Someone asked for this item of journalism earlier in the thread.
May 27 2001 BUSINESS NEWS The Sunday Times
An American opinion by Irwin Stelzer.
Airlines chase profits on a wing and a prayer
"COME fly with me," Frank Sinatra crooned invitingly on one of his hit records. An attractive offer in the days before anyone worried about deep-vein thrombosis or excessive doses of radiation on over-the-pole flights. And flying with Frank meant a private plane, with no airport hassles and certainly no queues at immigration.
But when an airline issues a similar invitation to come fly this summer, it will be a different story for business travellers and holidaying families. Delays, delays and more delays are in store for most passengers. Last year, more than a quarter of all flights were delayed in America, meaning more than 160m passengers spent some unplanned time in airport lounges or, worse still, on the hard benches of airline terminals. All in all, the 425,000 flights that were delayed in 2000 topped the 1999 record by 20%.
Things are no better in Europe. Lufthansa pilots, unhappy with an offer of a mere 18% wage increase, have already inflicted two strikes on the airline, and last week a business meeting I attended in Italy was disrupted by a quickie strike at Alitalia. As in America, Europe's pilots are fractious and the infrastructure - airports and the air-traffic-control system - is obsolete and overloaded. Add to that a refusal by the European Union's regulatory officials to allow airlines to trade slots and gates so that those scarce facilities can be used most efficiently, and you have a prescription for a summer of progressively lower levels of service.
Europe's pilots are not the only unhappy employees. Pilots in America are also restless. They have noticed that their fellow unionists were able to bring United Airlines to its knees last summer. By working to rule, the pilots so disrupted services that passengers fled to other lines, on routes where alternatives were available, or deluged their congressmen with complaints.
United caved in, and granted increases of up to 45%. That now makes it possible that Delta's pilots may reject the 23% to 39% rise on offer when it comes to a vote next month. After all, one cannot expect a pilot to get along on $300,000 a year.
Airline mechanics are also stepping up their demands. Northwest has already given its mechanics a 24% rise, and may have to offer more to keep its planes serviced and flying this summer. United faces similarly demanding mechanics who may cause a repeat of last summer's woes.
Customers are not alone in their suffering. Higher labour costs, high fuel costs and declining demand for business travel due to the economic slowdown have combined to push America's leading carriers into the red once again. The Economist reports that the seven largest American airlines lost $700m in the first quarter of this year, with only low-cost Southwest and high-service Continental staying in the black.
Sam Buttrick, an airline analyst at UBS Warburg, says fares will have to rise by 10% to offset the wage hikes. "That is inconsistent with the current demand environment," he says.
All this makes the profits performance of British Airways even more remarkable than its quadrupling of profits in 2000 at first seems. The carrier was able to make progress against the industry-wide headwinds for two reasons. First, the airline's chief executive, Rod Eddington, deployed his attractive, outgoing personality to get his ground staff and in-flight crews to abandon their grievances and petulance, and once again concentrate on customer service.
Second, Eddington vigorously implemented a plan initiated by Bob Ayling, his predecessor, to attract more high-fare passengers. BA installed more comfortable seats in business class, allowing passengers to stretch out fully on long flights. International road warriors, as peripatetic executives proudly call themselves, appreciate every amenity that makes life a bit easier.
But even BA cannot fight the market forever. Of particular concern to BA management is that Americans have stopped coming to Britain. Investment bankers and lawyers have no deals to do, and holidaymakers have been led by television images to believe that the portion of the nation's livestock that has not been incinerated will prove lethal if eaten - our concerned friends regularly call us when we are in London to ask whether we have anything to eat.
Things are not likely to get better soon. Although there are bargains to be had by those who book at the last minute, fares are due to rise. Even as service falls.
A US court has surprisingly cleared the way for the big carriers to drive smaller rivals from the field by engaging in predatory price cutting and by adding huge amounts of capacity on any route on which a new entrant rears its head. When the unfortunate newcomer is seen off, fares are often trebled and service reduced. The Bush administration has declined to permit its antitrust enforcers to appeal against this decision.
Some of this bad news is actually not so bad after all. The congestion in the skies and on the runways of America is due to the enormous success of deregulation, which has enabled carriers to juggle fares so as to make air travel more affordable for more people.
The number of people flying to business meetings and to visit grandma has grown from 250m at the time of deregulation in 1978 to 670m last year. And in real terms average fares have fallen by 40%, with people who have flexibility as to travel dates and times getting the greatest benefits. But service has deteriorated recently, and profits are hard to come by.
The six leading carriers argue that the situation would be improved if only they were permitted to merge, perhaps halving the number of big airlines competing for business. Why a reduction in rivalry for customers' favour would lead to an improvement in service remains obscure, at least to this economist. What is needed is more, not less competition.
One way to increase consumer choice and the pressure on incumbent carriers to shape up would be to allow foreign airlines to enter the US market as owners or operators.
That, say America's carriers and their supporters in Congress, is just not on. As always, consumers will bear the cost of this protectionism.
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Magnus