Wednesday, August 28, 2013

A New Religion Or Just A Cult

It is the "new religion of capacity constraint" as AWST calls it in its August 5 -12, 2013 edition, is what US carriers attribute their profitability to. Ten airlines collectively posted a net profit of US$1.6 billions in H1 2013 up from the US$1.2 billions for the same period in 2012 (click here for full story) a 2.1% net profit on a US$ 70 Billions turnover. Not stellar by any means but phenomenal for an industry that could hardly make money or recover since 9/11. For some reason Wall Street loves it, go figure and A4A reckons that this will allow US carriers to effectively compete globally. The airlines are reinvesting their profits into new technology aircraft and on board passenger amenities for the first time since a decade.

A closer look does not paint such a rosy outlook.

For starters, capacity constraint entailed initially the shedding of  aircraft, jobs and routes.It was not until recently that airlines started hiring. The last decade witnessed the consolidation of the legacy carriers Delta/Northwest, United/Continental, Southwest/America West and recently the yet to be approved America/US Airways. Mergers that were touted to benefit the consumer, in spite of all the turmoil of merging and shedding jobs and routes. It also reduced the passenger service to the level of the worst of the two airlines. Since then service levels, whether on time performance or passenger services, have improved and better service is offered on business class/first class domestically slowly spilling into economy class.

Most of the large carriers have put in orders for the new generation high technology aircraft except for Delta. Delta does not want to go through the teething pains of aircraft like the B787 or A350 but would rather invest in B717s from Southwest and MD80s from SAS because they reckon fuel prices are not an issue, after all they own a refinery. But then how would Delta compete against fuel efficient passenger pleasing high technology aircraft; only time will tell.

The airlines have decided that fifty (50) seats aircraft are not what they need and have invested in one hundred (100) seats, new technology fuel efficient aircraft, a great move. The seats offered did not increase after all capacity is expected to rise by 1.4% by Q4 2013 compared to the same period in 2012. So practically the number of operating aircraft is going to be less which means more passengers will fly on routes, hopefully profitable ones but then there will be less routes flown by less aircraft.

The airline costs have marginally risen as a result of new labor contracts and higher maintenance costs only to be saved by stable fuel prices and guess what, the infamous ancillary fees. Whenever, the airlines are in trouble, they just raise their fees, no explanations needed. 2012 was a record year and the airlines collected US$ 6 billions in baggage and reservation change fees, I expect 2013 will be more of the same. This allows the airlines to boast that ticket prices are being held back.

Even though the airlines have improved aircraft efficiency and staff productivity, their profits still come from fees and not from core airline activities.

No one ever got prosperous by holding growth. Holding capacity will not generate added revenues for the airlines and whatever efficiency and productivity new aircraft will provide will be offset by payments to cover the new assets lease or loan payments. Domestically, the airlines are consolidating and practically reducing competition; they have some sort of control of the playing field, maybe not for long as seen from the Department of Justice reaction to the AA/US Airways merger plan. Internationally, it is a different ball game, the competition is with aggressive, full service and award winning airlines that are innovative and firm believers in growth from the Far East and MENA. To effectively compete globally, the US airlines have to really leave their comfort zone and start being innovative instead of whining about EXIM Bank financing or deep pockets of rich nations.

Is it really a new religion or just a cult?


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