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Friday
Feb222008

« Where is Swelbar? Thinking About US Airline Industry Structure in Zurich »

Well Swelbar is sitting in a lounge in Zurich on his way to Dubai. But the day is no different than any other day. I wake up from my sleep, only this time I awakened in the comfort of United’s new business class interior. The new first and business class interior is a significant improvement over the previous offering and a product worth trying. (Now remember I remain a United shareholder). But, lie flat in business class is a nice seat and of course the video and audio entertainment is much improved as well if you are into that stuff.

But I am not a guy that plans to write much on aircraft interiors. I am a guy interested in the competitiveness of US carriers in the global marketplace. Whereas it has been said that the new interiors being installed by United and American may be an iteration old when compared to the interiors of the major global players, it is a start.

Theories Behind Consolidation

While I do not have much time to write this morning, Barney Gimbel of Fortune Magazine writes an interesting take on the Delta – Northwest deal. As I have written about this expected deal, the devil is in the details, but…… The stories to date suggest that labor stands to make gains in the neighborhood of 30%, at least in the case of the pilots. Further the stories suggest that very little flying will be cut, hubs will be maintained and in fact new service may be offered. No, that does not sound like consolidation or what I call phase 2 of the industry’s restructuring started in 2002.

But if ensuring that one group of employees does not have rates of pay less than another group of employees, those rates need to be adjusted to address the known internal strife that will be generated if not addressed up front. Moreover, strife that will stand in the way of achieving synergies in the many areas of the operation that are certain to be addressed.

If part of the increase includes future pay raises granted under a single collective bargaining agreement, then the question becomes over what term? Is commensurate productivity to be gained in return for those wage increases? And what period of time does a new collective bargaining agreement cover? These are important issues and questions to ask – and the devil will be in the details.

My take on the facts gathered from known good sources of reported information is that Delta will first try to maximize revenue from a "network rework" then turn to difficult cost cutting issues as they evaluate the top line performance of the "reworked network". The US Airways – America West merger did produce revenue synergies as the networks were combined. Pittsburgh has in effect been closed. But few, if any, meaningful other cost synergies have been realized. And this is partly the result of the labor divisions that stand in the way of full operational integration.

Mr. Gimbel raises a point that I have been raising on this blog since the beginning – and that is about finding a sound and sustainable industry structure. Yes the industry is made up of individual carrier and other disparate interests, but the key to a better tomorrow has to be in addressing the known fragmentation of the home market. And that involves tough and painful decisions otherwise we do just continue down the path of attrition that will be disproportionately painful for many.

It is widely assumed that when a Delta – Northwest deal is announced, others will follow. If United is involved, we know there is a management team that will pursue both a revenue maximizing and cost- minimizing approach and this may change the thinking of all carriers considering combinations.

Banking on revenue alone is a dangerous approach given that we still do not know the real underlying condition of the US economy or what effects the condition of the US economy will ultimately have on the global economy. Combined networks will result in the ability to sell city pairs tomorrow that one cannot sell today. But the health of city pairs are still impacted by the underlying economic forces.

So let’s wait on the details. Let’s acknowledge that there are many ways to address less than adequate financial performance. I do not believe that consolidation is a panacea by any means, but what I do know is that today’s industry construct does not work.

The debate on approach can only begin in earnest once we know how all of the "new" pieces will fit together. Mr. Gimbel raises good points. But, even he is early in the game to declare that it just does not work. It took a long time to create these structural inefficiencies and they cannot be erased with one deal. It will take more than one and a piece here, and a piece there. Otherwise we just perpetuate the status quo.

More to come.

Reader Comments (2)

Swelbar - Let me first say that I enjoy your columns immensely and I find you to be one of the most interesting commentators on the industry.

I have begun to see more and more analyses like that of Mr. Gimbel's that seem to miss the larger point. Just because the problems of consolidation will not immediately solve all of the airlines' problems, that does not mean it is not a necessary step. Further, it is this skeptical, inert mentality that will continue to hold back US airlines because it lacks the perspective of a global industry.

02.23.2008 | Unregistered CommenterVince

Good Morning from Dubai Vince

I only wish I had come up with the phrase skeptical, inert mentality. It is time to move forward and embrace this change. If everyone commenting on how bad it will be could see global aviation from the perspective of carriers in this region, my guess is opinions would change.

From the planned growth of the region's carriers to the simple aspect of just seeing passenger traffic in the airport, it does not take much to appreciate that changes in the global competitive profile are well underway.

The concepts of scope and scale are at the forefront of thinking here. As I said, it has taken a long time to create the inefficiencies in the US and we cannot even begin to fix them until we begin the process of addressing US industry structure.

Let's get on with it and appreciate that different commercial strategies are what ensure competitiveness in all markets. And in the end that is what is good for the many stakeholders in US aviation.

02.23.2008 | Unregistered CommenterSwelbar

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