Airline Consolidation
US Airways wants to buy Delta.
AirTran wants to buy Midwest.
United is doing the merger dance with Continental.
Lawmakers are afraid the industry is going to implode on itself.
I have news for the lawmakers in Washington: The industry NEEDS to implode on itself.
In the past 30 years, the airline industry has changed greatly, but the business models of the companies haven’t. That’s not good. You see, the biggest expense, after jet fuel, to an airline is its labor, typically mechanics and pilots. These are heavily unionized employees. Having a heavily unionized workforce makes it hard to change your business model. Oh, airlines have tried. But they always fail. This is where real change needs to happen. And honestly, if a couple of airlines have to go belly-up to make that happen, it won’t be such a bad thing.
The pilots at Southwest are among the lowest paid in the industry. At the same time, you never hear them complain. Why? Because Southwest has an employee stock purchase program (ESPP) that has made more non-executive millionaires of Southwest employees than any other company in history.
Most airlines have feeder/commuter airlines that feed their hub traffic. I’m talking about American Eagle, Delta Connection, Northwest Airlink, etc. Frequently, the airlines own a controlling (or entire) interest in their regional carriers. I can’t remember if Delta owns Comair or not this week. The idea is that the smaller planes are cheaper to operate by another company who doesn’t have the same union restrictions. At the same time, it adds another whole layer of complexity to a business model. JetBlue has so far successfully avoided this model. They fly two types of planes, the A320 and the EMB190. The EMB190 is a small plane. But it’s still the same pilots’ union, the same flight attendants, and the same mechanics who work for the same airline. So far, it has made sense.
When America West bought US AIrways, they brought America West’s sane (and simple) pricing model to the vast US Airways network. It was a brilliant idea. America West had been a really well-run company, and it looks like they’re doing well with a merged New US Airways. Simplified pricing and more reasonable walk-up fares (as in you walk up to the ticket counter that day and need to be on the next flight to Memphis) would be good for the industry. But that requires a shakeup of the whole business model. Don’t look for American or United to do that anytime soon.
I think the rest of the industry needs to look at Southwest and JetBlue as the future of the industry. I’m talking about oustanding customer service here. It’s why I hate to fly United. I’m a seat number, not a customer. JetBlue may have lower fares, but they have THE BEST flight experience of any domestic airline, in my opinion. They have amazing relationships betweeen employees and management, and they’re both incredibly profitable. United could learn a thing or two from the little guy.
I also think that the merger of AirTran and Midwest is a disaster waiting to happen. AirTran is low cost and zero frills. Midwest is competitive on price but is known for its perks like leather seats, cookies baked in-flight, and beverages served in real glasses. The corporate cultures are so vastly different that I think both airlines would be better served by trying to grow organically.
I would also expect to start hearing rumblings about Southwest buying American Trans Air. That would give Southwest a few more destinations and equipment. It would also give them some international charters.
I know one thing for sure: It’s going to be an interesting ride.
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