Both the CEOs of American Airlines (Gerard Arpey) and Southwest Airlines (Gary Kelly) decried rising oil prices as a crisis at a conference in Dallas last week. 

“We’re all very worried about what’s happening in the oil market,” Arpey said. “If the economic recovery dampens, it won’t be good for traffic.”

It’s true that rising oil prices will again challenge airlines to earn a profit and it is also true that the volatility in the oil market(s) makes things very unpredictable for airlines.

However, we have created another problem within the airline industry that goes unrecognized so far.  We haven’t allowed a major airline to go bankrupt and liquidate since Eastern Airlines.  Instead, we’ve allowed continually bankruptcy reorganization that has permitted uncompetitive companies to become marginally competitive again for a brief period of time.  Some of those companies figured out that they had to change the way they did business (Continental) and some haven’t. 

Mergers haven’t really eliminated airlines.  They have re-branded them with a new name.  Delta didn’t eliminate Northwest, it absorbed it and it continues on today.  United didn’t eliminate Continental, it continues on today. 

The reason we need to permit an airline or two to truely fail is that the barriers to entering the airline market are exceptionally high.  When we prop up the legacy and SuperLegacy carriers, we make it an order of magnitude more difficult for new new, leaner airlines to enter into the market place. 

We also don’t regulate anticompetitive behaviour very well.  In this country, it’s perfectly acceptable to allow an airline to flood a route with capacity and below cost pricing to eliminate a new entrant from that route.  The consumer is hurt in two ways:  They see potential for new, low fares show up for a very limited time and they see an new, better airline potentially eliminated from the marketplace.

After more than 30 years, we still haven’t done anything about the anti-competitive nature of unions in the airline business.  The airline industry got deregulated but labor did not.  The current scenario makes change in rapidly changing conditions all but impossible for airlines facing higher costs elsewhere. 

I’m not in favor of eliminating unions but I am in favor of eliminating years long talks between airlines and unions on new contracts.   Billion dollar business negotiate mergers and consummate those mergers in as little as one or two years.  It can take far in excess of 2 years for a union and airline to come to an agreement on a new contract that by the time it is voted in, market conditions have changed again.

This puts both unions and airlines at a strong disadvantage in this industry.  It is as big of a crisis as any oil crisis at this point.  This industry has no agility and is constantly lagging behind changing conditions. 

It’s interesting to me that the only airlines who earn profits and who do negotiate things like high oil prices with any agility at all are the newer airlines who have contained other costs such as labor and equipment or those airlines who have figured out that working with their employees to get agreements quicker is the right business decision. 

A depature from the marketplace of a major airline would be healthy and good for the airline industry.  It would put executive teams at various legacy and SuperLegacy airlines on notice.  It would put unions on notice as well.  The status quo isn’t working and the industry remains fairly stagnant.  Legacy airlines inch along while low cost carriers earn money for investors. 

We now even encourage airlines to become even larger monolithic companies that are even harder to turn around in the face of trouble.  That’s our real crisis in the airline industry, not oil.

Filed under: Airline News by ajax