Hard landing for airline sector

Given the nature of the current upheavals in the airline business, it can be safely predicted that things will get worse before they get better. The visible problems, as evidenced by the near bankruptcy of several airlines, are only the most obvious manifestations of the underlying fault lines within the airline sector.

Although Sept. 11 has had its impact, the root cause for the current crisis was visible well before that date. Sagging passenger numbers had highlighted the basic weakness of the sector. Glaring differentials in operating costs between the large “traditional” carriers and the new “lean and mean” generation of operators caused strongly contrasting profit and loss pictures for the two types of airlines. A significant proportion of those cost differentials is tied to labor rates, some of which spun out of control during recent economic boom years. The necessary corrections will be painful and not easily achieved.

The traditional carriers established international mega-systems for transporting passengers around the country and the globe. While they used their scale and leverage to reduce costs charged by suppliers, many did not take similarly aggressive measures internally. ALPA, the powerful pilots association, was able to use its clout to drive pilots’ wages up far beyond inflation rates and the mechanics unions followed suit. The airlines decided to pay up because they feared shutdowns and had the cash at the time. Now that the spigot has been turned off, most are hemorrhaging red ink.

Not all of the current crisis is of the airlines’ own making. Under deregulation the U.S. government essentially washed its hands of the commercial side of the nation’s airline system. Many communities suffered as airlines abandoned any remaining notions of community service and focused solely on bottom-line returns. Passenger service levels declined substantially as “yield management” became the mantra for the industry. Now that the damage has been done, government involvement has become unavoidable, as bailouts will be required to preserve the system in one form or another. This does present the government with an opportunity to reclaim some of the leverage it should never have relinquished. Let’s hope it will prove clever enough to seize the moment.

No-frills flying is here to stay and that reality will force the traditional airlines to remake themselves into much more efficient service providers. While there will always be a market for upscale travel, no traditional carrier will be able to survive solely on that type of traffic. In fact, the business and first-class niche could be lost for good to new specialty operators if the airlines don’t pay attention. Traditional carriers still have one major advantage over low-cost operators and that is scale. They can offer tickets to large varieties and combinations of destinations at a single fare, whereas smaller carriers tend to compete mostly on point-to-point routes. The danger in this market division is that travel in lightly contested market niches, such as certain overseas and less popular domestic routes, could become much more expensive again.

Actually, some air travel probably should become more expensive. During the boom years it became clear that our national air transport infrastructure has a finite capacity and the often willy-nilly travels undertaken during the recent boom years were probably a wasteful use of the system. More realistically priced air travel will bring with it a return to more carefully considered travel decisions, something that would benefit vacation attractions closer to home. It would also produce more level market pricing for many travelers. There is enough competition left to weed out price gouging while the range of fares narrows. Current reductions in business travel, as a result of high business fares and security hassles, will likely also cause fares to go up.

Passenger screening procedures should not be underestimated as a travel obstacle. The poor service and lack of common sense displayed at many airports since Sept. 11 has turned off many travelers and will increasingly do so unless the system is streamlined and made more efficient. The federalized system may not function well in the long term, as there will likely be too many bureaucratic obstacles. It was perhaps the right approach in dealing with the immediate crisis but the government would serve us all well by at least considering some privatization options in the future. Already the cost structure imposed upon the system would seem to be considerably out of line with other industry cost patterns and the scope of the Transportation Security Administration bureaucracy-in-formation does not bode well for the airlines or their passengers.

When all is said and done, it would be nice to see a more stable national air transportation system emerge, where labor costs are more effectively distributed. Currently there is an unreasonable spread between junior commuter pilots and senior line pilots. It also may make sense for the government to impose some reasonable parameters on fare differentials between popular and less frequented routes. Under deregulation some of America’s (smaller) cities have paid a heavy price in lost economic development potential. Businesses are reluctant to locate in areas where they are forced to pay comparatively high air fares.

While many people will be loath to see the government become more involved, it already is. The U.S. taxpayers are being asked to bail out airlines that have made poor economic decisions. As such taxpayers should be given greater say in the way the national mass transport system is managed and that involves the government in one way or another. It may not be a pretty picture but under the circumstances it may be the only way to fly.

Bob Ziegelaar is president of The Telford Group Inc. and formerly was director of Bangor International Airport.