Friday, February 10, 2012

Airlines and the Law of Diminishing Returns

Etihad Airways announced a modest net profit of 14 million USD over a turnover of 4.1 billioon USD. No mean achievement in a global recession and a region experiencing massive political upheaval ranging from quiet and peaceful political reform to the other end of the spectrum, civil war and everything in between. What is interesting it was a profit made through expansion; efficient, steady and productive. The type of expansion that adds value and jobs which is typical to the region (MENA/GCC).

This is so unlike the USA market that can only achieve profit by a tight control of capacity coupled with a reduction in staff and network. The type that is great for shareholder equity but bad for communities. It does not create value or jobs, on the contrary it reduces service and increases unemployment. For some reason airlines in the USA have very seldom achieved profitability through expansion. They tend to expand through mergers and acquisitions which are always at the expense of the staff and the community.

Airlines in the USA followed by legacy airlines in Europe and elsewhere have unbundled services, kept the original ticket price and convinced us all that we are only paying for what we need or use. Of course, we are paying twice.

So, when the DOT issued a ruling that passengers should know the fare inclusive of all services and taxes, the airlines went up in arms claiming this will only increase the cost and now a few Republicans in Congress are trying to overturn the DOT ruling.

Airlines have not been very good neighbors, of course there are a few exceptions, they like austerity but then the answer to today's problems is job creation. After all cost cutting is subject to the laws of diminishing returns while for revenue the sky is the limit.

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