Commentary: Waiting For The First Airline To Die
It looks as if the major airlines have nowhere left to hide. After four years of industry losses in the face of an economic slowdown, punishingly low fares, and high fuel prices, a shakeout now appears all but inevitable. The final blow may have come in early January with Delta Air Lines Inc.'s (DAL ) pricing revolution. The simplified structure is expected to batter already bleak revenues for everyone. Says Gary C. Kelly, chief executive of low-fare king Southwest Airlines Co. (LUV ): "Something's got to give."
If it wasn't already clear enough, Delta's bold move underlines the new reality: The days of high-cost, high-fare airlines are over. By lowering and capping top fares, Delta is simply bowing to the inevitable and forcing its managers and employees to face the facts. After identifying $5 billion in cost cuts, it will now have to work harder still to create an airline that can be profitable charging such fares. Delta's move also puts huge pressure on the other major carriers to speed their own restructurings. As they scramble to match Delta fare reductions, the industry as a whole could sacrifice $2 billion in revenues. "The majors are realizing that if they don't accelerate their transformation, they will die," says James E. Owers, a finance professor and airline expert at Georgia State University.
Nowhere is that clearer than at US Airways. Despite major cost-cutting strides in its second round of bankruptcy, workers angered by repeated concessions and wary creditors and investors could soon force the airline's demise. Foundering upstart Independence Air Inc. and low-cost ATA Airlines Inc., which is struggling to emerge from Chapter 11 after cutting a deal to sell some of its Chicago gates to Southwest, could also vanish. All told, those three carriers account for nearly 10% of domestic capacity.
Bankrupt United Airlines (UAL ), still wrangling for benefit concessions from its workers, isn't out of danger either. If it succeeds in terminating its pension plans, "people would be so demoralized that the carrier couldn't survive," says Robert Roach Jr., general vice-president of the International Association of Machinists, which represents United's airport workers.
That may be a bit of hyperbole. But even if these airlines manage to hang on, a shakeout is still imminent, driven in part by Delta's squeeze on revenues. Says J. Scott Kirby, executive vice-president of marketing at low-cost carrier America West Airlines Inc. (AWA ): "I don't know if we get there through consolidation, liquidation, or a lot of airlines reducing capacity." But ultimately, he believes, "capacity rationalization" has to come. With its own losses mounting, America West has cut its growth plan nearly in half, to 3% to 5% this year.
However it occurs, an industry restructuring is well overdue. Despite wringing out enormous costs, carriers are expected to lose at least $2 billion this year on top of last year's $5.4 billion. Part of the mess can be chalked up to aggressive growth: After three years of shrinking, capacity rose 7% in 2004, says Vaughn Cordle, CEO and chief analyst of AirlineForecasts LLC in Washington, D.C. Before Delta's bombshell, he forecast a 4.5% expansion this year. While much of the growth has come from discounters, the big players have expanded, too, rather than simply cede share to low-cost rivals. "What's perfectly logical and rational at the individual airline level is completely irrational at the industry level," says Cordle.
That's why the failure of one or even two of the majors won't be enough to save the ailing airlines. Any reduction in capacity is likely to be quickly filled by low-cost and legacy carriers alike. Southwest, for instance, would rapidly expand in Philadelphia should US Airways disappear. And that will keep the pressure on fares. "The notion of a competitor disappearing and solving your problems is naive," says former American Airlines (AMR ) CEO Donald J. Carty. No wonder the race is on to be a low-cost survivor.
By Wendy Zellner with Brian Grow in Atlanta and bureau reports