The airline industry has never generated sustained profits — by some estimates if you add up all the profits and losses since the Wright Brothers flew from Kitty Hawk in 1903, the net would be written in red ink. This year will be no different. The global industry will lose an estimated $9 billion, after running losses of $10.4 billion last year.
The question now is which carriers will survive the current downturn, offering what sort of schedules and service. Not an easy question, since two forces are at work: The current, temporary cyclical downturn, and a permanent change in travel habits.
Press reports are not much help. One day we learn that the industry has suffered staggering losses every year since 2001, with the exception of 2007, the next that United Airlines is placing a $10 billion order for 150 new jetliners. One day British Air announces that it won’t configure any new planes to allow it to offer first-class service, the next day Lufthansa and Air France-KLM announce plans to use their new A380 super-jumbos to expand their premium service offerings (first and business class).
There is no question that the current downturn is hitting the airline industry where it hurts — in the premium service category. This is especially true on the trans-Atlantic route and in the Asia-Pacific region. There aren’t many bankers and lawyers jetting around the world to do deals, and those that are find economy class more consistent with constrained company budgets and less likely to attract criticism from politicians who don’t want their bailout funds used to finance luxury travel.
Prices are being cut this summer, with some price-cutters making up for lost revenues by charging for checked bags and just about everything they can unbundle from the basic fare, prompting low fare Southwest Airlines to tout its no-extras policy. Low fares plus rising oil prices add up to bad news for carriers. If the fall in premium travel proves more than a cyclical phenomenon, losses will mount rapidly and we might see some U.S. carriers arguing that what’s good enough for General Motors and Chrysler is good enough for us, and get access to some free, taxpayer-provided capital — with the unions cut in for a large share of the handout.
The good news, of course, is that so far during this recession America’s airlines have done better than most because they cut capacity last year. The bad news is that because no airline has gone out of business the global industry still has substantial excess capacity, a condition that has plagued it for decades. Old airlines never die, they emerge from bankruptcy, so there is little prospect that a lean, mean industry will emerge from the current downturn. Well, at least not a lean one.
After all, the airline unions, always tough to deal with, and likely to be tougher now that they see how well the United Auto Workers did by bankrupting Chrysler and GM (with not inconsiderable help from management), aren’t in the mood to make any concessions.
United Airline’s management team is unfazed: It seems to believe that there is a pot of gold at the end of the recession — witness that order for 150 new planes. It is true that the new aircraft will be more fuel efficient, and more able to meet the pollution standards that the EU is preparing to impose on all carriers using European air space. True, too, Airbus and Boeing are so desperate for orders that they are likely to bid low for the order and offer cheap financing.
But it is equally true that the major carriers’ hub-and-spoke business model that feeds travelers into a few large cities and flies them out to their final destination, might prove unable to compete with point-to-point low-fare carriers such as Southwest. Moreover, the cost cutting triggered by the current recession means that business spending on air travel might never return to the levels of the good old days of off-premises corporate meetings.
One CEO with whom I met recently says that his managers have finally learned to use teleconferencing effectively, and he has cut his annual travel budget from $750 million to $250 million, “and it isn’t ever going to go back up.” So competition for premium business travelers will be intense. Which means they will finally get some of the benefits of deregulation, until now confined to those seated in economy and headed to see grandma in Florida.
Examiner Columnist Irwin M. Stelzer is a senior fellow and director of the Hudson Institute’s Center for Economic Studies
