Mergers Stall, Fares Soar, Services Slump and Consumers Sour
|IT'S BEEN A dizzying season of hookups and breakups for airlines. Everyone said they were single and ready to mingle. But, as it turned out, players found the game was not as easy as it first appeared.
The plan was simple enough. Coupling up would decrease expenses. But ultimately, the various living arrangements did not fly.
Opposition began to surface once it became clear the real business objective was to stuff more passengers into smaller aircraft, to reduce domestic service and to lay off workers.
As a result, major consumer and labor groups loudly protested. Especially since most carriers were fresh from receiving substantial bankruptcy relief from employees and debtors.
In particular, the two airlines most interested in cuddling, NWA and Delta, just emerged from bankruptcy court with huge savings less than a year ago.
The largest union in transportation, the Machinists Union, stated “that none of the mergers currently being proposed will benefit employees, passengers or the cities that these airlines serve.” The AFL-CIO made a similar statement. Both heavily lobbied Congress.
Rep. James L. Oberstar, influential chair of the House Committee on Transportation and Infrastructure, reacted coldly to merger fever with a flat “Hell No!”
Forty seven other members of Congress were less direct but still emphatic in their letter to the US Attorney General that “we are strongly concerned that future mergers could result in diminished service to small and medium size cities, job losses, less competition, higher fares and fewer options for consumers.”
But any chance of a honeymoon for the carriers really failed to take off once the historically troublesome pilot seniority issue appeared on the radar.
Air Line Pilots Association (ALPA) members at Delta and Northwest (NWA) never agreed on how the two pilot groups would combine into one carrier. This is a huge concern. Senior pilots at NWA are still angry about being bypassed by junior Republic pilots in a merger over twenty years ago.
A dispute with 12,000 pilots, along with the growing list of other opponents of consolidation, was too much baggage for skeptical investors already nervous about rising oil prices and a recession. The romance between NWA and Delta cooled.
Today, there is little talk of airlines combining. Instead, mothballed business plans to reduce service are back on the table.
Increase Revenue or Reduce Service
Except at Southwest Airlines, which consistently expands into locations vacated by other airlines, industry executives have accurately been accused of lacking imagination and growth innovation.
Instead of making their operation more efficient and attractive, they cut back. Instead of increasing customer service and building up the business, their predictable, lame inclinations are to fly less and charge more.
Each airline looks across the aisle to see if competitors follow suit. So far, most carriers are on the same page.
Fares have been raised six times by the majors since January 2008 according to FareCompare.com. Predictions are that it will continue.
At the same time, US capacity is being dramatically reduced by shifting routes to much more profitable international destinations. Delta, for example, plans to reserve 41% of its seats for international routes by the summer.
So, where do we stand after the merger craze seems to have subsided?
Airlines are raising fares, cutting back domestic service and threatening layoffs. These were the precise objections to consolidation in the first place.
But just as their pursuit of mergers failed to stabilize the industry, so too will these latest policies. Reducing the operation is a discredited shortcut that utterly fails to increase revenue and therein lies the problem.
“Cutting its fleet of airplanes does not address the larger cost problems that continue to beleaguer this airline,” said United Airlines ALPA chairman Captain Steve Wallach. “Instead of doling out hundreds of millions of dollars to shareholders and pocketing millions of dollars in bonuses and salary increases, perhaps management should reinvest that money into our operation.”
Simply put, when airlines cut back, earnings generally fall more rapidly than costs. Therefore, insufficient income is generated to cover expenses such as excessive fuel costs which alone increased an astounding 75% in 2008.
But despite these outrageous fuel charges, the majors were still profitable in 2007 without clipping their wings. In fact, they are estimated to collectively have stashed away $25 billion in savings.
Yet, management continues to squander these savings. Much of the income generated by employee concessions is being spent on executive bonuses and stock dividends rather than on enhancing customer service and offering attractive fares capable of expanding markets.
The latter, ultimately, is the only business plan consumers will find attractive.
Carl Finamore is former President (ret), Air Transport Employees, Local Lodge 1781, IAMAW. He can be awakened from his frequent naps at firstname.lastname@example.org
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