US Airline Industry Set To Shrink

Former American Airlines CEO Bob Crandall tells Businessweek some changes that would help the struggling airline industry.

--Revising U.S. bankruptcy laws to... ...deprive failed carriers of the right to use lower costs to undercut the fares offered by their more prudent rivals, forcing both management and labor to face the twin specters of liquidation and unemployment. In other words, take away the option of Chapter 11 and force troubled carriers into Chapter 7  the mere threat of which could force labor groups to offer concessions more readily, rather than being content to milk the cow until it keels over and only then consent to a lower wage scale. You know this will be popular with workers --Creating regulations that limit the number of scheduled flights to what the airport can handle. This is already a problem at airports like JFK in New York, which routinely slot far more flights than was ever intended  explaining why your 5 pm flight never leaves before 7 pm. Crandall argues that current schedules should be reduced proportionally, which would force each carrier to use the largest feasible aircraft in each slot. So bye-bye regional jetsand bye-bye competition.

The problem with takeoff and landing slots could be solved by selling them to the highest bidder. But the airlines have opposed this introduction of market forces for years. Business jet operators have opposed it even more because they want to land at places like JFK at peak times but would get outbid by jumbo jets.

As for bye-bye competition: if the slots were sold in a bidding process that would increase competition since airlines would compete to use each slot for the most profitable purpose. That would increase efficiency, reduce delays, and also reduce fuel usage as airplanes wouldn't circle waiting to land or idle waiting to take off. The ability to periodically bid for slots would allow new entrants to displace existing entrants.

Regardless of what the airlines do we are going to see less air travel in the United States and other Western countries as limited oil supplies and the bidding up of prices on those oil supplies by Asian countries drives ticket prices so high that passenger volume and number of flights will drop.

American and American Eagle are ending service to 8 airports.

American (NYSE: AMR), based in Fort Worth, Texas, and American Eagle serve 250 airports combined. The airports American will leave are: Oakland, Calif.; London Stansted; and Barranquilla, Colombia; and Albany, N.Y.; Providence, R.I.; Harrisburg, Pa.; Samana, Dominican Republic; and San Luis Obispo, Calif., for American Eagle, which also will close its maintenance base in San Luis Obispo.

The US airline industry is going to shrink back to where it was 10 years ago. Then it will shrink even further.

This week, the countrys two biggest airlines, American and United, announced plans to lop cities like Fort Lauderdale, Fla., and San Luis Obispo, Calif., out of their networks. Cuts also are taking place on international routes to cities like London and Buenos Aires, and even to popular vacation destinations in the United States like Las Vegas, Honolulu and Orlando. With more reductions coming next year, all the domestic industrys growth over the last decade will most likely be lost. The U.S. industry is undertaking a historic restructuring, Gary Chase, an industry analyst with Lehman Brothers, wrote in a research report Friday.

Some of the major airlines are headed for bankruptcy and liquidation.

In the hopes of bringing attention to the magnitude of the oil crises, Business Travel Coalition (BTC) commissioned AirlineForecasts, LLC to provide an analysis of what oil at several different price points means in terms of lost airline jobs, reduced seat capacity and increased fare levels. AirlineForecasts concludes that if oil prices stay anywhere near $130/barrel, all major legacy airlines will be in default on various debt covenants by the end of 2008 or early 2009. The implication is that several large and small airlines will ultimately end up in bankruptcy, and of those, some will be forced to liquidate.

Each of the airlines is trying to survive until their competitors liquidate. With the resulting reduction in total capacity the survivors can raise fares to levels high enough to pay for higher fuel costs. So which ones will go into liquidation? Some of the liquidations have to involve big airlines because the amount of needed capacity reduction is quite large.

At current oil prices about 1000 airplanes will need to get parked by US airlines.

Every $10 increase in the price of oil results in $4 billion in additional costs for the 40 passenger-only airlines. Oil prices have spiked to $135/barrel from last year's $72/barrel average. With oil prices in the $135 range, the airline industry could be forced to park upwards of 1,000 aircraft and shed over 80,000 employees, and still not return to health.

1000 idled airplanes equal about one year of the combined output of Boeing and Airbus.

Airbus has a backlog of 3,655 planes, or more than six years of work. It delivered a record 453 aircraft last year and is planning to hand over about 470 this year. EADS Chief Executive Officer Louis Gallois said on June 18 there were no plans to slow the production increase. Boeing, which had a backlog of 3,645 orders as of May, is in ``constant contact'' with customers and regards deferrals and cancellations as ``a normal part of its business,'' spokeswoman Sherry Nebel said last night by telephone. It plans to deliver 480 planes this year, up from 441 in 2007.

The older and less fuel efficient airplanes will get parked first. You might expect Boeing to benefit from this because of their new and highly fuel efficient 787 Dreamliner. But Boeing needs to delay 787 shipments yet again for some redesign work.