With the news that US Airways and United are in merger talks, the subject of mergers and industry consolidation among US airlines has been reheated to a high temperature again.  For the past several years, there has been a lot of talk about the need for consolidation among airlines in the US in order to return to profitability and there are many advocates (such as Doug Parker and Glenn Tilton of US Airways and United respectively). 

New fees seem to have brought in additional revenue but no one can seem to really claim that it has changed the equation for earning a profit for airlines.  Advocates say these new fees are helping airlines find a path back to earning a profit and I certainly think that experimentation with these fees isn’t over. 

Oil is always a frequent component of profitability.  Soaring oil prices just two years ago nearly brought several airlines to their knees but also brought huge profits to other airlines who engage in hedging their fuel costs.  I don’t think anyone would disagree that a more stable oil market would not only benefit the airlines but a lot of other industries.  The wide oscillations of fuel prices have brought a big element of uncertainty to many parts of the economy. 

I’m not sure consolidation is really the answer, however.  Frankly, I think one big mistake of the 1990’s and 2000’s is that we have permitted airlines to go through bankruptcies (some multiple times) and reorganize themselves rather than being more insistent on a liquidation or two.  It’s politically difficult to do so because liquidating a large legacy airline means tens of thousands of people suddenly becoming unemployed. 

Yes, the airline industry is a network business to a large degree and network businesses can do better if they grow larger and capture more market share.  I question how viable that is over the long term without restructuring other legacy costs as well.  I think it is a nice, immediate answer and certainly offers short term (2 to 5 years) gains in share prices but there are other issues that need to be decided as well.

Seniority is king in the airline business and I’ve really come to believe that that is a huge obstacle to health for many airlines.  Airlines have to compete on price in the market place but are not allowed to compete on salaries in the employment market place.  Union contracts based on seniority are killing many airlines.  Mind you, that isn’t to say that airline employees don’t have legitimate issues too, they do. 

Airline employees are expected to quite literally work for poverty wages for years before starting to earn a real family supporting wage and then finally make it to a level for their last 10 or 15 years of work careers where they earn extremely generous wages for the exact same work that a junior level employee does for a salary that is unable to provide modest life.   This disparity has to stop.  Entry level wages should be higher and senior level wages should be lower.  Airline crew should be able to move between airlines without having to re-set to the lowest wage scale again.  We have enough airlines in this country that it is somewhat absurd to believe that a strike at one major airline threatens the national economy.  It doesn’t.  Airline employees deserve to be able to agree on a contract in a much more timely fashion.  Failing to do this results in an even greater tenacious hold to seniority since it is the only thing that raises wages.

LCC airlines have managed to remain profitable and grow but only by keeping their business model flat with respect to equipment and staff.  This allows them to keep productivity high and prevent creeping wages based on a structure that makes weight and distance the prime factor in pay.   Actual work loads and skill sets are secondary in paying flight crew. 

No, I’m not sure we need more consolidations and mergers and, frankly, I don’t think such things would substantially raise airfares given that LCC’s are pretty adept at spotting opportunities and entering markets.  Virtually the only thing that keeps them from certain routes is legacy airlines holding monopolies on airport space or slots.   Even then, those LCC’s are very good at looking for ways around those problems to gain a foothold.  Notice how vigorously Delta and US Airways are trying to keep Southwest Airlines from gaining more slots in NYC?

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