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Archive for Thursday, June 3, 2004

Discount carriers flying high

June 3, 2004

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— Douglas Parker seems normal. But he runs an airline, America West, and is cheerful, so what does he not understand? Preternaturally optimistic, he thinks government policy will become more sensible, other events will cooperate and the airline industry, which is in the red since flight began at Kitty Hawk, will make money.

But not soon. Parker is optimistic, but not delusional. The industry lost $15 billion in the last two years and probably will lose $5 billion in 2004. Jet fuel, now at a 13-year high, is more than 40 cents over the historic norm. Every penny increase costs the industry $180 million.

Yet antitrust worries caused the government to disapprove a merger of United and US Airways. How do you get a dangerous monopoly in such an industry? How would the public suffer from the merger of two of the nation's 13 major airlines -- those with at least $1 billion in annual revenues -- when both of them have 50 percent higher costs than Parker's airline?

Just 21 years old, America West is the only airline founded after deregulation that has made it to the status of a major carrier. Under the old regulatory regime, fare competition was minimal and labor costs were essentially the same industry-wide. Those costs were passed on to consumers, who had few choices -- and no Internet to bring the choices to their fingertips. America West has market-based labor costs.

The Internet creates real market-driven fares. It allows airline seats to be treated as what they are, a perishable inventory: when a flight takes off, its empty seats are lost. The Internet makes possible the sale of some seats at declining prices as flight time approaches.

America West, based in this booming city, is thriving -- more or less; relative to most other carriers -- because most of its passengers' trips either originate or terminate in Phoenix or the only other American city booming as much, Las Vegas. America West, which depends less than other carriers on business travelers, is more insulated from business cycles. With just 150 planes and annual revenues of $2.5 billion (American Airlines, the largest carrier, has 730 planes and revenues of $17.4 billion), America West is the eighth largest.

It has just one gate at Chicago's O'Hare airport. United, which is based in Chicago, has many gates and huge financial problems but is not selling any gates. There should be ongoing auctions of gates. However, airports, to insure their revenue streams, like to lease gates for 20 years.

The industry could benefit from a reduction of 20 percent of capacity, which is United's share. If this were not an election year, and if many United employees were not constituents of House Speaker Dennis Hastert, and if the government's response to 9-11 had not included establishment of the subsidy-dispensing Air Transportation Stabilization Board, United might be endangered.

Insecurity permeates the industry. American has cut annual costs by $4 billion -- some employees' pay is down almost 25 percent and its fleet has been reduced from almost 900 planes before 9-11 to 730 -- but it still has $25 billion of debt to service, its pension plans are $2.7 billion underfunded and its first quarter loss was $166 million.

Delta -- first quarter loss: $387 million -- had an $85-million pilots' pay raise come due last month and now experiences ruinous success: as passenger volume reaches pre-9-11 levels, it must rehire 1,060 pilots furloughed after 9-11. This will increase annual labor costs by about $115 million -- not counting benefits.

This is, however, a sensational time for air travelers, thanks to the low-cost carriers that have sprung up in emulation of the original of that breed, Southwest, which has 393 737s, and almost 400 more on order. Last May was the first month in history when a discount airline, Southwest, carried more passengers than any other airline. Why do these low-cost airlines now carry 25 percent of air travelers, heading toward 40 percent next year? Consider:

US Airways, the seventh-largest carrier, spends 10 cents to fly a seat a mile, not counting fuel, while Southwest and America West spend roughly 6 cents. Philadelphia, the nation's fifth-largest city, is US Airways' biggest hub. But now Southwest has entered that market. So US Airways' unrestricted round tip fare to Providence has fallen from $938 to $177.

Parker says, reasonably, that there are "far too many" airlines. He will be pleased by the inevitable coming casualties -- assuming, of course, that America West is not among them. But that is among the industry's multiplying and unsustainable uncertainties.




George Will is a columnist for Washington Post Writers Group..

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