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Thursday
Jan102008

A Little Blackbook on Creative Destruction

For some of you, the comment areas on a blog are often the first place visited. For others, they are largely ignored. For all of you, I have made an entire comment, made by blackbook, available below including my response back. Blackbook's thoughts are well worth reading.

On January 4, 2008, Blackbook responded to a post click here and raised the idea that: “what is missing in the airline industry is the type of creative destruction that has kept America’s companies at the forefront of research, development, innovation and change”.

I like the term “creative destruction”. How can it be applied to the US airline industry in order to make it a sustainable and profitable business?

blackbook said...
Yes, there is a lot about which to be pessimistic concerning the state of the U.S. airline industry. But, I feel these concerns mirror those that we see worldwide in the media concerning the status of our country as whole.

While there are many factors that would lead to such pessimism, both the U.S. and the airline industry have historically been sources of creativity and have a talent for reinventing themselves. Perhaps it's the natural optimist in me but I feel that, while we might get a bit bloodied en route, we will still emerge on the top of the heap.

What is utterly lacking in the airline industry is the type of creative destruction which has kept America's companies at the forefront of research, development, innovation, and change. Whether or not this comes as consolidation or another form of players exiting the market, it is clearly necessary.

Swelbar, I think you might have posted something at one time about the airline industry having higher barriers to exit than barriers to entry. With such diverse constituencies as employee groups, airports, lenders, aircraft lessors, etc... all working to prevent such an exit from the market, it is hard to imagine how ANY airline could have gone out of business. If all the major carriers survived the post 9/11 upheaval more or less intact, how can such an exit take place now?

Consolidation for consolidation's sake is not the answer, in my opinion. Look at the only example of the recent generation of it, US Airways. With each passing day it reminds me more and more of a late 1980s Continental, with a ragtag fleet of airplanes, various employee groups that hate each other, and a product which is shoddy at best. It is the present-day version of Gordon Bethune's comment about making the pizza so cheap, no one would want to buy it. Certainly such an entity cannot compete in the global marketplace. Neither shareholder nor stakeholder value is enhancing with the current situation.

Perhaps the market would be better served with exits rather than consolidation. The difficulty is of course in how these would actually take place. The current labor situation at some of the legacies are filled with enough animosity to make an Eastern Airlines-style Pyrrhic victory possible. If I had been subjected to what some of these employees went through in the bankruptcies only to see their executives line their pockets with millions, I probably wouldn't be opposed to seeing the whole ship go down. Still, I would have to say this is the only option I find less palatable than consolidation. It will, indeed, be an interesting year.

Swelbar responded...
Welcome back and Happy New Year. You ask many great questions and I will attempt to answer them in this comment back. But I think many of the ideas you espouse will require some separate writing and thinking.

As for your source of optimism on US aviation emerging again as global leaders, nothing would make me happier. Bloody road, yes; better off, yes.

As I asked my audience in a talk given recently: Why should we fear individual carrier failures or consolidation? We should not, although it will be painful for the subject carrier or carriers lost. Labor wants changes to the bankruptcy laws. Be careful for you ask for as the European approach may indeed be right.

I did respond to a commenter's suggestion affirmatively that the barriers to exit are higher than the barriers to entry. We talk alot about the need for consolidation here but I like your term of creative destruction.

And destruction may just be beginning as some stocks are acting like another round of bankruptcies may be ahead. And some of these bankruptcies may be in the regional and LCC space which is precisely where this industry needs to begin the process of shedding duplicative capacity and the associated fixed costs and tax on the infrastructure.

I definitely agree with you that consolidation for consolidation's sake is not the answer. What I have stated here many times is that any combination where one plus one is less than two is good - if not very good for the industry as a whole. So yes, that is destruction of capacity in some form.

Your reference to Eastern serves as a reminder that icons can be tombstones and three carriers that can emulate that disappearance today are American, US Airways and United. My sense is you read here so it does not take much to sense the anger emanating from the AA pilots that write to this blog.

Whereas the timing of the executive payouts probably could not have been worse, I am not sympathetic to that issue. It is hard to attract experienced people to this industry when they have many other choices in front of them. My experience as a board member has made this very clear and real.

Maybe the only way to create value in the immediate term would be to engage in a prepackaged Chapter 7 filing where proceeds from the sale of core and non core assets would flow directly to the shareholders? Value creation and creative destruction all at once?

But yes, consolidation that is good for shareholders, employees and the health of the core business would certainly seem to be more palatable than a liquidation -- one would think.