation where the industry has seen the price of a key component of its production (fuel) triple in a year.”

“Demand for air travel has not decreased in this country, but airlines are going to have to shrink their operations anyway. Two years ago, the big boys could fly a 50-seater from one of their hubs to a small city like Grand Rapids, and still make money. Today they can’t. So that route needs to go, even if the demand is still there.”

“A profitable route network is half of the equation. The other half is generating more revenue by flying more passengers. You do that by becoming the carrier of choice. A lot of airlines have forgotten that they’re not in the business of moving airplanes; they’re in the business of moving people.”

“Passengers always have another choice, and if you want them on your flights, you make things easy for them. Planes should be clean. Flights should be on time. And airlines need to cool it with the fees. I should not be paying $1.00 for a Coke – being in prison is better than that. A new fee might generate $15 million in extra revenue, but that’s a very expensive $15 million if your passengers go elsewhere. The airlines need to reorient their businesses so that passengers again become the focus.”

STOP OIL SPECULATION – David Castelveter, Vice President, Air Transport Association The Air Transport Association represents US passenger and cargo carriers, working with Congress and government agencies to advocate for the industry. Castelveter has over 25 years of airline industry experience.

“There’s one word to explain what ails this industry right now: fuel. In 2000 US airlines spent $16.8 billion on fuel, in 2007 that number jumped to $41.2 billion, and it’s on track to come in at $61.2 billion this year. When a barrel of fuel goes up by a dollar it costs the industry an additional $430 million. Nine airlines have gone out of business (as of August), and the rest have been forced to make deep and painful cuts. The number of seats in the US will be down nine-percent by the end of the year. Ninety-seven communities with scheduled airline service in 2007 will have none by the end of this year.”

“A big part of the problem is that speculators are manipulating oil prices. People who buy and sell oil without ever using a drop are driving it up by $30 to $60 a barrel. How else do you explain what happened in June, when a barrel of oil went up $11 bucks in one day?”

“Congress needs to take action. They need to create transparency so that we can see what sorts of trades are happening in the markets, and close the loopholes that allow traders to escape scrutiny. Yes, we absolutely need to do other things – to increase our domestic oil supply and explore alternative energy sources – but in the short term, some common-sense regulatory solutions would create immediate relief.”

“We started the Stop Speculation campaign in June. Airlines sent letters to their frequent fliers describing the toll that speculation is taking on this business and on the larger economy. More than 1.5 million people contact their rep in Washington, and Congress heard them loud and clear, though they have yet to take action. And action is what we need.”

RETHINK THE BUSINESS MODEL – Howard Weiss, travel agent and industry expert Howard Weiss has visited more than 100 countries on six continents, and is an elite level frequent flier with many different airlines. Today he operates a successful travel agency that serves sports figures and celebrities.

“This business is a disaster right now. Airlines are blaming their problems on oil prices, but that’s not it. The problem is more fundamental than that. The perception of air travel has changed. People now equate flying with taking a bus, and that has driven prices down to an unsustainable level. Sometimes I want to remind people that you couldn’t always hop a $129 flight to Florida. College kids didn’t fly home for Christmas – they took a bus. Deregulation broke this industry by forcing the big airlines to drop fares so they could compete with the budget guys. That was a huge mistake. Low cost airlines cater to the Greyhound crowd, and the network airlines don’t. After deregulation, they lost sight of that.”

“There isn’t anything left for the airlines to cut. The blankets and pillows are gone, and the food is gone. Pretty soon there will be a machine at your seat where you insert quarters for fresh air.”

“The only way airlines can bail themselves out is by doubling or even tripling fares – that’s just the new reality. Airlines are afraid they’re going to lose passengers if they jack up the prices, and they might. But the ones that remain will be willing to pay. They don’t want getting on a flight to be a nightmare anymore, so they’ll pay for a clean plane, a snack, and a friendly flight attendant.”

THE VERDICT: TAKE ACTION NOW  – Despite differing perspectives on the reasons for the industry’s woes and what should be done to address them, there is one thing that Crandall, Boyd, Castelveter, and Weiss agree on: without action, things will only get worse. Castelveter predicts that without changes, the industry will see more schedule cuts and bankruptcies. Mike Boyd says that as airlines search desperately for new revenue streams, passengers will face more fees and surcharges. And Crandall says that without government intervention, airlines’ financial positions will continue to deteriorate, resulting in older fleets and fewer flights.

Perhaps Weiss sums it up best. “If things don’t change air travel will get worse. And I don’t think passengers can handle that – they’re already close to the breaking point.”

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