Thursday, April 03, 2008


From 1978 until recently, the little discount carriers flourished at the expense of the legacy carriers. Former majors such as Eastern Airlines, Pan American and TWA bit the dust. Others such as CAL, DAL, UAL and US Air went through bankruptcy proceedings at least once. Now the worm has turned.

Aloha and ATA have filed for bankruptcy. It is the "big boys" that are surviving the latest crunch. ATA was a direct competitor to DAL and CAL on flights to Hawaii and to UAUA on other flights. Consumers can be assured that the ticket price to and from Hawaii is going to rise. Shareholders of DAL and CAL can expect to see higher yields.

Speaking of higher yields, the latest report from CAL was posted by the media in the typical negative fashion. The typical headline was about the small decline in load factor. The careful reader could dig to find that CAL increased capacity by a significant amount of around 6% and increased revenue passenger miles by almost as much. Even after a small decline in load factor, the company still reported flying with almost every daylight hour seat filled. What could not be found in many of the "news stories" was the significant increase in yields. The revenue per available seat mile increased by better than 6%. While we still do not know the total increases in costs or the exact increase in revenues, the "news stories" that implied weak business growth were incorrect. Any business that is able to expand its volume of business substantially while increasing the price charged per unit of business, while facing the head winds of negativity, is a strong business.

The national airline of Italy is coming in for a crash landing. There are no open bids to buy this failing business. In healthy markets, weak players are allowed to go belly up. The efficient competitor increases its sales as the weak players leave the field.

The airline business has been turned upside down from where it used to be. Even now the highly paid employees have a hard time accepting that the return to yesteryear is not likely. KLM had an offer on the table to buy Alitalia but the entrenched unionized employees are like the former employees of Eastern who were willing to risk liquidation rather than accept a more reasonable wage scale. The traveling public was forced to pay airline employees exorbitant salaries for many years. The gig is up. The management that fails to keep costs in line in this newly competitive market will be punished. The managements at major carriers are taking the steps necessary to insure profitability. DAL just increased its fee for curb side baggage check-in by $1. This kind of increase seems like small potatoes but an extra dollar a few million times a year is worth the asking. The key is that the demand for service is strong enough that the charge can be made. The public is well aware that the fuel costs have risen. The person that is flying today is a person who is willing to pay the extra buck.

The real truth is that the airline business was upside down 30 years ago. It simply took a very long time to flip the business over. Now that ticket pricing has been almost rationalized, airport and airline service will grow in the areas of need. We know that market based systems work better than government dictated systems. Flying is more affordable today than ever before. There will be significant growth in the years ahead.