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Boyd Group: Airline Ch. 11 facts vs. myths (part 2)

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Well-known member
Dec 15, 2004
[font=Tahoma, Verdana, Lucida]Other Common Myths[/font] [font=Tahoma, Verdana, Lucida]Myth: The Legacies Are Dead, The LCCs Are The Future: Lots of the alleged "experts" are telling the world that legacy carriers simply cannot compete anymore with the likes of Southwest and jetBlue, which, they point out, are consistently profitable.[/font]

[font=Tahoma, Verdana, Lucida]Fact: This is a sure sign that whoever makes the statement doesn't know any more about the fundamentals of today's airline industry beyond what they just read someplace else.[/font]
  • [font=Tahoma, Verdana, Lucida]Note: Last quarter, American and Continental reported profits, and they were essentially paying "retail" for their jet fuel.[/font]
  • [font=Tahoma, Verdana, Lucida]Note: Last quarter, if Southwest had been paying retail for their fuel, they'd have reported a big loss. True, they have hedged fuel, but that was a bet they made long ago - a bet that, fortunately, they won big-time. But it does not change the fact that on an apples-to-apples basis, AA's cost restructuring over the past three years gave it an all-up quarterly profit, and on an all-up basis, Southwest's system isn't making money. [/font]
[font=Tahoma, Verdana, Lucida]It's great that whoever lost the hedge bet is bearing much of the cost of WN's fuel, but without that, the basic model Southwest operates today isn't a money-making one with high fuel prices.[/font]

[font=Tahoma, Verdana, Lucida]Myth: NW & DL Are In Bankruptcy Because They're "Legacy" Carriers.[/font]
[font=Tahoma, Verdana, Lucida]Wrong. It's not the "system." It's not the "legacy" problems from the 1970s that pundits try to point out through the haze of over 25 years since deregulation.[/font]
[font=Tahoma, Verdana, Lucida]Their problems were that they got caught in the headlights by fuel prices that went up a lot faster than they could adjust to quickly. True, both were in the process of getting their labor costs down - something that American, Continental, and United have already done. When jet-A went to over $2 a gallon, the immediate need was to conserve cash while labor and other cost reductions were achieved.[/font]
[font=Tahoma, Verdana, Lucida]Lots of "experts" go into diatribes about how these legacy carriers have unsupportable cost structures and route systems, dating from the days of regulation in the 1970s. Sounds great, but it is more nonsense. It's missed by these grand prognosticators - most of whom have never worked within the airline industry - that if oil had stayed right where it was at the beginning of last year, as most of us expected, these filings would not have taken place. [/font]
[font=Tahoma, Verdana, Lucida]The fact is that many of these alleged dead-man-walking legacies have addressed most of those structural problems. The fact is that most of these legacies - Northwest being at the top of the list - have revenue systems that will make them in the long run (and even in the short-run) the carriers to bet on.[/font]
[font=Tahoma, Verdana, Lucida]But when fuel cost doubles in a period of only a few months, and a hurricane flummoxes both the price and the distribution of the stuff, the cash positions of airlines can get zapped quick. It's just that NW and DL had not gotten their labor costs down fast enough. In the case of DL, you could make an argument that the pre-Grinstein regime sat on its hands. In the case of NW, you could argue that the strategy taken didn't address labor soon enough.[/font]
[font=Tahoma, Verdana, Lucida]But what you cannot argue is that the basics of these two airlines - particularly Northwest - are fundamentally flawed. They are not.[/font]
[font=Tahoma, Verdana, Lucida]If fuel had stayed where it was projected to in early 2004, we would not be now bombarded by the dogmatic idiocy being spit out by a whole circus of sudden experts on the airline industry. [/font]
Someone stop this insanity and delete this thread!

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