229-I Guess it Takes Bankruptcy…
In our previous blog (see Here), we described the resuscitation of the comatose manufacturing employment due to renewed flexibility in many union shops, such as GM. I guess it takes bankruptcy to get attitudes to change. Look at American Airlines, for an example.
Over the last several years, its big airline competitors have been getting bigger. United and Continental combined, as did Delta and Northwest. U.S. Airways merged and Southwest has just purchased Air Tran. Through it all, American stood largely on the sidelines.
Most of the other competitors had a real advantage. They went through bankruptcy. Of course, Southwest did not, but the other legacy carriers did. What those airlines and their workforces learned in bankruptcy created a lower cost and more flexible set of work rules for these airlines. Now American Airlines is beginning to pay the price for its competition with lower cost airlines.
American is clearly a high-cost airline. Its 2010 cost to fly a seat mile is 12.76 cents. This is the highest among the six largest carriers. Predictably, its pretax margins for the first half of the year were negative, while its peers produced positive operating earnings.
The problem American faces is primarily due to high labor costs. This may surprise you since several of the unions agreed to give-backs in 2003. Further, the American Airlines pilots claimed to be working at 1993 hourly rates. In short, all the unions working at American seem to be up in arms in frustration over their lack of economic progress.
The problem is less the rate of pay for the workforce than it is the work rules. American is at the bottom on industry measures of productivity because of restrictive work rules. Does that sound like the American automobile industry’s problem before the recent spate of bankruptcies?
Still, the unions are up in arms. Despite long term negotiations, the company has reached little in the way of agreements. Some unions are now threatening a strike. Let’s see. Take a high cost airline that is losing market share, increase its costs and scare away its future passengers with a threat of a strike. That sounds like a prescription to insure the future of an airline and the jobs that go with it, doesn’t it?
The airline industry is well out of hostility. American Airlines costs are no longer the highest in the industry. The airline joined the acquisition bandwagon in 2013.
By early 2020, the US domestic airline industry had become an oligopoly. The top 4 airlines (Delta, American, Southwest and United) controlled nearly 2/3 of the total market and had good control on pricing. By 2020, Southwest was the far-and-away leader in domestic passengers, 20% to Delta’s 16%. In revenue passenger miles American, held a slight lead over Southwest. SWA continued to maintain a cost and all – in pricing advantage over its legacy rivals. For the major fee generating services, Southwest is always less expensive than the 3 other legacy airlines. The legacy carriers seem to lack the will to sacrifice any profits to match Southwest’s prices. See HERE and HERE for more explanation.
American Airlines acquired US Airways in 2013, which allowed it to reduce its costs per seat mile. By 2018, it was no longer the costliest airline. Here are comparative costs in cents per seat mile in 2018:
Delta 14.1 American 13.6 United 13.4 JetBlue 12.3 Hawaiian 12.2 Southwest 11.8 Alaska 10.7
THE SOURCES FOR STRATEGYSTREET.COM: For over 30 years we observed the evolution of more than 100 industries, many hostile. We put their facts into frameworks applicable to all industries and found patterns. Strategystreet.com describes the inductive results of these thousands of observations and their patterns.