Essays on Rebuilding America: Essays on Rebuilding America – Airline Reform

Columnist : Jonathan Williams

by Col. Frank Ryan, USMC Ret.

Thus far in 2008, five airlines have either filed for bankruptcy protection or for liquidation. An additional 10 airlines are on credit watch. Allegedly, the culprit is oil but are oil prices really the problem? The shortcomings in the industry are well known except to the airline industry apparently.

To blame oil prices for the demise of so many companies or September 11th or any other “act of God” would do terrible harm to an industry that needs to correct itself before more disasters follow. To act the victim in the marketplace is tantamount to admitting defeat. Solving the wrong problems lead only to more bankruptcies.

I became convinced years ago that the airline industry in the United States is a failed business model. Except for a company like Southwest Airlines and a few others, the industry is mired in the status quo. It is still business as usual for the industry when the business as usual has proven to be a disaster.

It is a failed model because it fails to take into account that it has never made the transition from a regulated industry to the free market. It continues to believe that the old model will work. Only Southwest and a few other smaller carriers get it.

Specifically, the industry must look at its critical success factors and its cost drivers to survive first and then thrive.

Critical success factors are anything that could lead to the success or failure of a company or an industry. One such critical success factor is the hub concept. Much of the airline industry model is based upon a hub concept. Yet it does not take a genius to realize that a hub only makes sense if you can easily predict and control weather. Failure to control weather means that the entire hub network is subjected to the vagrancies of weather with all the associated costs of rescheduling irritated passengers and finding lost luggage.

A cost driver is anything that causes cost. When an airplane is late, baggage handling becomes more of a challenge and missed connections are all too common. Both locating lost luggage and rebooking passengers adds significantly to cost.

The industry has also failed to deal with its overcapacity. As you increase supply with more aircraft, prices decline. With rising fuel costs, the higher capacity and lower prices are deadly combinations. Any industry that operates at 90% capacity (read seats full) and cannot make money is in deep trouble. Even today, American Airlines is putting a charge to “check” baggage rather than admit that it must raise prices to cover its costs.

Ask any one who flies if they are comfortable while airborne and the answer is a resounding no. I would love to take some industry executives to a restaurant, put them in extremely small seats with no leg room, have the customer next to them recline impeding their ability to eat, and then have them wonder why people do not come back to the restaurant.

If you cannot charge a price that is high enough to serve your customers comfortably then I question the soundness in the long run of the business model. Since the inception of the airline industry, it has never made a cumulative profit! Amazing! At what point will we learn that if it does not make money, it is a flawed model.

Southwest is approaching the market differently and doing well but it too has issues that it must (and I believe will) solve. You see, Southwest recognizes that it is in the transportation business and not the airline business. The strategic difference between being in the people transporting business versus airline business is huge. The transportation business concept would be focused on the customer not the means of satisfying the customer. The airplane is merely one way of transporting people. If you really want to be profitable in the transportation business focus exclusively on what the customer wants. Build a model that satisfies the customer and they will come.

If you really want to fix the industry, make it easier for customers to get to the airport and move through the airport. Disney apparently knows how to do that fairly well so ask them. Also, standardize equipment to reduce variety related costs, eliminate routes that are not profitable or not in demand, stop the hub concept, and insist on more deregulation to allow for more rapid changes in flight schedules in order to satisfy customer demand.

Unless the industry is willing to heal itself, the coming merger of Delta and Northwest will merely mean that we can write the next chapter of a nearly bankrupt industry. It is no wonder that Warren Buffett is putting his money in trains.

Frank Ryan is a member of the Lincoln Institute Board of Directors and lectures for the AICPA and BLI on management related topics. He can be reached at [email protected].