The current downturn has already exposed some fundamental weaknesses in the traditional airline model and this time around the industry may not be able to count on any quick return to growth to help paper over the cracks
In a previous incarnation as a White House economics advisor, Alfred Kahn, the architect of US deregulation, once said he would refuse to utter the word "recession" for fear of spooking the nation. Instead he joked that he would simply substitute the word "banana" when referring to any economic malaise. Economists are once more debating the finer points of the current downturn - and indeed whether the world is technically in recession at all. But whatever this downturn is called, two things seem clear enough. First, that a quick bounce back to healthy world growth is unlikely in the foreseeable future, at least not if the US economy is any guide. And second that for the world in general, and the airline industry in particular, this latest downturn could be a very different shape from previous bananas.
As with the last downturn a decade ago, this recession was triggered but not necessarily caused by a single crisis. Then it was the Gulf War that finally burst the bubble that followed deregulation in the 1980s. Today, the 11 September attacks came hard on the heels of a spectacular bust that followed the IT boom. But there are differences too. This latest crisis has struck the US economy and its carriers much more directly and its effects have lingered. When shooting stopped in the Gulf War, the path was more or less cleared for a recovery, albeit that the airline industry had another year of pain to come in 1992 before the upturn. As yet there is no sign of a definitive turning point which would signal that the worst is over. The threat of war in Iraq or renewed terrorist action elsewhere still casts a shadow. The string of US business scandals which began with Enron has shaken confidence in corporate America and beyond.
In short, the world is hunkering down for a drawn out period of uncertainty. Even if the USA does manage to escape the double dip recession which some have predicted, Kahn's feared word is in full play. So is a demand for change among ever more powerful investors and consumers.
If this downturn does prove deeper and different in kind, then so too must the airline industry's response. In past recessions, the formula has been to slash costs, stimulate demand, prepare for an updraft in economic recovery and then carry on business as usual. This time, growth may not come to save the day. Neither will state aid if the current climate prevails in Washington and Brussels.
Witness the current plight of US majors, with US Airways already in bankruptcy and United Airlines, now with a market value of less than $100 million, perilously close to following suit. Or indeed the soul-searching taking place at the likes of British Airways or KLM. All have had their day as industry success stories over the past decade - remember the $1 billion profits at US Airways in 1997? But all have had deep structural fault lines, even the former role-model BA, which have been masked rather than resolved by the dash for growth.
Few major players anywhere have truly laid to bed the legacy of complexity, inefficiency and bureaucracy carried over from the bad old days before deregulation. Most have now set about tackling their cost base in earnest, but it is a massive task, made all the more pressing by a resurgent low-cost sector which is better organised and better financed than before.
Phil Roberts, of the Unisys/R2A consultancy, has long benchmarked US airline performance. He reckons that the majors need to start bridging the unit cost disadvantage they have compared with Southwest Airlines. This penalty ranges between 15% at America West through to 69% for US Airways. No coincidence that US Airways, by more or less universal admission, inherits about the highest costs and the most complexity of any of the majors.
Labour costs are a large part of the legacy, with at least one analyst calculating that US majors overall now need to cut their wage bill by around 25% to have a chance of sustained profitability. But there is much else besides labour in the frame. And the need to start thinking about the unthinkable goes deeper, down to the basics of how airlines are put together and what they are for.
Not all will make it through. Gordon Bethune at Continental Airlines is characteristically blunt about the prospects for the "usual suspects" among the troubled US majors and will not mourn their passing: "My own personal view is that we will be all high-fiving it when US Airways disappears because all that capacity is going to flow back to us."
Be careful what you wish for. Bitter experience suggests that carriers, even bankrupt ones, rarely die but linger on painfully or simply re-emerge under fresh new liveries. The industry's track record on consolidation is hardly spectacular. Many of the structural faults now being exposed stem from badly bolted together mergers of the past. Better to learn from such mistakes and look to fundamentals rather than fixes.
Source: Airline Business
