The Airline Chess Game.

[BOING]

Sort of nice to have a quiet little corner to whine on your own!

The US airline industry is in a mess. I do not think anybody really knows how much of a mess or what the final scenario may be. It is a bit like watching a committee of amateurs play chess. Everyone wants to insist how the game should be played but not one of them is capable of visualising more than one move ahead.

Example, the management of American and Delta are doing their best to convince the ATSB not to grant loan guarantees to United. On the face of it a good policy. Downside is that if United does not get the loan guarantees it will probably declare Chapter 11. At that point United gets to cut labour costs drastically, gets protection from creditors and still continues to fly. Result, United does not go away but hurts the other two carriers by cutting ticket prices due to the court provided cost advantage. Delta and American would be better off to help United get the guarantees then watch while United struggled to service the debt.

The RJ situation. Everyone rushed to get in on the RJ act. The wave of the future. The industry now has a vast amount of new small jets flying. Bombadier is in trouble because, having provided a bunch of these aircraft it is getting few new orders. Why should anyone order a new RJ for the next five years when they have all the new aircraft they need? Do they have all the aircraft they need? Perhaps not all they need but all they can operate. After the first bad winter at the big airports the outcry against RJ's will be incredible. The cry will be that the RJs soak up slots but provide no service and income to the airport. Airports run on concessions and the business they bring to the community. They do not exist just so all those pretty aircraft can go up and down. An RJ slot moves fifty pax., great for Moline but lousy for Chicago. Eventually the major airports will work out that they are subsidising the airlines, not the airlines providing them profit, because the throughput of passengers when the weather is bad wil drop to miserable values. The airports want two hundred passengers delivered to the city not twenty. When the weather gets bad they want two hundred people trapped in the concessions and hotels not twenty. Look out for pressure to reduce the number of RJ flights in a bad winter. Pure community economics NOT airline economics, but nobody is thinking of that angle. For small communities and airlines the RJs are great, for the local business community in big cities in bad weather they stink.

Next, selling off large aircraft during tough times. Seems to make economic sense to ground airplanes which are expensive to operate. Since they are grounded you might as well sell them if you can. Unfortunately, the price you get for your aircraft is going to be pretty poor and the most likely buyer is a potential competitor, perhaps a competitor who is doing well in the small aircraft area but has no big aircraft. Possibly a competitor who could not normally afford a nice, nearly new widebody. Smart move Fella! You just opened up a part of your market that was safe from your competition by subsidising his purchase of an aircraft to use against you.

Etc. Etc.

[saudipc-9]

BOING,
The more I watch this situation unfold the more obvious it becomes that no one has the slightest idea what they are doing. The majors were all expanding because everyone else was and they did not want to be left behind. Sounds like the arms race doesn't it! Then boom. The economy goes down the crapper and on top of that 9/11. This provides the majors with detente and a reason/excuse to cut back capacity to where they should have stayed at 4 or 5 years ago. That and they can do it without ALPA causing a stink.
Mind you this is all with 20/20 hind sight. However, hasn't this all been played out before?

[InitRef]

Have to agree - I doubt that anybody in mgmt/strategy at the airlines know a) what is happening and b) what to do.

Everybody concentrates on costs - because its the easy thing to do. I'm afraid that only DAL and AMR have a clue - even if the clues are pure gambles.
DAL with their LCC is doing what could be argued is the same as CO Lite, Metrojet or Sh*ttle by United - but at least they are trying.

AMR is re-trying the simplified fare structure that lost them about a US$ billion in the early 90's - maybe it will fail again, but one thing is clear - in the hurry to cut out the travel agents, the airlines thru the web, have made airline pricing transparent - and biz trvlers don't want to pay 2,400 for a transcon and sit next to someone who paid 400 for the privilege of staying over Sat night.... when the tech economy was booming, companies did not care about little things like saving a few grand on air tickets....

On the other hand the financial community believes that everybody should become like Southwest - yeah right - that will work if nobody ever wanted to fly to HKG or SYD on US carriers - then it will be a happy world with everybody flying 737's hopping around the US (except for Wall St types who will no longer have domestic First Class to travel in...)

However it does appear that unlike PanAm, Eastern etc, these days some majors can shrink into profitability - the main reason being the express carriers at the regional end, and the deathStar type alliances at the international end. Code-sharing, mileage cooperation, and revenue sharing now means that UAL can get more RJ's via UAX, abdicate more routes to LH metal, and still offer the same route network :mad:

[zerozero]

I don't disagree with one word written so far, and far be it from me to defend myopic airline management, but I think the American consumer bears some responsibility here.

In a country where you can have ten different kinds of milk, 20 different kinds of toothpaste, etc, then of course we're not gonna be satisfied unless we have 15 choices of how to travel from Point A to Point B.

There are some companies that will put a 737 between Los Angeles and Las Vegas on the hour, every hour!

Or between Los Angeles and San Francisco every hour!

My question is: Do we really need that kind of frequency? Isn't the system already saturated? Didn't Boing make a special version of the 747 especially for the Japanese, high-volume, short-haul market?

The RJs are frustrating but not just because of scope.

Sometimes I wish the industry was like it was before deregulation: Big airplanes, glamor, only the rich flew (and dressed nicely when they did), tickets were expensive.

Oh well.

[BOING]

The FAA and other international organisations are STILL projecting massive increase in air travel over the next ten years. I suppose the questions are, Who will be around to fly these people and can it be done at a profit?

Yes United can shrink into survival but it is like the old military maxim which appears in various forms "a retreat is by far the most difficult military manoeuvre to perform". By deferring new aircraft, USING as many of its old aircraft that it MUST make the payments on. Reducing costs in various ways, many of which it has not yet even considered, United can compete. United needs to survive until the inevitable turn round comes.

Talking of the inevitable turn round a few factors come to mind. The present conventional wisdom, still expressed, is that somehow terrorism is still preventing people from flying. Absolute , pure, unadulterated BS. Terrorism was a catalyst which greatly accellerated an inevitable situation. Without terrorism the airlines may have been able to make a gradual transition into the new airline business reality. Frankly I doubt if they would have done so. Airline management has been so short sighted and so locked into their outdated thought processes that without terrorism we would still have seen a steady decline in the industry. The present slow down in the US travel industry is psycho-economic. Fear and indecision. What must be faced is that, with a few exceptions, the management of US businesses and US politicians are actually no smarter than the management of the US airlines. A frightening thought. Let us face it though. These people come from the same business schools. They got their positions through being part of the same "in group" or through massive ambition. Why should the reaction of these people to an economic down turn be any different to the reaction of airline managers? Cut, slash, reduce costs, reduce travel. Chase the years old dream of business all done by computer and telephone - who needs face to face contact? The present slow down in business travel is an ECONOMIC problem, a mindless CUT, CUT, CUT reaction that is inherent in this generation of business leaders.

The present situation is that the "average joe" is travelling because he can see airline ticket prices are a bargain. The average business traveller is not flying because he has either been told not to do so by his company or he is reducing his travel to a minimum, either way the business traveller is looking for the cheapest ticket. Despite what we hear from the uninformed Press airline load factors are not bad in classical terms, it is just that the ticket prices are not producing enough revenue. It is certainly a great idea to ensure your employees travel economically if they must travel. The business problem with the present mentality is one of bean-counting. It is easy to account for travel costs, it is very difficult to account for lost business due to lack of face to face contact and it is very difficult to account for the productivity lost whilst employees search for the lowest price airline ticket.

When businesses realize that it is counterproductive to restrict travel and when they realize that the absolute ticket price is not the only criteria for travel costs the airlines will see some measure of inprovement in their income. However, the only real improvement will take place when, in addition to the above, the supply of seats is reduced to meet the demand. This will need a rethink in the way the whole airline industry operates. As a previous poster says, it was great before deregulation, this was simply because supply was restricted artificially.