Are we witnessing the beginning of the end of air travel as we have known it?

Long before September 11, 2001, the airlines were in trouble.  I know of no other industry where the customers, the management and the employees hate each other so vehemently.  I believe the tragedy of September 11th will hasten the change.  

The major hub-based airlines' costs, employee relations and customer service are out of control.  They have based their business models on business travelers paying more than $2,500 to fly transcontinental in coach and more than $5,000 transpacific in business class.  The dot com boom deluded the airlines into thinking they could get away with it.  They made money during that time, raised fares significantly, gave big wage increases to the employees, ordered whole new fleets while service to the customer went into the tank.  The dot come bust was bringing reality to the bottom line prior to September 11th.  There was no way to rationalize the prices.

The stock value of most of the full-service airlines is at junk bond levels.  Most of the US based airlines have a strong overseas route system and have made the majority of their profits on their international route system.  That was changing prior to September 11th and even more so now.  They had used their US route structure to feed their international gateways.  

United Airlines is in bankruptcy but was owned by it's employees yet they were angry with management.  I envision a picture of the United employees with their own hands around their own throat threatening to strangle their management.  Delta senior captains can earn up to $250,000 and the other airlines' cabin crews were upset and playing catch-up.  They all want an "industry leading contract" in a game of wage leap-frog that will kill them.  Labor contracts contain 'scope clauses' which prevent the airlines from using their commuter partners (lower labor costs) from flying larger planes and from flying point to point rather than to/from the hubs.  Passengers are fed-up with the hub system.  With the concerns about airport security, hub and spoke systems are even less desirable for the traveler today.

Large corporations are buying "time-shares" in executive jets and not flying the major carriers.  The price of an airplane time-share is looking much better if you compare the full-fare ticket prices that businesses often pay.  If you watch the Yahoo airline message boards, it's a verbal war between employees, passengers and stockholders.  The Yahoo board for Southwest is mostly positive with speculation about which city will get their service next.  There is actual pleading by residents to serve their city.  Midwest and Jet Blue are at the top of the list of great airlines.

The typical traveler looks at air travel as a commodity much like long distance telephone service.  There is little to differentiate between different airlines.  Price is all that matters and if you're going to be crammed into an aluminum tube for hours and treated shabbily.  Why spend more than you have to?  If you can treat the customer with on-time service and a comfortable seat you can win more customers but only if the price is at or near the lowest.

The attempt to build brand loyalty via frequent flyer programs will not hold up over the long run (witness S&H Green Stamps).  Leisure travelers will not pay business fare prices except in extreme cases.  Regardless of how large the aircraft is, the major airlines can not make money charging $250 to $300 to fly coast-to-coast, especially when a significant portion of the charge goes to taxes.  However, the business traveler has been asking his employer to shell out ridiculously high dollars to fly on short notice without a Saturday night stay.  The business traveler generally hasn't cared about the price of the ticket until the economic downturn.  After all, it wasn't coming out of his pocket.  Business travelers have become addicted to the opiate of frequent flyer miles and first class upgrades.  Many European and Asian based airlines have excellent service and amenities.  Business travelers are flocking to them because of it.  Can you imagine the benefits to US based travelers if foreign airlines were allowed to carry passengers within the US?  I doubt whether congress would allow it to happen.

Airline imposed constraints have kept fares that business travelers pay high.  The airlines' contract of carriage prevent the use of back to back tickets, hidden cities and re-selling your ticket.  Their requirements of buying a round trip ticket when advertising one way prices also hurt the credibility of the advertising dollars spent.  With these types of limitations, a black market is inevitable and it surprises me that it is not bigger than it is.  The tip of the iceberg is evident at E-bay with the sales of bump vouchers, coupons and frequent flyer tickets.

A few airlines like Southwest, Midwest, Jet Blue, Frontier, Spirit, AirTran, and others have build their business models on lower labor costs, better service, more flexible work rules, simpler route systems, fewer perks, common fleets, quicker turnarounds, more modern distribution systems (higher percent of sales via their web sites), use of lower cost alternate airports, no Saturday night stay or round trip required and more flights per day per aircraft.  Some don't offer: assigned seats, interlining with other carriers, meals, movies, high flight frequency, international destinations, frequent flyer programs, airport clubs, etc.  The bottom line is that these other airlines can make money on lower fares and fewer restrictions.

The business traveler has discovered these alternative airlines.  Travelers are being told to use them or don't travel.  It's that simple.  While the traditional full service airlines had mostly full planes prior to September 11th, the average revenue per ticket is down below the point where they can make money.

The major airlines have eliminated most free meals on domestic flights, started to impose strict baggage charges and eliminated commissions paid to travel agents.  This is like rearranging the deck chairs on the Titanic.

Airlines have deferred aircraft deliveries, closed reservation centers, closed city ticket offices, closed airport clubs, parked (in the Arizona desert) their most inefficient aircraft and lay-off the most junior employees in an attempt to stop their losses.  However, they are under pressure on so many fronts from the newer airlines, they can not raise their fares in monopoly markets high enough to cover their costs of battle elsewhere.  The newer airlines are picking apart the major carriers piece by piece.  Mergers may be discussed anew but the justice department will scuttle the idea until a few become casualties.  When allowed, mergers may look like two drunks holding each other up.  The simple reality of the impossibility of peaceful integration of pilot seniority lists will prevent mergers.  In addition, no airline will want to acquire another when they already have too many employees and aircraft.  If an airline fails, the others will waive advanced purchase requirements and sell discount tickets to the customers that can show ticket receipts for the failed airline.

With the cancellation of numerous orders, Boeing, Airbus and the leasing companies will have lots of planes.  There is also a whole flock of small commuter (25 to 100 passenger) jets built by Canadian, Brazilian and US based companies.  These aircraft are designed to be 'hub busters' and can travel over 2,000 miles from point to point.  They are the ideal way to fly from any smaller city to any other smaller city if only the "scope clauses" were not there.  Hub and spoke routes make sense if you want high frequency and have high labor cost.  If the airlines furlough pilots, there will be lots of pilots.  The dot com's are no longer sucking up all of the venture capital.

What if a bunch of airlines go out of business?  I don't believe that our government (your and my tax money) should be used to prop-up any of the airlines.  I believe we should go so far as to be the insurer of last resort.  If there is a demand to go from City A to City B at some dollar amount and if an airline can make money doing it, an airline will enter the market to serve it.

Twenty years ago Detroit offered high priced, lousy automobiles and bad service.  Japanese auto manufacturers saw the needs of the market and responded.  The quality of today's automobile is many times better than ever before and the service is vastly improved.  The customer has benefited from the globalization of the industry. 

As an investor, I would not put a penny in a traditional airline.  As a customer, I find airline travel on all but a few airlines something to be endured and tolerated.  As an observer, I think it will all change significantly over the next few years.

Joe Brancatelli wrote (12/6/01) an excellent editorial entitled Burning Down the House predicting the future of airline travel.  I'm a Darwinist and believe that most of what Joe predicts will come to pass.  It's only a matter of time.  It was on track to happen long before September 11, 2001.  That tragic day just hastened it along.

An excellent article was in the Wall Street Journal on 28 August 2001 but is no longer available on line (I used to have a link here).