Archive Widget

Entries in 30 years of Airline Deregulation (4)

Tuesday
Dec152009

Sacred Cows and Fatigue

Last week, I was in Boston listening to the students in MIT’s Airline Industry class make group presentations on six US airlines.  It is always refreshing to hear the analysis, reflection on strategies and recommendations from really smart kids who aren’t burdened, like me, by three decades of taint or cynicism. 

Do We Have a National Aviation Policy?

The student presentations got me thinking about the role of national policy on the U.S. airlines. Michael E. Levine, now a Distinguished Research Scholar and Senior Lecturer at  the New York University School of Law, wrote an op-ed in the December 1, 2009 Aviation Daily titled:  “We Have a National Aviation Policy.”  Many will remember Levine as one of the minds behind and framers of the Airline Deregulation Act of 1978.  Levine went on to serve in numerous senior management positions at a number of airlines along the way.  To the serious industry observer, Levine is a must-read.  You may not always agree with his viewpoints, but you always know that the work will be well researched, thoughtful and provocative.

Levine’s Aviation Daily piece has its roots in the recent comments by former American Airlines CEO Robert Crandall and Business Travel Coalition President Kevin Mitchell suggesting that the U.S. lacks an effective  aviation policy.

Levine disagrees:  “Our government has an excellent aviation policy:  continuously improve safety, promote environmental goals, maintain consumer choice, and allow the general public access to a system not run specially for the benefit of stockholders, banks, elite purchasers, aircraft manufacturers and workers more privileged than they are,” he writes. “We even have a mechanism in place to make sure that service is provided where social policy demands it and the market won’t pay for it.”

In Levine’s view:

  • Profit is the job of managements and shareholders, not government
  • Air transportation must be safe
  • Government’s job is to ensure that aircraft are safe, not new
  • Airline wages and career options should be no more or less a government concern than they are for workers in general
  • US airlines should compete in world markets, and our government should eliminate impediments put in their way by other governments
  • The terrible accident in Buffalo raises issues about pilot experience, fatigue and past performance that underscore the need to revisit negotiated seniority rules and pay scales that pay pilots more to fly bigger aircraft, leaving some of the least experienced pilots to do some of the most demanding flying
  • Pilot fatigue comes not only from duty assignments but also from lifestyle choices that have pilots commuting to work from homes that may be thousands of miles from their jobs.

I encourage readers to find a copy and read Levine’s piece in its entirety.  It is good.  And of course many of the ideas are those espoused here at swelblog.com.  If I have a quibble at all with Levine’s piece, I would say that the US government and the narrow-minded thinkers in Washington who are in power positions on committees overseeing US commercial aviation produce at least as many impediments as do other governments. 

Levine’s analysis is also well timed to the formation of Transportation Secretary Ray LaHood’s Blue Ribbon panel to study the industry. A mind like Levine’s would serve the industry well because unlike Crandall and Mitchell, he does not have a dog in the fight.  Furthermore, his writing reflects the need to cut to core issues that govern US aviation today and fix the things don’t work – even if those things include some sacred cow(s).

Pilot Fatigue

Last week, FAA Administrator Babbitt testified before the Senate Commerce Committee’s Aviation Subcommittee on a variety of safety issues including pilot fatigue. As I have written here many times, there can be no productive discussion on pilot fatigue until the issue of commuting is included in that discussion. 

Until last week, any Congressional testimony fatigue or flight time/duty time regulation changes centered on the work of an FAA Advisory panel that met during July and August to recommend changes to existing rules.  But that committee -- comprised of labor, management and other stakeholder groups  -- decided that commuting was “outside the boundaries” of their mission.  So it is left to Babbitt and the FAA to seek comment on commuting with respect to the proposed rule changes.

Commuting, of course is among the industry’s most sacred cows. I don’t know how many airlines would be willing to go first in telling a pilot, or a flight attendant, that they cannot commute or that they have to live within X miles of their assigned domicile.  Clearly,  Babbitt is not convinced that commuting is the only major factor in the fatigue question. So for now, Babbitt’s mantra is the right one:  Show up fit to work.

But commuting is a management issue as well.  Back in the day when I was flying, pilots were paid moving expenses and had the company buy their house (in the event it could not be sold) if they were displaced to another domicile.  As the industry began to grow and merge and create new hubs and thus new crew domiciles, the moving expense issue was a big one for companies to consider.  Lo and behold, it was one of the early concessions airlines sought from pilot contracts in their efforts to cut costs and the industry structure began transforming itself.

I am glad that we are looking at fatigue and flight time/duty time regulations with a learned eye to make fixes where science suggests fixes need to be made.  What doesn’t make sense is this hue and cry that fatigue is an issue because airlines have worked to improve productivity by getting their pilots to fly an additional eight hours a month.

Tuesday
Oct282008

05. The Swelbar Deregulation Index

100 People, Companies, Concepts and Events that Have Shaped the Course of the US Airline Industry (and one man’s career in the business). To commemorate my 100th swelblog post and to cap off my analysis of 30 years of deregulation, I submit the list of the 100 most influential people, things and events that have shaped my views...

Click to read more ...

Wednesday
Oct222008

02. It’s Airline Deregulation Bday Week: Triangulating Southwest to the Point of Indifference

Second in a series on Deregulation

There cannot be a discussion on the morphing of the US airline industry over the past 30 years without a few words on Southwest Airlines. The presence of this one airline, and its unique model in the US market, has influenced everything from network development; to labor costs; to non-labor costs; to the fostering of an environment that screams “I luv my job,” – rare in the US airline industry.

As I said in Monday’s post, I believe the industry’s discussion of commercial aviation’s economic impact is backward, I am indifferent about the role of Southwest and the Low Cost Carriers sector in general. But I believe that Southwest has had profound influence on the industry, both good and bad.

Network Triangulation

In the late 1980’s and early 1990’s, the Dallas-based carrier was increasingly recognized as a potential force. In May of 1993, the US Department of Transportation published what is now a highly recognized piece analyzing that force: The Airline Deregulation Evolution Continues: The Southwest Effect. Many know Southwest’s storied beginnings, beginning with a napkin on which the initial route network was drawn: Houston – Dallas – San Antonio. As the name implies, much of its network was confined to west of the Mississippi River until 1995.

In addition to the obvious airport market attributes Southwest looks for before it enters a new city, the carrier employed a fairly rigid network strategy as well. One day, I sat down at a table and mapped out Southwest’s growth city by city over its history. Lo and behold, when the initial nonstop segments were announced from a new airport market, you could bet that new triangles were formed. For example, from Indianapolis, Southwest might announce Orlando and Kansas City service. Southwest made sure before announcing any two new segments from a new city that there was existing service between the two points, just as there was in the case of Orlando-Kansas City when Southwest began service in Indianapolis.

Airline observers often refer to the hubs of the network legacy carriers as “fortress hubs.” Southwest built its own fortresses of sorts through the use of its network triangle strategy, protecting its own flows no matter how small. Over time, the carrier took small hub airports and made them medium hubs – or nodes -- which like fortress hubs serve to protect Southwest’s primacy and discourage competition.

Southwest’s construction of its nodal network provides it with both the flexibility of being a point-to-point carrier as well as a carrier that connects traffic across its system at super nodes like Baltimore, Nashville, Phoenix and Las Vegas. While it serves only 64 of the nation’s 340+ commercial airports within the contiguous United States, Southwest impacts more than 90 percent of nation’s domestic origin and destination traffic.

This calculation is tedious but its methodology is simple. Draw a circle of two hours driving distance around each of Southwest’s 64 points – a clear visual of their strategy that aims to expand the catchment area, or reach, of the airport markets it chooses. Then, envelope multiple airports within the catchment area; each of them becomes a source of demand for the carrier’s lower fares. Southwest service has demonstrated clearly that the highway is an acceptable entry point to access the US air transportation system, but it also has had a negative and profound effect on small airports.

[Editorial question for policymakers: why is access to the air transportation system via the highway acceptable when Southwest is involved and not acceptable if a network legacy needs to close a market because it is not economic to serve a particular airport market?]

Earlier this month, Southwest announced it would start service to Minneapolis/St. Paul making the Twin Cities its 65th node. To give you an idea of the power of the carrier’s "no-connect network", it advertises that modest service between the Twin Cities and Chicago-Midway will provide access to more than two-thirds of Southwest’s entire network.

Great to be a Southwest Employee, Not so great for other airline employees

In recent years, Southwest employees have fared significantly better than their network legacy carrier peers in winning wage and benefit improvements. Today, Southwest workers are, on average, the highest compensated employees among the top dozen carriers. Their secret in providing industry-high average wages is simple. Their model incorporates and employs high productivity across a network of shorter stage lengths and smaller aircraft that should, by definition, make this achievement most difficult. And all of this is made possible through their unique network.

Keep in mind however, that Southwest did not enter the competitive fray burdened by labor contracts with provisions held over from before the advent of jet airplanes. It didn’t have a senior workforce or the labor costs bloated by seniority pay. And it didn’t have a network like those of its competitors that entered the market well before deregulation – in other words one designed by regulators who determined which cities, from which carrier, would get commercial air service with little regard for efficiency. Instead, Southwest got to draw its own lines and routes that define the company today. And they did so with an evangelical approach to labor and employee relations that many believe give the airline an edge in customer service and reliability as well.

Productivity is the Southwest mantra – whether it is labor, aircraft or facilities. Southwest’s non-labor costs have always been a competitive advantage. Many observers believe that unit labor costs are the airline’s most effective weapon, but I argue that is not the case. Instead, it is the relationship of productivity and pay that has provided Southwest with flexibility to pay relatively high wages as it negotiates with its highly-unionized work force.

This is the concept that the unionized work forces of the network legacy carriers struggle to comprehend. Traditional hub and spoke carriers with vast operations cannot achieve Southwest’s level of productivity. But there is a relationship, or an equilibrium, that can be found at each and every carrier. If the will to ”find it” could only be found.

Now, 30 years after the deregulation experiment began, Southwest has grown to be the largest domestic carrier in the US, with low costs and network scope that will continue to pose a significant competitive challenge to other airlines. Southwest may well be the best managed airline in the business, as most industry observers agree. But its success was also helped by the fact that Southwest did not enter the fray with a legacy noose around its neck. Instead, Southwest succeeded because it was small, nimble and could easily adapt and exploit opportunities as the competitive landscape evolved.

Triangulating Labor, Network, and Southwest

In an ideal world, an airline’s network would drive the labor and staffing decisions to achieve the best possible efficiency and productivity for the respective airline. In the real world, the legacy network carriers are often forced to create a network around the labor contracts that have put strict limits on productivity and constraints on how best to serve markets in its system.

Low cost carriers are most often cited as the primary driver of consumer benefits because low fares have opened the skies to the masses. But are they? Have they been? No. Consider that Southwest serves only 20 percent of the commercial airports in the contiguous United States. So how can they, and their low cost carrier peers, be considered the shining light(s) of deregulation? Yes they drove prices down in the larger markets – the only markets the low cost sector serves with few exceptions - and in some small markets indirectly, but the effect was to kill off many small airports in their wake.

Through its efficient and methodical approach to building a company, Southwest puts pressure on incumbents to be just as efficient. We see this most recently as network legacy carriers have reduced wages and increased productivity. But the process has been supremely painful and, in some cases, required a trip or two through the bankruptcy courts, in part because neither management nor labor leaders had the will to make changes necessary to adapt to new competition.

Today, Southwest’s network touches virtually every geographic market of size in the US. As the domestic market is now contested at each and every point, the network legacy carriers are left with two choices: 1) attrit and possibly exit the domestic space; or 2) negotiate a new labor construct that can cohabitate with the likes of Southwest. Neither choice is ideal. But one choice is better than the other.

Concluding Thoughts

Throughout my career, I’ve been engaged in some battles involving Southwest – but only on the other side. I can attest that they are a hard-nosed competitor. But I am a professed network carrier guy that fervently believes the low cost sector receives entirely too much credit for bringing the benefits this industry drives each and every day.

Southwest is often first to cry foul with claims of being competitively disadvantaged when it tries to enter new markets or protests paying for what it believes is its fair share of the air traffic system. But that so-called “disadvantage” has done quite well for Southwest’s leaders, employees and shareholders.

I applaud and admire the airline’s culture and competitive success. But before we give all of the awards, I ask that small communities and legacy carrier labor ask what good Southwest has done them? In fact, it is the network legacy carriers that deserve awards for keeping many small communities alive by continuing air service, even when some of these routes can’t be flown profitably. It is also true that ticket prices have been contained or even reduced by the hub competition that exists in the US domestic market today.

In the future, look to the horizon for the new competitive battleground. It will be more about Auckland than Amarillo. It really will.

More to come.

Monday
Oct202008

01. It’s Airline Deregulation Bday Week: Economic Impact of Commercial Aviation

First in a series on Deregulation

For the past couple of months I have been doing a fair amount of public speaking. Appreciating that this month/year represents the 30th birthday of the passage of the Airline Deregulation Act of 1978, most of my engagements have focused on the industry's evolution over the past three decades. Over the coming days on this blog, I will focus on where deregulation got it right; wrong; indifferent; or maybe even backwards. Today, I am going to start with one idea that just might be backwards.

Between Airlines and Airports: Who Really Creates the Economic Impact?

Do a Google search for the economic impact of aviation. The impacts on North Carolina, Oklahoma, Wyoming, Oregon, Nebraska and Texas will all populate the first page of that search. On the same page of the search you will find the Air Transport Association’s study of the economic impact of commercial aviation on state economies. As the ATA’s study and other studies say in their own ways: commercial aviation is inextricably linked to the health of the local, national and global macro economies.

The first page of ATA’s report quotes Pulitzer Prize winner Daniel Yergen:. "Every day, the airline industry propels the economic takeoff of our nation,” Yergen observes. “It is the great enabler, knitting together all corners of the country, facilitating the movement of people and goods that is the backbone of economic growth. It also firmly embeds us in that awesome process of globalization that is defining the 21st century."

My question: Are the airlines themselves enablers? Or facilitators? Yergen is probably right in suggesting a combination of inputs are necessary to create the commercial aviation industry. Any economic assessment of the impact of commercial aviation will measure direct benefits of the service; indirect benefits generated from the service; and induced benefits derived from air service on the economy as a whole.

In the most simple form, direct impacts are the earnings and employment generated by the service. Indirect benefits typically measure expenditures driven by the passengers who travel to the destination on the service. And induced economic activity is measured by related industries that benefit from the direct and indirect economic activity of the service – typically a multiplier of the direct and indirect activity.

Can Airlines Make Themselves Profitable on a Sustainable Basis?

Given estimates that the US airline industry will lose nearly $20 billion since deregulation, while local and national economies have expanded, could it be argued that the model is backward? Government policy is hell-bent on promoting competition in each and every market. The industry has delivered a network platform comprised of carrier-to-carrier competition, hub-to-hub competition, and the competition between network legacy carrier and low cost carriers. There is not a single airline flying for which the current revenue model works if only the fares charged passengers are counted.

In an article published in the current edition of Foreign Policy magazine, I note that US carriers of all ilks lose money per enplaned passenger when only passenger revenue is counted – a simple but telling analysis. Counting only passenger revenue, both the legacy and low cost carrier sectors have lost money per passenger since 2001. In fact the low cost carrier sector has only made money based on this metric three times since 1995. Thus the industry absolutely needs to raise fares, charge ancillary fees and/or continue its efforts to cut fixedcosts - or all of the above - as the loss per enplaned passenger calculations exclude interest expense and direct investments in the business.

Airlines have a long way to go before they find a sustainable operating model that manages to “feed” various stakeholders. In some circles there are calls for re-regulation. But this ignores the fact that the federal government already heavily regulates this so-called “deregulated” industry, so it is unlikely that further regulation is the answer.

Now the Question?

Maybe it is the communities that realize the economic benefits of commercial airline service that should subsidize the airline’s losses?

After all, it is not the airlines that are realizing millions– and in some cases billions - of dollars in economic benefits – profits that they would otherwise use to pay higher wages or invest in new equipment. Rather, most of the gains go to the communities in the US and around the globe that depend on air service to drive direct, indirect and induced benefits, even while many complain that air fares are too high. Some of these economic benefits go to support airports and the infrastructure around them, but most subsidize the local economy without direct gain for the airlines that generated benefits.

It Is All Local – Until You Have to Pay For It?
Let the Local Market Wet-Lease Service

If all politics are local; and local economies depend on airline service; then shouldn’t politicians in local markets explore ways to “buy” the air service they believe is necessary to support the regional economy while also satisfying the expectations of their constituencies on the price of that air service? In effect we already have a similar model in place in the practice of network carriers that purchase capacity from their regional providers that includes a cost plus arrangement.

If politicians and the communities they represent protest higher fares, fees and reductions in service, then the answer should be a simple matter of economics. Have the community pay the difference between the ticket revenue and the cost-plus of maintaining the air service, plus some reasonable profit for the airline to reinvest in its business. Already, politicians and community leaders boast about the the economic benefits of air service; alternately, those facing air service reductions are the first to cry foul based on their estimates of economic costs. The decades old airline-airport/community operating model of today could be reworked to meet the financial realities of tomorrow’s aviation market.

Economic activity stemming from commercial aviation service is already calculated every day. What is suggested should be a simple investment decision for communities. There is a price to pay for being a node on the global trading map and decisions to be made about what type of service best meets the need of a community. But it is not the responsibility of airlines to ensure your dot remains on the map.

Today many think that the low cost providers would be the answer to end all discussion. We would see, wouldn’t we?

More to come.