It has been fascinating to watch the airline industry (particularly in the United States) evolve in the past several years, since the start of the pandemic. In some ways, the industry came back stronger and faster than expected, which is great. However, I also think the industry has fundamentally shifted, and the only solution may be consolidation (and I’m not meaning to sound like some self-serving airline industry executive, I swear!).
In this post:
The airline industry is really, really tough
Consumers (including me!) can be tough on airlines, though I think it’s important to acknowledge that the airline industry is a really tough business, even during good times. It’s one of the most cyclical, capital intensive, low margin businesses out there.
Those who choose to work in the airline industry largely do so out of passion, while those who invest in the airline industry (at least on a long term basis) might struggle with math, or maybe just aren’t aware that other industries exist. 😉 It’s just a really, really tough industry.
People love to claim that airlines are greedy and are these wildly profitable companies earning billions of dollars, but the reality is that this is really consolidated across a couple of airlines, and that’s only during the best of times, while when anything goes wrong, the airlines lose billions.
When the topic of industry consolidation comes up, obviously consumers are vehemently opposed to that. I get it. I mean, what consumer would want less choice and less competition? For example, look at JetBlue’s takeover attempt of Spirit, which was ultimately blocked by the Department of Justice.
The reason the merger was ultimately blocked is because it was decided that it would be better for consumers if Spirit remained independent. The only problem was that Spirit hadn’t made money in years, and had no viable path to profitability. Now we’ve seen the airline completely change its business model, all while it sells off aircraft and is on the verge of Chapter 11 bankruptcy.
Ultimately Spirit’s cheap ticket prices over the past several years have been financed by investors, and that’s just not sustainable.
To give a totally different example, take a look at the current situation at JetBlue. It’s an airline that has long tried to offer customers more, from extra legroom, to free Wi-Fi, to seat back entertainment, to drinks and snacks. Yet the airline has also struggled with profitability, because consumers aren’t willing to pay a premium for an all-around better experience.
So now in a bid to return to profitability, JetBlue is trying to cut costs and increase revenue. I can’t blame the airline, but best case scenario, JetBlue could be mildly profitable, despite having a strong position in some of the country’s most lucrative markets (New York and Boston).
Why there’s a new profitability “divide” in the industry
Why have a vast majority of the profits in the US airline industry been consolidated at Delta and United, while other carriers struggle with profitability? There are a few factors at play here.
For one, we’ve seen labor costs increase massively in the airline industry since the start of the pandemic. It’s one of the few industries where wage increases have exceeded inflation, at least among some work groups.
I’m really happy for the employees who received pay increases, but there’s no denying that this makes the cost structure of the industry much higher, and it also makes it more difficult to offer low fares. The reality is that demand for air travel is elastic, and if airlines could just raise fares, they would.
Next, the reality is that much of the profitability at the most profitable airlines comes from their loyalty programs, and their lucrative co-brand credit card agreements. I’m not suggesting all their profits come from these programs, but the finances at Delta and United would look materially different if it weren’t for SkyMiles and MileagePlus, respectively.
Smaller airlines simply can’t leverage these programs in the same way, since it’s hard to build that level of wallet share when you’re a smaller, regional airline. For that matter, many people collect points with the dream of jetting off somewhere exotic in a premium cabin, and that’s something many smaller airlines can’t offer.
Lastly, at the end of the day, the “big three” US carriers have gotten better at competing domestically, largely offering fares that compete with the value proposition of the lower cost carriers. Aside from loyalty programs, much of their profits come from strong premium demand, including on long haul flights.
They’re able to sell a lot of economy tickets at a loss, simply to fill seats, because it’s better than keeping a seat empty, and also to increase engagement in the loyalty program. That makes it harder for smaller airlines to compete, where they need to make money on each seat they sell, since those domestic economy seats are the core of their business.
Is there a solution other than consolidation?
While shareholders subsidizing airline ticket costs is great in the short term, it’s not a long term solution. So, what should be done to address the fact that so many airlines are struggling with profitability, due to higher costs and lower revenue?
The reality is that costs likely aren’t going down. Short of a bankruptcy filing, airlines aren’t realistically going to be able to renegotiate their labor contracts. We’re seeing some airlines try to shrink into profitability, by deferring new aircraft. That’s also not great for consumers in the long run, since less capacity could lead to higher fares.
However, it seems to me like consolidation in general is the only practical solution for the profitability problem in the industry. There’s power in scale, from loyalty programs, to route networks, to synergies from reduced costs.
To be clear, this doesn’t have to mean that American, Delta, and United, should just gobble up every airline. However, I do believe that some additional consolidation would ultimately benefit the industry, including potentially creating larger national competitors to American, Delta, and United.
This is what JetBlue tried to do by buying Sprit, but that didn’t work out (and the economics of that deal were questionable to begin with, but that’s a completely different story). We did recently successfully see Alaska acquire Hawaiian, and I’d say that’s great for consumers. Hawaiian was losing money, and I’m looking forward to seeing the consumer benefits of this merger, from Hawaiian adopting the Mileage Plan program, to the airline joining oneworld.
I swear I’m not trying to be some industry apologist here, but does anyone have a better solution? Anyway, in a separate post I’ll cover the airline that I think is most ripe for being acquired, especially as the industry continues to evolve…
Bottom line
The airline industry is a tough business, even during the best of times. Here in the United States we’ve seen US airlines report some record revenue in the past couple of years, but also record costs. This makes it really hard for smaller airlines to compete, as they have fewer revenue opportunities than the major global players.
With several airlines continuing to struggle with profitability, I can’t help but feel like some more consolidation is inevitable… and it might not even be bad for consumers!
What’s your take on airline industry consolidation? Do you think we’ll see more?
Spirit and Frontier merge and keep the Big Front Seat. JetBlue join OneWorld, essentially a limited version of the Northeast Alliance, which Justice might find more palatable. Or possibly JetBlue merge with Southwest making that latter carrier into one I would actually want to fly. The above would improve my choices as a award points hoarding premium traveler on a budget.
I have to disagree with the general article here and its author. The American public has lost out greatly due to the recent consolidation of the US airlines, and any further consolidation should not be permitted. Sure, the airline industry is a tough industry, but you name ANY industry out there... it's all tough! And the other industries (excluding the banks and all of that foreclosure mess some years ago) have not been bailed out...
I have to disagree with the general article here and its author. The American public has lost out greatly due to the recent consolidation of the US airlines, and any further consolidation should not be permitted. Sure, the airline industry is a tough industry, but you name ANY industry out there... it's all tough! And the other industries (excluding the banks and all of that foreclosure mess some years ago) have not been bailed out by the very people that are now getting completely jerked around... the American taxpayers.
I have never paid so much for my travel costs as I do today, and I believe that's because there is simply much less competition. I have also never been on so many consistently full flights in my life. The last time I saw an empty seat on a flight was 2 months ago. They are all packed solid! And on top of both of those facts (higher costs and packed flights), the quality of service has dropped in both economy and premium cabins. So what exactly DO we get from a field of three airlines? A much better reason to stay at home!
The TWU at AA ratified a 2 year contract extension for ramp and maintenance employees which will result in an immediate 12-15% increase in salaries and 3% more on Jan 25.
A huge part of the problem is that there's already been way too much consolidation in the industry, which creates a kind of haves and have-nots situation. Since United is paying pilots a half million to a million dollars a year with overtime, how is a small airline like Avelo or Spirit supposed to compete? Of course they can't but when there were a lot more airlines the power was a lot more decentralized. I...
A huge part of the problem is that there's already been way too much consolidation in the industry, which creates a kind of haves and have-nots situation. Since United is paying pilots a half million to a million dollars a year with overtime, how is a small airline like Avelo or Spirit supposed to compete? Of course they can't but when there were a lot more airlines the power was a lot more decentralized. I think the minimum response should be to break up the last round of mergers for the Big Three airlines. It'll be a mess but it will create more choices and decentralize power, which helps consumers. Additional moves like changing gates and landing slots from perpetual ownership to 10 year rotating leases would also help out. Assuming that some airlines declare Chapter 11 then they'll be able to renegotiate pilot contracts to a more sane level.
Frontier and Spirit on the ULCC side; American and Jet Blue ( I honestly think AA might be limiting NYC to have a more favorable merger with B6 and Boston is a no brainer. . .would move AA back to #1 but strengthen their east coast footprint (BOS/JFK/LGA/PHL/DCA).
ULCC prices in the US aren't even particularly cheap. How are outfits like RyanAir able to operate in a way that would seem impossible given Europe's propensity for overregulating markets? Have the FAA and DOT gotten that bad?
Our air markets are not over -regulated and we have rail competition as well, so how do FR, Wizz and EZY manage to succeed?
Yes, there needs to be a lot more consolidation in the industry. We need to go down to one airline, and that airline is United. First on the chopping block is the disgusting B6, an airline created to pander to the entitlement whores known as Noo Yawk Yankers and Massholes, the biggest entitlement whores in the world, and considering they share the planet with the French, that's saying something.
It’s almost like Tim is Dr Jekyll and Mr Hyde… sometimes praises delta nonstop then switches to a weird United love when his brain breaks
Wtf did I just read lol.
some people see demons behind every doorknob even when they are looking at their fairy godmother
Only idiots use "lol". And I'm just expressing a truth that Noo Yawk Yankers and Massholes don't seem to realize: they aren't kings of the world, and the vast majority of Americans hate them. They can go drown themselves in the Atlantic for all I care, and take their "hometown airline" with them. In the meantime, I will promote my hometown airline, unfashionable as it may seem to do so.
An Alternate Acquisition:
Since B6 has hunkered down along the East Coast and Caribbean, it would benefit by acquiring a commuter airline like Silver with a new name of JBExpress. For BOS & JFK, JBExpress would take care of the airports within 150 to 250 miles. For FLL, JBExpress would take care of the Bahamas, Tampa, & Key West. For SJU, it would address the US & British VI, plus a few more islands.
An Alternate Acquisition:
Since B6 has hunkered down along the East Coast and Caribbean, it would benefit by acquiring a commuter airline like Silver with a new name of JBExpress. For BOS & JFK, JBExpress would take care of the airports within 150 to 250 miles. For FLL, JBExpress would take care of the Bahamas, Tampa, & Key West. For SJU, it would address the US & British VI, plus a few more islands.
B6 already has a code share with Silver. However, an acquisition would allow B6 to deploy its jets to longer and more profitable stages while fortifying its focus cities with commuter capacity. Any surplus seats on the turboprops would be made available to adjoining airlines to address concerns of the DOJ & DOT.
In such a scenario, any suitor (both domestic & foreign) for B6 would have to make a "serious offer" for a well entrenched airline.
Just a thought!!
No. B6 needs to die, immediately.
Speaking of slow news days, Somebody is already above a 2,000 word count for today's rants...
YOU
ARE
FIXATED
I
HAVE
WON
and yet you always find time to reply to me. I'm so flattered. ;)
If you define winning as spending your entire day in the comment sections of actual respected writers while others laugh at you, I guess you're right. By your own unusual definition. You've won. By any normal sane definition, you only reinforce what a huge loser you are.
Most of us have better things to do than write more than...
and yet you always find time to reply to me. I'm so flattered. ;)
If you define winning as spending your entire day in the comment sections of actual respected writers while others laugh at you, I guess you're right. By your own unusual definition. You've won. By any normal sane definition, you only reinforce what a huge loser you are.
Most of us have better things to do than write more than 2,006 words in a comment section to praise an airline that seems to make up your entire world.
So yes, Tim. You've won in your own fantasy world of delta propaganda taking up your entire day... a COMPANY that doesn't love you back and where you're just as much of a joke inside the DL HQ walls as outside. ;)
I thought I counted 2,013 words.
the fact that you even bother to count is what is bizarre.
No, beyond bizarre.
heck yeah, Julie, I reply to you... and everyone else too.
I don't complain about you participating other than the bizarre things you write
You do know it is incredibly easy to count the words in your post? Takes about 15 seconds.
People need to stop bringing up an Alaska/JetBlue merger. Alaska executives have stated many times that they are profitable bc of their very slow/strategic growth that has slowly expanded across the west coast region. It is the exact opposite of Jetblue's wildly aggressive and occasionally illogical growth attempts. B6 wrote in their leaked deck that they had long-term goals of acquiring AS, whereas AS has zero interest in B6. B6 would have to try a...
People need to stop bringing up an Alaska/JetBlue merger. Alaska executives have stated many times that they are profitable bc of their very slow/strategic growth that has slowly expanded across the west coast region. It is the exact opposite of Jetblue's wildly aggressive and occasionally illogical growth attempts. B6 wrote in their leaked deck that they had long-term goals of acquiring AS, whereas AS has zero interest in B6. B6 would have to try a hostile takeover a la Spirit yet I can't imagine Alaska's board ever agreeing to a B6 ran acquisition. Across most categories, AS and B6 are extremely different companies.
Interesting strategy, since Alaska has 3x the market cap as B6. Not sure how someone as small as B6 could afford that.
As a monthly visitor to the USA from an international destination, I almost go out of my way to avoid flying on a US carrier.
My life is too short and my time too precious to be abused by the US aviation industry.
When the US aviation community up their international and domestic game, I might reconsider my position.
What are you doing on a monthly basis? How do you not fly on a US carrier unless you're stopping at your first port of entry in the US? somebody needs to take a look at your immigration history...
This is a wonderfully fascinating article on why we should all suffer more and make our lives more miserable to help airline profitability get even higher.
The one thing the author forgot to mention was why any of us owe the airlines higher profits at all. They chose to be in a commodity business. Turning it into a monopoly commodity business will help no one except the CEO buying himself a third vacation home.
But isn’t the concern that if no consolidation occurs, smaller airlines will simply go bankrupt and so there will be a monopoly type situation anyway. Surely it’s better to have decent competition to the big 4 even if it’s fewer competitors than now?
We live in a free market society. It's not the consumer's or government's responsibilities to make sure a poorly operating company doesn't go bankrupt.
It is however, the government's job to ensure the remaining companies do not operate as monopolies and ripoff consumers.
Is more consolidation needed by whom?
From a consumer perspective - airfares are relatively low on an inflation adjusted basis. The larger airlines are investing in the customer experience really across the board (new planes and routes, new lounges, new boarding and seating options for Southwest, JetBlue, Frontier). The main issue there seems to be from a customer standpoint is that airlines with fortress hubs and routes price gouge - and consolidation would make that...
Is more consolidation needed by whom?
From a consumer perspective - airfares are relatively low on an inflation adjusted basis. The larger airlines are investing in the customer experience really across the board (new planes and routes, new lounges, new boarding and seating options for Southwest, JetBlue, Frontier). The main issue there seems to be from a customer standpoint is that airlines with fortress hubs and routes price gouge - and consolidation would make that worse. The most recent mergers (Alaska/Virgin, Southwest/Airtran) have been negative for the consumer, neutral to negative for the actual acquiring airlines, and have led to reductions in service and routes - so not a great track record.
From the company standpoint, Delta, AA, United and probably Southwest are likely banned from consolidating. That leaves the others. Frontier and Spirit could work as it could make a stronger ULCC. But beyond that I dunno. JetBlue probably needs some more scale outside of the Northeast - Alaska could make sense, but there is a gap in the middle there.
The solution for lower proftability airlines is for them to simply operate and compete better over the very long run - along with some airports maybe reopening slots so that competition can truly flourish.
I think in part it's an obsession (not just in the airline industry and among daydreamers in the avgeek fraternity but also in the US version of capitalism) with growth as the only measure of building success and eliminating competitors either by killing or absorbing them is the only (or best) path to that goal. (Although the European big three seem to be following similar logic.)
I think there's been enough consolidation and it would...
I think in part it's an obsession (not just in the airline industry and among daydreamers in the avgeek fraternity but also in the US version of capitalism) with growth as the only measure of building success and eliminating competitors either by killing or absorbing them is the only (or best) path to that goal. (Although the European big three seem to be following similar logic.)
I think there's been enough consolidation and it would help if stakeholders of airlines
Oops
... like JetBLue and Alaska would build on a regional niche (or a product difference) and build successful businesses within their defined area. For sure, some transcon flights to serve the needs of their core area as Alaska does now, so the new AS/HA can serve their west coast and Hawaiian focus areas with AS's east coast services and HA it's Pacific Rim area of interest and some long haul east coast routes....
Oops
... like JetBLue and Alaska would build on a regional niche (or a product difference) and build successful businesses within their defined area. For sure, some transcon flights to serve the needs of their core area as Alaska does now, so the new AS/HA can serve their west coast and Hawaiian focus areas with AS's east coast services and HA it's Pacific Rim area of interest and some long haul east coast routes. Success as a business and growth should not be seen as inherently inseparable.
The majority of the US airline industry is held by large institutional investors – they understand math very well. Some airline stocks have outperformed market indices at various times.
“new economy” industries such as tech and pharma drive the largest growth in stock valuation. Every investor should have a lot of high growth stocks but also “old economy” stocks including services such as airline (which are usually considered “industrials” along with manufacturing. And let’s...
The majority of the US airline industry is held by large institutional investors – they understand math very well. Some airline stocks have outperformed market indices at various times.
“new economy” industries such as tech and pharma drive the largest growth in stock valuation. Every investor should have a lot of high growth stocks but also “old economy” stocks including services such as airline (which are usually considered “industrials” along with manufacturing. And let’s not forget that many airline stocks look absolutely pristine compared to Boeing. Airlines should not be a primary part of any investor's portfolio but dividend paying airlines like DAL and LUV are attractive to some investors.
Most industries have up to 3 nationwide super players. Airlines are network businesses where size and efficiency matters.
The Big 3 all have pre-domestic deregulation (1978) business models; for much of deregulation, the legacies (including the predecessors that are part of the big 3) did poorly with LCCs the darlings of the industry.
American has done poorly ever since 9/11. United is just reaching the potential it has had for decades. Delta figured out many of the post deregulation airline industry dynamics post 9/11 which is why they led the industry in implementing many of the strategies that have fueled its profits including having strong market positions w/ mainline in the domestic market and moving the product upscale which United is now copying. Delta has long had a higher share of corporate travel than AA or UA. Delta has uniquely used its high domestic corporate travel share to grow into new markets as evidenced by the fact that DL is the only one of the big 3 that has built new hubs and isn’t finished building hubs in more cities. American is largely not pursuing the same strategies trying to shift its network to markets which it can dominate without a high level of service. AA’s strategy fails because they have to be nationwide and they continue to lose ground in major competitive markets even if they do well in some of their largest and most profitable hubs.
Labor costs are a huge factor in how the industry has developed the way it has. Airlines are heavily unionized except for Delta which has paid its employees well but holds its employees to higher service standards and gets more productivity out of its employees. DL has led the industry post covid in raising salaries in order to ensure it has a steady supply of employees in order to grow; it was known even pre-covid that there would be a shortage of pilots and mechanics. Covid and the government’s handling of it simply increased inflation so that all employees have seen an erosion of buying power. Delta is unique among all industries in leading wage increases even for non-union employees. Delta’s labor cost increases are and will be a major factor in the weakening of competitors which ultimately makes DL stronger and with more domestic and international share.
It is noteworthy that UA’s total labor costs have long been comparable to DL even though UA has more employees; in the most recent quarter, UA’s labor costs exceeded DL’s even though UA has not settled with its FAs and other UA labor groups are due for large post-covid contracts which will involve large pay increases.
Southwest has been a major player in the domestic market but is struggling because it has increased labor costs far faster than its ability to generate higher revenue; WN is a mature airline now and has many senior employees. Its egalitarian revenue approach simply does not work in a society where many consumers are willing to pay much more for travel than other people.
The people that argue that revenue is all about the cheapest price completely miss that Delta has led the industry in profits because it gets far higher revenue per seat mile – people ARE willing to pay for better service. United is trying to copy that formula.
United also has its target on LCCs and ULCCs in supporting UA’s domestic growth, where UA is the smallest of the big 4. But UA can’t get the airplanes it wants even as UA’s fleet is the oldest in the US meaning more and more new aircraft will have to be used for replacement rather than growth.
UA has the greatest overlap by metro area with WN, not ULCCs. WN’s inability to get new aircraft could provide opportunities for UA if WN and UA weren’t dealing with the same Boeing delivery issues.
JetBlue has simply made many strategic mistakes despite it being the youngest of the major US jet airlines.
AA is also hovering just above the surface and has for years. From an economic standpoint, AA should not continue to exist – it has negative stockholder equity and does not cover close to covering its cost of capital. AA has grown to a large enough size that is dying slowly
There is a profitability dividing line in the industry but it is not specific to any business model. The fact that DL and UA are legacy carriers focused on broad international networks doesn't change that AA, WN and most of the rest of the industry besides DL and UA are not currently generating profits sufficient to exist on a long term basis.
Since 2008 only Alaska has outperformed the SP500
https://yhoo.it/3NYe0ct
AS is a well-run airline and they learned alot from their Virgin America acquisition which took a toll on its finances.
It's interesting the time period you choose to use.
Over the past 5 years, DAL is the only major US airline that has positive stock performance -and that is less than market indices.
Over 10 years, you can add UAL - but not ALK.
ALK stock did very well but pre-Virgin America merger. Its peak was well before Covid and hasn't recovered.
Jetblue seems like a prime acquisition target. AA would be a good acquirer but would probably be blocked, so leaves Southwest (although customer base and experience doesn't overlap well) or Alaska.
Southwest is the largest domestic airline by passangers flown. The Justice Dept would block a merger involving the big 4 US airlines, unless they are buying pieces of B6 if it went through BK and was being liquidated.
Let JetBlue and Alaska merge. Let Frontier buy Spirit. Delta, United, and American are big enough already.
What happened to JetBlue is a shame. They're truly one of the most innovative airlines in the US, their Mint product is excellent and offers superb in-flight service and seat. The problem is they're unable to get a revenue premium for literally being better.
We definitely need more airlines, especially ones like JetBlue in the industry to serve as disruptors. Look at Porter in Canada, they offer a superior product and are growing as a result.
except B6 is not high quality in its operations. The best onboard service in the world doesn't matter if flights are consistently late - which is more true for B6 than almost any other airline.
It isn't a surprise that B6' current execs have made fixing B6' operations a major priority.
It also isn't a surprise that DL has grown as much at JFK and BOS at B6' expense. People first and foremost pay for...
except B6 is not high quality in its operations. The best onboard service in the world doesn't matter if flights are consistently late - which is more true for B6 than almost any other airline.
It isn't a surprise that B6' current execs have made fixing B6' operations a major priority.
It also isn't a surprise that DL has grown as much at JFK and BOS at B6' expense. People first and foremost pay for getting from someplace to another place on time and without cancellation. Delta simply does that better than JetBlue which is why DL has won over so many more high revenue passengers than B6 where the two compete.
I agree. I feel like JetBlue could charge a slight premium if it had a domestic first product, especially by selling its extra legroom seats as a separate product instead of an extra fee. Those who would pay slightly more for more economy legroom are the same who aspire for the ‘free upgrade’, but when that isn’t on the table one may take one’s chances elsewhere
Porter is growing because the rest of the Canadian airlines are garbage. JetBlue has too much competition from decent airlines like UA and DL.
What this is telling us is that for all the griping the consumer does about how the airline experience has gotten worse, it has also gotten much cheaper as a percentage of the average income and consumers are not willing to pay more for a nicer experience. It's easy to have exactly the nicer 1960s experience if you want it, all you have to do when you book is choose to pay 1960s prices. The...
What this is telling us is that for all the griping the consumer does about how the airline experience has gotten worse, it has also gotten much cheaper as a percentage of the average income and consumers are not willing to pay more for a nicer experience. It's easy to have exactly the nicer 1960s experience if you want it, all you have to do when you book is choose to pay 1960s prices. The reason there is a race to the bottom is because 99% of consumers will always go to a Google Flights type search engine, finally the absolute cheapest ticket, and book that. They aren't scanning plane models to see if it means getting 1" less legroom space.
"It's easy to have exactly the nicer 1960s experience if you want it, all you have to do when you book is choose to pay 1960s prices."
This!!!!! People say they want 1960s travel glamor back, but they also want to pay $99 for a transcontinental fare. It is astonishing how many people don't realize this.
You're right on. Something 85% of passengers are infrequent flyers and make decision almost always on price and airlines have accepted that consumers will just take the lowest fare. The experience has gotten so miserable there is a segment of the population now willing to pay for extra legroom or premium. Part that's still pretty small. You see on it on this board (and other like blogs). People think they should get Spirit prices and PanAm service.
Agree completely. I love B6. I wish they had acquired Virgin America instead of Alaska. I can see B6 being acquired by Alaska now, but then they’d probably get rid of Mint.
If AS did to B6 what they did to VX, I'll cheer them on every step of the way. Eradicate B6 to the point of damnatio memoriae.
I will write two posts - one for the general theme of the article and another for the details and carrier specifics.
First, it is clearly a slow aviation news week so throwing in a few industry thoughts for discussion makes sense.
Most important point is that the airline industry is NOT consolidating into the big 4. Smaller carriers are being allowed to merge AS/HA succeeded– but B6/NK was blocked because B6 believed that it...
I will write two posts - one for the general theme of the article and another for the details and carrier specifics.
First, it is clearly a slow aviation news week so throwing in a few industry thoughts for discussion makes sense.
Most important point is that the airline industry is NOT consolidating into the big 4. Smaller carriers are being allowed to merge AS/HA succeeded– but B6/NK was blocked because B6 believed that it could eliminate a lower cost category airline and use its resources to grow B6’ model, something the DOJ has never allowed a US airline to do. Just as with the AA/B6 alliance, B6 has tried to do things the government has not allowed and has lost valuable competitive energy and money in the process.
Basic thesis Ben’s article is flawed. Low quality producers are failing and will continue to fail. They happen to be some of the smallest airlines. But they are not consolidating into the big 4.
While the failures are biggest for the smaller airlines, AA is incredibly weak financially and is losing share in some of the largest markets as it tries to concentrate its network around the hubs which it dominates. AA is failing slowly while smaller airlines are failing at a faster rate esp. given that they were strong before.
And the biggest winner in this consolidation is Delta, whether some people want to admit it or not. Delta led the megamerger trend with its merger with NW and DL has figured out what it has needed to do in order to succeed in the deregulated era including generating revenue premiums to support its high costs. DL has led the big 3 in capacity growth since 2010, the period of the megamergers.
DL has the largest domestic network of the big 3 on mainline aircraft which is the most cost-effective way to serve the domestic market. DL is now focusing on international growth because industry fundamentals are favorable. If UA can make money with an extensive network, DL can too and will grow its international network with much more efficient aircraft and a stronger domestic network.
DL and UA are the two carriers most capable of adapting but they aren't going to grow through mergers or acquisitions but organically taking share from other carriers IF they can get the aircraft to grow - something DL is proving it is able to do while UA is not. AA is losing share in high value markets. Low cost carriers including WN are struggling because they can't generate revenue to offset their high costs, just like AA.
Im fiscally conservative but I can acknowledge that the free market doesn’t work great in every circumstance. Airline travel leverages public assets like airports, competing against other airlines flying the same equipment, there really isn’t much opportunity for product and service differentiation. It’s squatters rights for airport slots and gates.
Hence, airline travel should be treated like other public utility companies with private sector contracted out to do the service. not saying we should...
Im fiscally conservative but I can acknowledge that the free market doesn’t work great in every circumstance. Airline travel leverages public assets like airports, competing against other airlines flying the same equipment, there really isn’t much opportunity for product and service differentiation. It’s squatters rights for airport slots and gates.
Hence, airline travel should be treated like other public utility companies with private sector contracted out to do the service. not saying we should go back to the CAB days but there’s a middle ground regulatory environment. If left to the free market the industry will dwindle down to 2, maybe 3 big airlines. Nothing more. New entrants will find it impossible to enter the marketplace and compete effectively.
United and delta are ahead because their hub networks are balanced well between premium coastal and large continental fortress hubs, with expansive international networks.
AA was last to merge during consolidation and it lacks significant slot allocation in NYC and has a huge network gap west of Chicago and north of phoenix. Ultimately AA, Alaska, and JetBlue need to come together to be able to to compete with United and Delta
The rest of the LCC’s no longer have viable business plans and will ch 7 eventually. LUV is the exception, with its scale it can turn itself into a “legacy” airline with lounges, premium business class seats, and a wide body fleet.
first, AA had the largest slot portfolio at JFK at the time B6 was created but AA has squandered opportunity after opportunity to grow. AA argued that slots at JFK and LGA should be destroyed post 9/11 but the FAA, for brief periods of time, removed slot controls at both airports and DL aggressively grew its slot portfolio then.
DL did masterfully trade US' LGA slot portfolio (under Scott Kirby and Doug Parker) for...
first, AA had the largest slot portfolio at JFK at the time B6 was created but AA has squandered opportunity after opportunity to grow. AA argued that slots at JFK and LGA should be destroyed post 9/11 but the FAA, for brief periods of time, removed slot controls at both airports and DL aggressively grew its slot portfolio then.
DL did masterfully trade US' LGA slot portfolio (under Scott Kirby and Doug Parker) for a much smaller portion of DCA slots but AA and US had the slots to compete but did not know how to.
And the US government has been far more aggressive in opening US airports to low cost and ultra low cost carriers than any country in the world. Compare the share of non-legacy carrier slots at LHR and FRA or HND compared to LGA and DCA.
It is precisely because of the government's forcing open US airports to competition that the big 3 have learned to compete very effectively with all competitors, something that does not happen in other parts of the world.
The past doesn’t matter. Todays macro environment is vastly different than it was during the slot allocation debacles of the early 2000’s.
You seem to think Delta is a gee wiz innovative company. Truthfully, they’re all public utility service providers with different inherited assets subject to government approval, and they all play to those strengths, delta included.
It isn’t rocket science to decide to command higher prices through first class seating, improving quality,...
The past doesn’t matter. Todays macro environment is vastly different than it was during the slot allocation debacles of the early 2000’s.
You seem to think Delta is a gee wiz innovative company. Truthfully, they’re all public utility service providers with different inherited assets subject to government approval, and they all play to those strengths, delta included.
It isn’t rocket science to decide to command higher prices through first class seating, improving quality, and being reliable. It helps that the merger helped DL monopolize 4 different continental hubs.
While management deserves credit for not making too many mistakes, it’s important to keep things in context.. they don’t deserve too much credit, as good for operating metrics were largely circumstantial.
AA didn't lack slot allocation, they quite literally had unused slots and didn't realize.
AA is shrinking massively at any hub w/ competition (ORD/JFK/LAX) and retreating to its fortresses like PHL, MIA, DFW, and CLT.
AA/AS/JetBlue combining will never happen.
How many of those slots were unused?
Correction, AA had shrunk in LAX and ORD. They’re currently boosting capacity in ORD and when construction is complete in LAX they’ll be doing the same there too.
They’ve also announced in their latest investor reports the initiative to boost capacity in northern hubs including NYC.
When it comes to mergers, it all depends on who’s in the white house.
Despite what a lot of people believe, the DOJ's handling of the airline industry has been fairly consistent regarding of party in the WH.
Second, AA has said alot of things but executed well on few. They have grown and shrank JFK and PHL more times than we can count.
UA has simply outgrown AA so much at ORD that it is unlikely that AA can recover the premium travel revenue that AA used to...
Despite what a lot of people believe, the DOJ's handling of the airline industry has been fairly consistent regarding of party in the WH.
Second, AA has said alot of things but executed well on few. They have grown and shrank JFK and PHL more times than we can count.
UA has simply outgrown AA so much at ORD that it is unlikely that AA can recover the premium travel revenue that AA used to carry. Remember that LHR is the only longhaul international market at ORD that AA flies on a year round basis.
It is unlikely that AA can recover what it has lost to DL at LAX. UA is also trying to grow and has overtaken AA in total capacity - but with fewer domestic flights in some months. AA and DL do have the advantage of being adjacent to the international terminal which LAX is willing to allow AA and DL use.
bottom line is that AA has likely passed the point of returning to the same league as DL and in terms of network breadth with DL having the advantage in domestic markets and UA having the advantage across the Pacific with DL and UA essentially tied to Europe and Latin America
"It is unlikely that AA can recover what it has lost to DL at LAX."
What has AA lost? OneWorld is bigger at LAX than it's ever been and Delta is easily the smallest carrier in Southern California overall which is the real driver.
AA is in the middle of a terminal construction project taking gates offline and Delta tried for about three months to build at LAX before retreating in a rather painful and embarrassing way to watch.
Sorry to bust your bubble, Tim.
American itself is far larger - and you clearly can't stand to admit it so you tag onto AS' presence even though there is no joint venture and AS and AA legally do and actually do compete.
AS carries a small percentage of AA coded passengers - nowhere near enough to offset AA's market share losses.
No, DL hasn't retreated. It is still the largest airline at LAX and AA and UA have both pulled...
American itself is far larger - and you clearly can't stand to admit it so you tag onto AS' presence even though there is no joint venture and AS and AA legally do and actually do compete.
AS carries a small percentage of AA coded passengers - nowhere near enough to offset AA's market share losses.
No, DL hasn't retreated. It is still the largest airline at LAX and AA and UA have both pulled back longhaul international flights.
Only in a world where you cherry pick facts do you come up w/ the idea that DL is failing at LAX while AA will grow again.
And let's not even talk about NYC where AA was slightly smaller at JFK at the time B6 began service.
Now, DL is easily twice as large as AA in NYC.
or BOS where AA foolishly tried to let B6 do the heavy lifting and DL took both of them down for the count
Sure is lousy when you mess up the first word of your reply, huh?
I'll note you didn't reply to my question. AA has lost nothing at LAX. Their alliance in LAX and in SoCal is bigger than its ever been.
And the West Coast Alliance is alive and well as much as you hate it. If you're an AA passenger at LAX, there's absolutely no issue taking AS given how your loyalty...
Sure is lousy when you mess up the first word of your reply, huh?
I'll note you didn't reply to my question. AA has lost nothing at LAX. Their alliance in LAX and in SoCal is bigger than its ever been.
And the West Coast Alliance is alive and well as much as you hate it. If you're an AA passenger at LAX, there's absolutely no issue taking AS given how your loyalty is rewarded on both airlines. But don't let facts bother you, they rarely do.
And yes, DL has retreated from their growth at LAX and Delta is still the smallest alliance, mileage group, and loyalty in the Southern California area. As much as you seem to want otherwise. I'd spell it out for you but you'd only change the subject when you're proven wrong, as usual. But I will remind you Delta has now tried twice to fly the largest market out of LAX, LHR, and failed twice in the last four years.
you are seriously delusional.
AA, on the metal it controls - which is AA mainline and its coded regional airlines, is indeed smaller.
The size of AA's oneworld JV partners at LAX hasn't changed much.
The fact that you cling to AS to try to prop up AA's abysmal performance at LAX says volumes about the level of denial you are in
"The fact that you cling to AS to try to prop up AA's abysmal performance at LAX says volumes about the level of denial you are in"
as is your ignorance about what the addition to AS in the OneWorld does to Delta: Makes them dead last place on the West Coast. The delusion seems to be how you live in the 1990 airline world pre alliance members.
Totally agree with you. As Lucky points out in the article, the aviation business is cyclical and profitability over the long run is virtually a wash. Private enterprise in the US is of course sacrosanct, but every decade or two, inevitably the US taxpayer ends up bailing out the airlines and their investors over some industry-collapsing calamity (be it 9/11, a global pandemic, war, etc). It's a oft-repeated story for other vital industries too.
...Totally agree with you. As Lucky points out in the article, the aviation business is cyclical and profitability over the long run is virtually a wash. Private enterprise in the US is of course sacrosanct, but every decade or two, inevitably the US taxpayer ends up bailing out the airlines and their investors over some industry-collapsing calamity (be it 9/11, a global pandemic, war, etc). It's a oft-repeated story for other vital industries too.
Remember that corporations will demand that profits be privatized but losses must be socialized! At the end of the day, aviation links are a vital part of our national infrastructure. Given that's the case, shouldn't taxpayers be entitled to share in the profits when the times are good if we are being required to throw in money when times are bad?
I'm hoping that American finally merges with JetBlue. That way, when someone asks about my trip I can slowly shake my head and respond with, "AmericanBlue..."
can we immediately cease and desist with the endless non-sense that AA and B6 should merge or should be allowed to merge?
Both have had access to enormously valuable national airline assets but have each made multiple strategic mistakes. You don't reward two poorly run companies with the ability to consolidate.
Further, B6 is a higher cost airline than AA and the combination of AA and B6 would end up with AA's costs. Most of...
can we immediately cease and desist with the endless non-sense that AA and B6 should merge or should be allowed to merge?
Both have had access to enormously valuable national airline assets but have each made multiple strategic mistakes. You don't reward two poorly run companies with the ability to consolidate.
Further, B6 is a higher cost airline than AA and the combination of AA and B6 would end up with AA's costs. Most of B6' network won't work at AA's costs. AA can't make its network from JFK and LGA work with the slots it has now.
If there is a solution, it is to allow other carriers besides DL and UA to try to grow at LGA, JFK and EWR but if that doesn't happen which it won't they DL and UA should be free to grow in those places.
Florida including FLL is the other place where failing LCCs/ULCCs have high market shares but those airports are not slot controlled.
If DL or UA can grow their and be profitable, those assets need to be made available to producers that can better use them.
Neither DL or UA will end up with market share in any other Florida city as high as AA has at MIA
No.
AA supposed lower cost structure would be good for any airline, yet alone JetBlue.
You need scale to make any hub work efficiently, without scale AA will have hard time making NYC operationally profitable. It’s really that simple.
AA has higher costs than B6.
You can't acquire a lower cost airline and expect costs to remain at the low cost carrier's costs.
A merged AA plus any other carrier would result in AA costs PLUS.
DL has the scale in NYC and also has high costs. They just can generate more than enough revenue to offset their costs and still directly compete with AA and B6... same thing in BOS
Yet that's the mantra of airline executives as a way of resolving their financial and operational issues. Find someone to merge with. I suspect that if some of the weaker airlines begin to teeter on the verge of bankruptcy they will be allowed to merge under the hopes that two drunks can make one sober person.
Long Term, I envision B6/AS combining together. After AS is done with Hawaiian and everything that comes with that merger that is the next likely outcome. AS has a strong west coast presence and B6 a strong east coast presence. Combined they would be able to compete with UA, DL, and AA. It would be a natural fit when it comes to company culture and customers of both airlines would welcome it. To beloved airlines...
Long Term, I envision B6/AS combining together. After AS is done with Hawaiian and everything that comes with that merger that is the next likely outcome. AS has a strong west coast presence and B6 a strong east coast presence. Combined they would be able to compete with UA, DL, and AA. It would be a natural fit when it comes to company culture and customers of both airlines would welcome it. To beloved airlines who have a unique identity in their respective regions combined with a great rewards program and a great business class product MINT would be formidable against the legacies.
Alaska got rid of the superior Virgin America first class (cradle seats) when they acquired them. I suspect they’d do the same to Mint.
It's the same old story since deregulation in 1978. Boom and bust. Airlines build up capacity, costs are rising but they can't raise fares to cover costs. So there's bankruptcies and consolidation. Maybe if there were only 3-4 US carriers (seems to be more US centric) the cycle would end.
There's always the pressure to fill seats at whatever fare an airline can get because a lost seat revenue can never be recovered and leveraged...
It's the same old story since deregulation in 1978. Boom and bust. Airlines build up capacity, costs are rising but they can't raise fares to cover costs. So there's bankruptcies and consolidation. Maybe if there were only 3-4 US carriers (seems to be more US centric) the cycle would end.
There's always the pressure to fill seats at whatever fare an airline can get because a lost seat revenue can never be recovered and leveraged against the direct and indirect cost of operating that flight. But discounting leads to more discounting which leads to the current mentality that the airline can lose money on the fare but become profitable with ancillary fees (unbundling the product) or non flying activities.
Go back to the days of the CAB, which did not guarantee airlines a profit since airlines were still responsible in keeping their costs in line with the fares set by the CAB? From what I've seen of government over the past 30 years that would be an even bigger disaster. So no more than a few mega airlines might be the only potential solution.
Let the free market economy (if that still exists) sort itself out.
Jetbreeze, Breezyblue anyone?
It will happen, eventually. AA/B6, AS/DL, UA/WN.
The problem is the modern mentality - people want cheap, cheap, cheap, no matter the hidden costs. We retailers are facing a crisis because people prefer buying Temu and Alibaba crap to made in USA, artisan goods (which are obviously more expensive).
This is the same thing. Investors floating a company for years is absurd and any company that based its business model on that deserves to go under.
Businesses should operate to be profitable,...
The problem is the modern mentality - people want cheap, cheap, cheap, no matter the hidden costs. We retailers are facing a crisis because people prefer buying Temu and Alibaba crap to made in USA, artisan goods (which are obviously more expensive).
This is the same thing. Investors floating a company for years is absurd and any company that based its business model on that deserves to go under.
Businesses should operate to be profitable, period. Anything else - whether it be by subsidization or investor insanity - distorts the market and consumer expectations and ultimately leads to the demise of the entire industry as the chickens come home to roost at some point.
People wanting to pay the lowest price possible is a good thing. It’s also human nature. It puts pressure on the businesses to provide the best value proposition possible.
What has kept unprofitable airlines going is government with your tax dollars.
More consolidation is never a good thing for consumers. It has never been and never will be. When has monopolies or a lack of competition ever been a good thing for consumers?
@ JustinDev -- I'm not arguing for a monopoly, and certainly the industry is a long way off from that. But I think you're missing the point I'm trying to make (or maybe I'm just not doing a good job getting the point across). If you have some competitors who are consistently unprofitable, the only options other than a merger are for them to shrink, file for bankruptcy protection, or liquidate. That's also not good for consumers, right?
Retrenching the legacies have harmed and will harm consumers. DOJ/FTC would likely approve F9 and NK merging, like with Hawaiian. B6 remains poorly run, possibly a takeover candidate for Alaska. Avelo proves you can run a profitable startup airline with industry savvy. Breeze should fail if unprofitable.
Consolidation of the airlines has been good. It created stable airlines that could invest in technology, safety, new equipment, pay reasonable salaries, and compensate shareholders. The boom bust cycle where all the legacy carriers went bankrupt was not stable or good for the US public or the employees.