Synergies, Sanctuary & Survival
July 1st, 2008
In reaching a tentative agreement between pilots at Delta Airlines and Northwest Airlines, the merger to form one of the worlds biggest airlines amidst a backdrop of surging wholesale fuel costs and ticket increases, is the wider industry going to either sit up and take notice or perhaps even initiate a few moves of their own to secure their long term survival?
Even as the intended pace of the Delta-Northwest merger quickens, by no means is this marriage one that will either be a match made in heaven or whether it will stay the course.
Peering over to US Airways merger with America West, the internal wrangling that has been a constant factor mars whatever projected synergies the two had into a botched love affair with neither party being entirely satisfied with the other. Equally concerning is the slow rate at which major US carriers have collectively woken up to realise that they cannot forever rely on older airplanes.
In a “catch-22” situation, without new airplanes, airlines can’t cut costs and they can’t make money using gas-guzzling aero-relics. Why some of these carriers were not better prepared financially to make allowances for fleet renewals is anyones guess - Continental Airlines, while rolling back capacity and removing older 737’s from its fleet seems to have by far the best business model in the USA.
Image courtesy of Rick Schlamp
At the same time, it is taking delivery of new 737’s and has orders for the hot selling Boeing 787 Dreamliner too. Its recent announcement to join the Star Alliance and co-operate with ailing United Airlines is somewhat bizarre to say the least, however the carrier has shown that diligence and proactive management can indeed negate the desire to merge in times of uncertainty.
Back in the late 1990’s, the red tape bureaucrats resident in Brussels were up in arms over Boeing’s big deals with the likes of American Airlines and Delta Airlines. Yet looking back in hindsight, it is a wonder why more deals on this scale were not seen given the desire to secure long term airplane renewals with the flexibility to switch models to demand and various markets. Surprising then, that a decade on from these mega-deals, a plethora of US carriers languish behind their Asian, European and even Latin American counterparts on a variety of fronts.
So what’s the answer?
Well, one solution emanated from former American Airlines CEO Bob Crandall when he spoke recently at the Wings Club in New York.
He advocated revising U.S. bankruptcy laws “to deprive failed carriers of the right to use lower costs to undercut the fares offered by their more prudent rivals.“
Not many airlines can rely on such protectionism outside of the USA.
In being a vocal proponent for the EU-US Open Skies deal, many US-based airlines have to wake up and smell the coffee that not everyone is entitled to sanctuary. Once we see the demise of at least one major US airline, synergies may present themselves more clearly to those that survive.
Sphere: Related ContentEntry Filed under: Aeroplane, Aerospace, Air Transport, Air Travel, Airbus, Airbus A330, Airbus A350, Airbus A350XWB, Airbus A380, Airlines, Airplane, Airplane Order, Airplanes, Airport, Airports, American Airlines, Aviation, Boeing, Boeing 747-8, Boeing 767, Boeing 777, Boeing 777F, Boeing 787, Boeing 787-3, Boeing 787-8, Boeing 787-9, Boeing Orders, Continental Airlines, Delta Airlines, Dreamliner, Northwest Airlines, Open Skies, Skyteam Alliance, Southwest Airlines, Star Alliance, Travel, US Airways, United Airlines, oneworld Alliance
4 Comments Add your own
1. Aurora | July 1st, 2008 at 12:53 pm
Some pundits speculated awhile back that the likes of United and American would employ a “bottom feeding” approach to fleet renewal. In other words, as airlines that ordered during the period of “irrational exuberance” started canceling and deferring orders, they would step in and grab the delivery positions for a song. I can’t speak to American, but in the case of United, they will be fortunate to survive without another bankruptcy filing. The likes of ILFC and other lessors now seem ready to pounce on the slots made available by Jet Blue, Air Tran, Skybus, et al.
Another score for myopic management in the race to the bottom!
2. Chris Wallace | July 1st, 2008 at 1:53 pm
Many forget that the first “customer and manufacturer” deal was between Airbus and US Airways for the A320 family. This deal is what pushed airlines like Delta and American into cutting their own deals with Boeing. Unfortunately for Airbus, only US wanted a deal with them, so the EU cried foul when Boeing secured additional deals.
The US commercial aviation market has lurched from boom to bust due to poor management decisions made at both HQ and labor. When the airlines made money, HQ placed insanely large capital purchases of scores of new planes while labor demanded large pay and benefit raises. The end-result was both HQ and labor management saw they were making twice as much money, so they each spent that amount extra, resulting in all the profit being quickly wiped-out and replaced with huge losses.
The US commercial aviation market has to contract. It will increase prices and result in many cities losing major service, but there are always alternatives. Here in Seattle a new company has started “air taxi” service with a 9-seat turboprop between Boeing Field and Portland International. It’s about the same price (or cheaper) as flying Horizon or United Express, but you don’t have to deal with the TSA (BFI has no separate sterile area) and BFI is about half the distance from downtown Seattle compared to SEA. So you save a good deal of time.
I expect you’ll see such service from smaller cities to the major’s hubs if the major’s pull out. A morning flight from SBA to LAX would collect the one person each who are flying out on UA, CO, DL, NW, AA, US and AS that day. And the evening flight would bring those people back home. Sure, you might see longer layovers at the airport, but the airports can benefit from that by improving their terminals and amenities. The new Central Marketplace at SEA is very nice. I now arrive at SEA an extra hour early so I can enjoy a nice meal before I leave and I see many people getting last-minute gifts and such at the stores.
3. Jacobin777 | July 2nd, 2008 at 2:05 am
Given the amount of carriers going “bust” the past number of months, as well as the fact some other carriers are looking like they will go under…I think Aurora has got it right. Many slots will be opened up.
The one caveat I see here however is that of widebodies such as the B787….the vast majority of the B787 is being ordered by carriers who are profitable (or at the least, carriers which probably won’t go away).
Of the U.S. majours, I think U.S. Airways is the most vulnerable.
4. Aurora | July 2nd, 2008 at 5:09 pm
Other considerations are germane to this subject as well, viz, politics, unions and local community support. The airlines enjoy support from their local congressional representatives, as well as their communities. For example, do you think that the Georgia congressional delegation would stand idly by while Delta went into Chapter 7 liquidation proceedings? Same holds true for UA, US, AA, CO, or NW; there would be enormous pressure on Congress to “do something”. There is also an understandable reluctance to let “darwinian market forces” do their thing and watch several score thousand jobs go away, which is what would happen if a legacy went off into that gentle night. It might not be as simple as dollars and cents, or even common sense, but airline survival is a very emotional issue here. In fact, I fully expect that the debate over re-regulation may come to the fore after the next president is settled in the White House, especially if it is the senator from Illinois!
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