Thursday, April 07, 2005

The Best of Times, The Worst of Times
I'm not sure there's any worse job at the moment than running one of the big legacy airlines. As the Financial Times just reported, the global airline industry is expected to lose more than $5 billion dollars this year, with high fuel prices as a major contributing factor. This will bring cumulative industry losses since 2001 to roughly $40 billion. It's hard to think of any business in the world that is so central to modern life and yet so unprofitable.

And it's not as though the business environment has been bad. It's one thing to lose money in a year like 2001, with the economy reeling and a major terrorist event shaking the public's confidence in flying. Instead, we see passenger miles growing nicely on the back of strong global economic growth, and we see airlines starting to queue up to buy the latest offerings from Boeing and Airbus.

Competition has been the real killer, amplified by absolute fare transparency via the internet, not high jet fuel prices. The traditional airlines are unable to raise fares to cover higher costs, because of pressure from established economy carriers like Southwest and upstarts like Jet Blue, which is expanding its transcontinental service. Instead, they subject coach passengers to the indignity of coast-to-coast flights without meals--as wretched as most of those used to be--and instead offer $3 snack boxes with contents worth about 30 cents. Once you've flown Jet Blue, you start wondering how much longer American and its brethren can survive.

Something has to give, but it won't as long as governments allow moribund airlines to remain on life-support. This option hurts everyone except the employees, because it robs shareholders of any opportunity for profit, while subjecting consumers to shabby service. There are really only two choices at a policy level: re-regulation, which would go against the flow of 30 years of history, and radical restructuring. As a first step, the latter requires giving every airline in bankruptcy a deadline for exiting that state, and informing all airlines that their next trip into bankruptcy will take them into Chapter 7 liquidation, not Chapter 11 reorganization.

Perhaps this is one area in which high oil prices will be beneficial, by making the cost of a dysfunctional status quo unsustainably high.

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