In most industries, bankruptcy is something to be avoided at all costs. But for airlines, it’s a bit like joining a private, exclusive club (albeit one that is heavily subsidized by government handouts). What’s the recipe for joining this club, you ask? To start, blame your sagging balance sheet on union demands and the challenging travel environment post 9/11. And don’t forget to toss in “predatory competition from other low-cost airlines.” Then, lean on the courts to bail you out and hire the best PR, turnaround, consulting, and accounting firms to keep your wings in the air, as you emerge from court protection from creditors and start the cycle all over again (repeat every 2-3 years as needed).
Historically, we’ve had to tolerate this behavior from the airlines, as domestic trade and the overall economy depended on having reliable transportation among not just major cities, but the hundreds of smaller cities in the country. Previously, only national carriers like United, American, Northwest, Delta, and US Airways could offer this type of service. But recently, low-cost providers like JetBlue, Southwest, Airtran, ATA, and America West with their point-to-point strategies have more aggressively begun to serve the national market, offering flights between major cities across the country as well as regional airports. Now, for the first time; our federal and state governments have no reason to keep bailing out the major carriers. And it’s about time.
Historically, low-cost providers like Southwest would enter markets and cherry-pick specific routes that they thought would be most profitable. But driven by the need to continue rapid growth, Southwest recently decided to more aggressively take on the hub and spoke strategy of the major carriers directly, creating large bases of their own in cities like Philadelphia (where US Airways was the the previous major carrier). Driven by market forces―not by government set asides and subsidies―Southwest saw an opportunity to displace the incumbent US Airways as the largest provider in the region, which, given its lower cost structure and higher margins is, only a matter of time.
Southwest’s new hub strategy in markets like Philadelphia is great news for consumers and businesses alike. And it appears that federal and state regulators are beginning to react to this shift in the market, coming down harder on the major carriers. In recent months, US Airways recently filed bankruptcy again and United was denied a federal loan guarantee. For the first time, the specter of liquidation looms over both companies.
While this might be a tragedy for the employees and retirees of both organizations, liquidation is the best option in both cases. Both United and US Airways are continually plagued by cost structures and over capacity that far exceed those of low-cost providers. And management at both organizations continue to prove their incompetence by focusing cost reduction efforts on things like taking away free drinks on international flights and olives out of salads (rather than areas like fleet standardization and the hedging of jet fuel contracts which have a much greater impact on cost reduction). At the same time, despite having some of the highest labor cost structures in the business, United and US Airways still face hostile management/labor relationships thanks to entrenched unions who care only about self preservation.
Enough is enough. Now that low-cost providers have proven they can dominate the domestic skies, it’s time to pull the safety net out from under the majors. Out of their demise, we’ll see new airlines that offer additional innovations, lower costs, and new types of service. It’s time for Adam Smith to take over the friendly skies.
