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Interesting analysis of the "Big Six"

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furlodpilot

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Mission impossible: Here's the real reason the Big Six are dying
I greatly respect Joe Brancatelli, my fellow USATODAY.com Travel columnist. He's a brilliant writer, and right about most things. But we consistently disagree on one point: the real reason the Big Six airlines are failing.
Joe claims that the major carriers are dying because their fares are too high, fare structures are too complex, customer service is poor, management is inept and top executives have been fiscally irresponsible by taking too much compensation.

I'm a former airline executive, and I agree with Joe that the Big Six are dying — at least as they exist today. And I agree that many of the factors he cites are contributing to their demise. But I believe that even if all those issues could be solved, it would not save the big airlines.

The Big Six – American, Continental, Delta, Northwest, United, US Airways — were doomed by deregulation a quarter-century ago. Their cost structures are based on long histories, and deregulation opened the door to a new crop of airlines such as Southwest and JetBlue that were not saddled with the same burdens. The upstarts could charge lower fares and still make money. Deregulation created an uneven playing field that has forced the Big Six to deteriorate over time.

In fact, the Big Six used to be the Big 12, but names like Pan American, TWA, Eastern, Braniff, Republic and Western have vanished in bankruptcies or mergers since deregulation.

The survivors have cut wages, eliminated unprofitable routes, squeezed more seats into airplanes, laid off employees, cut back in-flight services and amenities, and devised complicated fare structures to extract every last penny out of the traveling public. And then when all that didn't work, they begged the U.S. government for handouts to help them survive.

But it hasn't been enough — and it never will be. For one, the Big Six have labor contracts that keep their costs higher than airlines that entered the market after deregulation. These newcomers can pay rock-bottom wages and set up work rules that favor the airline.

These airlines are called the Big Six because they provide comprehensive service across global networks. That means flying a wide variety of routes, some of them unprofitable, and employing several different types of aircraft to do it. Low-cost airlines, for their part, typically fly only on carefully selected, profitable routes. They operate a single type of aircraft to minimize training and maintenance costs.

The Big Six have started launching low-fare subsidiaries: Delta's Song, United's Ted. But for the Big Six to emulate the models of their low-cost competitors, they would have to change so much they would be unrecognizable. They would no longer be the Big Six.

I agree with Joe that there have been some egregious travesties in executive compensation, and other wasteful acts by managers of Big Six airlines at one time or another. This certainly has not helped their images or financial situations.

But even if Big Six management had been completely saintly over the years, the outcome would still be the same. The big airlines cannot survive in a two-tiered cost structure.

When a company is profitable, it's easy to spread the cheer, the way Southwest does. But when a company suffers continual losses, problems flow. As the Big Six began to cut service, customers became angry. As low-cost carriers began to offer $200 airfares, the public became enraged that prices had been so high for so long. And as the Big Six tried to make up for lost revenue, they alienated business travelers and fliers on noncompetitive routes by sticking them with high fares.

But unlike Joe, I can't really blame the Big Six for cutting service and manipulating airfares to charge whatever the market would bear. They had no alternative, if they wanted to try to stay in business. I'm not condoning their practices; I'm just saying that what they did was totally rational.

Only it hasn't worked. As the economy slowed and the crisis deepened, Big Six airlines alienated not only travelers but also their own employees, laying off thousands who had faithfully devoted their lives to those airlines for countless years. Many who still had jobs became bitter, and sometimes took it out on customers, making matters worse. Only one Big Six airline – Continental – made Fortune magazine's list of the 100 Best Companies to Work For this year, and it shed more than 1,000 jobs.

Please don't get me wrong. I am not defending the tactics of the Big Six, nor am I bemoaning deregulation. Deregulation of the airline industry has been a great boon to consumers, who have reaped the benefits of low airfares. The expansion of low-cost carriers throughout the world has increased the demand for air travel and made it accessible to many people who could not otherwise afford to fly.

Nor am I bashing the unions or employees of the Big Six carriers. These people want the same things as every other American – a decent job with decent wages and some job security. But we must recognize that deregulation created a situation where the old carriers and the new carriers could not peacefully coexist. And the result was an industrial earthquake that has shaken airfares, service and thousands of jobs.

Joe Brancatelli is correct that the Big Six are a dying breed. Some of the companies may survive, but not with their existing business models. And when they are gone, fares will be lower and probably less complex, amenities offered in the air will be commensurate with the price paid for travel, and many new jobs will exist at the low-cost carriers for airline employees who are willing to work for less. As a result, the public will arguably be better off – with the painful exception of the airline employees whose jobs were eliminated.

But change won't necessarily bring stability. We've already seen newer airlines, such as JetBlue, coming into the market with cost structures that are even lower than the original low-cost carriers, such as Southwest. More are undoubtedly waiting in the wings. We'll have to wait as well – to see if history repeats itself.
 
This begs the questions:

What happens when the employees of the LCC have been there for a while and start wanting more money (seniority creap), a retirement plan (for after the company stock has become stagnant), and the aircraft in the fleet start to age, MX costs start to increase.

This is a capital intensive business and nobody is immune to the laws of economics. Not Southwest, JetBlue, United or anyone else. It seems like a viscous cycle that will repeat itself.

It will be interesting when JetBlue and Southwest (maybe)introduce the new, smaller airframe onto the property. My guess is the seat costs will start to go up and there they go, repeating the same "errors" of the legacy carriers.

Just some thoughts from a guy that works for a 72 year old dinasaur airline.
 
mach none,

You see the furure clear oh wise one.
 
But even if Big Six management had been completely saintly over the years, the outcome would still be the same. The big airlines cannot survive in a two-tiered cost structure.

That's funny, they seemed to be able to operate with a two-tiered pay scale! (A and B)
 
Very interesting article. Good points, although none of us know exactly what will happen. Things were going well for all of us unitl the combination of 9-11 and the tech bubble burst smacked everyone (except SW) who had more than 300 airplanes sitting around with most people afraid to fly for a few months. That right there put a huge dent into cash flow, and then things , mainly associated with the economy, started to snowball. Did anyone on this board know 9-11 was coming? Do we know what will happen in the future? It looks like right now the Majors need to get their costs under control to compete with the LCCs domestically---and that is occuring. The economy needs to get better (it is), and fuel prices need to fall---they should I hope. Those two things will help in a huge way and could stop the bleeding. Now, to compete with the LCCs--there needs to be costs cuts, and hopefully (at my airline anyway) that will occur. But, there also needs to be trust in management and their "view of the future", and that is not happening at some airlines. Will there be more Chap 11 filings and maybe some Chap 7s? Maybe, and I hope that doesn't happen--but it might. Will there never be an "up" cycle again just like the author says? I doubt that. Sure, the internet has provided lower fares on the spot for businessmen, but as the economy grows (and some analysts say the DOW could hit 15,000 by the end of the DECADE) there will be more priority travel for them that will cost big bucks. Can we rely on that for our business models? No way. That is why there should be some cost cutting etc, but with assurances that management won't run away with huge bonuses at the same time.


Bye Bye--General Lee:rolleyes: ;)
 
But it hasn't been enough — and it never will be. For one, the Big Six have labor contracts that keep their costs higher than airlines that entered the market after deregulation. These newcomers can pay rock-bottom wages and set up work rules that favor the airline.

Perhaps the author would like to list the number of "newcomers" that are no longer in operation.


Braniff, EAL and Pan Am did not go under because of labor costs, they suucumbed to poor management decisions and/or corporate raiders like Lorenzo. But hey, don't let history get in the way of a superficial analysis of an entire industry.
 
I wonder if the writer knows the next loto numbers? (I may need it, right?) Who knows? Nobody really knows for sure, and it would be nice to negotiate and get some costs down---no doubt. But, it has to be NEGOTIATIONS---not "You will give this amount or else....."

Bye Bye--General Lee;)
 
A couple of observations about the article... in general what he says is okay, but there are some details he just fumbles, and I don't think it's an especially insightful piece.

He sees deregulation as the sea change, and airlines that came along after deregulation as having all sorts of advantages over the old ones. If that were so, would National have folded? Legend? Midway? There's a lot more to the story than "pre-deregulation" vs "post-deregulation."

The author mentions the dynamic of "Big 6" serving lots of routes, some of them unprofitable, while the LCCs pick only profitable routes. Two problems with that: for a small LCC, one would certainly HOPE to use jets on the best (i.e. most profitable) opportunities available, but for the BIG LCC, it isn't about "cherry picking" routes. If it were, do you think SWA would serve Boise, Spokane, Midland, Lubbuck, Amarillo, and Jackson MS with jets that could be flying between the northeast & Florida? Which ties to the second problem with that piece of analysis: a LCC can turn a profit on a route that a "Big 6" carrier perhaps can't... having low costs MAKES the thinner routes profitable.

Finally, Jet Blue does NOT have a lower cost structure than Southwest. Their seat mile costs are lower because their average stage lengths are longer, but comparing CASM on equal stage lengths, SWA's costs are lower. The numbers aren't way far apart, but the writer got the detail wrong.

Who wrote the piece in the post that started the thread?
 

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