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Monday
Apr072008

The First Four Out Are Not the Final Four

Memphis v. Kansas

We awaken this morning anticipating the final game of the 2007-2008 college basketball season. And lest you think I’m drifting off topic here, the geographic locations of each school have some relevance to happenings in the US airline industry. Lawrence, Kansas does not have direct air service; residents are dependent on the highway system to access air transportation. With the airlines’ costs for fuel now nearing an "in the wing" $130 per barrel, Lawrence is simply one among many rural/small communities that have little hope of supporting direct air service.

With fuel prices forcing a re-examination of the entire route structure, there are some analysts who believe Memphis – and some cities like it – can’t justify the air service it receives given the city’s modest scope, scale and contribution to the US air transportation system as a passenger air transportation hub. This is particularly true in light of the renewed merger talks between Northwest and Delta as reported by Justin Baer and Francesco Guerrera of the Financial Times. If negotiations are indeed underway, there will be heavy scrutiny on the deal structure, network structure, labor construct and cost containment strategies. Will the hard questions be addressed or deferred?

The only thing we’ll know for certain by the end of today is the national champion of college basketball. For the US airline industry, we are just beginning the journey down the road to the Final ????????

The First Four Out

The first four US airlines out: Aloha; ATA; Skybus and Champion, which announces out on 5/31. Let’s not forget about Maxjet, which exited the market in December 2007. Even before the Skybus exit, some pundits and analysts were writing that the U.S. would not lose any more airlines. That’s not the bet I’d put money on. But the real question is whether any of these exits from the market will have meaningful impact on the structure of the ailing US domestic market. The answer is no.

What is interesting is that each of these carriers was a niche player with presence only in a relatively contained market space. Aloha in Hawaii. ATA, which was arguably the most confused carrier in determining what it wanted to be when it grew up, was best known for its late-in-the-game code share relationship with Southwest to serve Hawaii. With Champion, the airline’s claim to fame doesn’t go much beyond its business as the non-scheduled carrier of professional sports teams. Skybus, a carrier trying to bring the Ryanair model to the US five years too late, focused its operation in Columbus, OH (yawn). And Maxjet built its model on the transatlantic business class passenger.

A game-changing development? Not in my opinion. A start, perhaps, in addressing certain regionally concentrated capacity – but in no way contributing to a meaningful improvement in US airline results. The saga surrounding Alitalia is much more interesting than anything happening in the US right now. There, the sixth largest carrier in Europe is on the ropes, largely due to labor and politics standing in the way of what everyone knows needs to be done. The media this week actually suggested that the airline needs an exorcist as much as it needs a business plan. In my view, the Alitalia story is a precursor to what could be coming in the US. And when this begins to happen, then it will get truly interesting.

Get ready to put yourself in the same mindset the industry adopted after 9/11. The discussion will be all about liquidity (Clark Kellogg of CBS Sports might call it spurtability), assuming that fuel prices remain at this level. Already, 24/7 Wall Street and The Street.com have written that it is not entirely out of the question that American Airlines will follow the path of the other legacy carriers in filing for bankruptcy, even with $4.5 billion of unrestricted cash in the bank. I’d say it’s a little too soon to make the call, but it sure does underscore a rough and tumble environment out there. As a friend in the industry wrote to me last week: “We do live in interesting times.” In China, that’s considered a curse.

No #16 seed has ever beaten a #1 seed, and at this point all we have lost in the airline tournament is four very low seeds. Hell, we have not even gotten to a meaningful matchup between a power conference team and a mid major. Every year March Madness produces that game and every year a mid major knocks off a power conference team, and when we get there, the tournament gets more interesting.

What makes the NCAA tournament so much more fun to watch than the US airline industry is the fact that there are no barriers to exit and a lot more barriers to entry - you earn your place.

The real airline tournament begins with the next four out of the US market. Enjoy the game.