Summary
The U.S. airline industry is besieged with inefficiency, will our government add to the industries woes or save it from self destruction. Are more regulations and restrictions necessary and is it the government's priority to save the industry, protect the consumer or can both be accomplished with success.
Analysis
The U.S. led the way in 1978 with the deregulation of the airline industry. This was later followed by Europe whose final stage of deregulation became effective in 1997. Deregulating the industry stimulated competition in the industry and gave rise to the numerous global low cost carriers (LCC).
The challenges ahead for alliances are regulatory rather than geographical. Global airlines are seeking wider range of antitrust immunity. Global alliances were formed over a decade ago to overcome a variety of barriers that limited revenue and competition. Limits on investment and ownership have also been relaxed over the decade.
Collectively alliances have done very well. The three major alliances Star, Skyteam and Oneworld accounts for more than half of the world's total airline capacity carrying about two-thirds of the world's air travelers. Air travel remains a large and growing industry; it facilitates economic growth, world trade, international investment and tourism and is therefore central to the globalization taking place in many other industries.
An alliance’s greatest power is to increase revenues jointly rather than to save members on spending cooperatively. Members must coordinate scheduling and capacity in order to offer the broadest network of benefits to their customers. Antitrust gives members a way to present global access to their customers, especially the corporate customer. Historically corporate customers have been a key to the success of airline alliances. Increasingly corporate customers are seeking a single point of contact and a single airline partner or alliance partners for their global business.
A major driver for the success of alliances and their growth strategies are multinational corporations and others who spend millions a year on travel. Business travel has also grown as companies become increasingly international in terms of their investments, their supply and production chains and their customers. The rapid growth of world trade in goods and services and international direct investment has also contributed to growth in business travel over the last decade.
The Wall Street Journal article “Does Obama Want to Own the Airlines? Welcome to government for the benefit of government officials and their hangers-on by Holman W. Jenkins, Jr. were on target.
Mr. Jenkins states…”Only luck and falling oil prices saved Washington from having to face mass bankruptcy of the airline industry in 2008. Now the specter is rising again. Fuel prices are up. Traffic continues to plummet amid a global recession. United Airlines last week mortgaged its spare-parts inventory to raise cash at a usurious 17% interest rate”.
Mr. Jenkins is also correct in his statement that the justice department offers no supporting evidence for this proposition, which has resisted academic verification, and in dismissing the "putative" benefits of immunized airline alliances. It is the Justice’s insistence that DOT should set this high bar for antitrust immunity since its antitrust enforcement has been less than a boon for consumers.
Central to the globalization occurring in other industries, air travel remains a very restricted industry. Business travel has grown over the last decade as companies become increasingly international in their investments, supply and production chains, and customers. The rapid growth in international direct investment has also contributed to a rise in business travel.
Airlines earn revenue by transporting cargo, selling frequent flier miles to other companies, fuel surcharges, baggage fees, and up-selling in-flight services. The largest proportion of the industries generated revenue derives from regular and business passengers.
Democrat congressman James Oberstar of Minnesota a long-time leader in aviation introduced legislation to review and possibly dismantle airline alliances over the next three years. The airline regulatory environment appears to be changing; this will have an adverse effect on future alliances. The Department of Justice (DOJ) views some of the request for antitrust immunity as anti-competitive and not a good deal for consumers.
Airlines need antitrust immunity." Immunity then leads to joint sales, product development, distribution and other activities. Airlines carry an estimated 35 percent by value of the world’s traded goods. Without airlines it would be difficult to enjoy the catch-of-today from a distance land in your favorite restaurant. Globalization presents an unprecedented opportunity for the world’s airlines, as airlines play an irreplaceable role in the force of globalization itself. Unfortunately congressman Oberstar remains opposed to the formation of tighter airline partnerships and are unconvinced of the benefits.
Labor groups are expressing their concerns and objecting to alliances, citing the numinous code shares and the slow growth in the industry has lead to industry outsourcing and a loss of jobs. The global economy, dwindling airline cash reserves and revenues has lead to slow growth in the industry. High labor cost, low productivity and many other airline inefficiencies has lead to the outsourcing of jobs. You cannot pay a baggage handler $80K plus and expect to be profitable. Airlines that emerged from bankruptcy were able to reduce cost and compete more effectively with LCC’s; those that did not are at a disadvantage. One would think that labor and the DOJ would welcome airline alliances; antitrust exemptions generate million of dollars in additional revenues for airlines. These extra dollars would likely save jobs and help ensure the survival of the company.
Overall airline growth has been in a freefall since 2008. The economic slump in the United States and the weaker global economy has led to lower passenger demand and cargo growth. Labor, one of the airline industry’s biggest adversaries, is putting pressure on the industry for unacceptably high wages and benefits and fuel cost are rising. Further, the U.S. government has and continues to react too slowly to resolving the air traffic congestion and security issues that confront it.
Airline profitability is closely tied to economic growth and trade. The stimulus package did not produce the results that were expected. From the first quarter to the fourth quarter the output of goods and services produced in the United States -- decreased at an annual rate of 5.5 percent in the first quarter of 2009, in the fourth quarter, real GDP decreased 6.3 percent. Real gross domestic purchases by U.S. residents of goods and services decreased 7.5 percent in the first quarter, compared with a decrease of 5.9 percent in the fourth.
Alliances are important to airlines, but they are not likely to save them. The industry has far too many seats chasing too few passengers. Unlike many LCC’s, legacy carriers are besieged with inefficiencies and their financial difficulties are exacerbated by older and less efficient aircraft fleets, higher labor rates, the need for productivity improvements and poor customer service.
It is becoming more difficult for legacy carriers to compete with LCC’s. The scope is beyond the cost of a ticket, and competing on price alone will not suffice in the long-term. The industry is full of recycled leaders who are short sited and not the visionary so desperately needed. Leadership, sensible government and a transformation of the industry is a must if the industry is to be successful.
