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Get Four
|  | AUGUST 24, 2004
By Amy Tsao Seven Solutions to the Airlines' Woes Old-style carriers need to radically change the way they do business. Here's how the experts think they should start These are dark days for the airline industry, particularly for the traditional, so-called legacy carriers: Delta (DAL ), American Airlines (AMR ), US Airways (UAIR ), United, Continental (CAL ), and Northwest (NWAC ). All are well along the way to posting huge losses this year. One, United, is in bankruptcy proceedings, and several more may be headed that way. Between record fuel costs, an uncertain economy, and a lingering post-September 11 travel slowdown made worse by the SARS disease scare in Asia and Canada, the industry hasn't been able to catch a break. "This is by far the worst airline downturn ever," says Standard & Poor's airline-credit analyst Phil Baggaley (see BW Online, 8/24/04, "The Downdraft at Delta and US Air"). Baggaley recently downgraded Delta's credit rating, as well as that of US Airways, and he sees a possibly severe shakeout in the year ahead (see BW Online, 8/19/04, "S&P Cuts Delta Air Rating to 'CCC'" and 8/20/04, "S&P Cuts US Airways Ratings"). HOPES DASHED. Since World War II, airlines have rarely been a high-growth business, with high overhead and huge labor costs. But the old-style carriers have been barely muddling through with the aid of numerous restructurings and lots of government help since September 11. This year -- as the economy strengthened and carriers made changes -- some airlines were expected to turn profits. But this summer's record surge in fuel prices derailed that hope. Even with the continuing advantage of having the international market to themselves, legacy carriers still must remodel their businesses along the lines of successful domestic discount carriers such as America West Holding's (AWA ) America West Airline and JetBlue Airways (JBLU ), most analysts agree. Even those in relatively strong shape will need to make major changes if they want to thrive. What must they do? BusinessWeek Online asked several airline experts to list the important changes they would like to see. Here are the seven top recommendations that could go a long way toward curing what ails the big airlines: 1) Reduce labor costs. This is Job No. 1, though it's far easier said than done. In order for the most financially strapped carriers -- Delta, United, and US Airways -- to avoid Chapter 11, managements will have to win significant concessions from their workers in the coming weeks. Lower labor outlays, says Baggaley, would consist of a mix of reduced wages, more flexible work rules, and trimmed benefits. Pension changes might also be needed. Reducing the actual dollar amount that legacy carriers spend on labor is key, but more flexibility in setting employees' workloads is arguably as important. "There has to be more give and take," says Mike Miller, partner of Velocity Group, an aviation consulting firm in Washington, D.C. Elastic work rules have helped low-cost carrier Southwest (LUV ) remain profitable for decades. "Workers there are paid very well but have very flexible work rules in their contract, so they do more work for the same pay," Baggaley says. 2) Simplify flight operations. Low-cost carriers like Southwest and JetBlue use just a few types of aircraft, a strategy that cuts training and maintenance expenses. It's more complicated for the bigger airlines. They fly internationally, to more remote destinations, and require more varied fleets of both large and small planes. But they can and should work toward streamlining the types of planes they fly. Another way to simplify operations would be to modify the hub-and-spoke model, which uses designated headquarter airports for transfers. Traditionally, the big airlines have sent many of their flights through hub airports at peak business-travel hours. That way, since carriers typically charge heaps more for business fares, they can get more revenues per flight. But many experts argue that it's time to give up on that model -- especially as low-cost carriers increase service along heavily traveled routes. Experts like the idea of so-called rolling hub operations, where flights are scheduled throughout the day so that an airline's assets -- from employees to planes to hangars -- can be used more efficiently. In a traditional hub system, planes and workers spend more time waiting for connecting flights to come in at peak operating times. With rolling hubs, travelers may end up waiting a little longer to get a connecting flight, but planes end up in the air for more hours of the day. "If you spread more evenly, you can use your facilities more efficiently, rather than bunching them up at certain parts of the day," says Baggaley. American Airlines has been lauded for its experiment with a stretched-out schedule at some of its connecting airports.
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