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Obituary: The Modern-Day US Airline Industry, Transporter of Passengers, Dies at 30

The modern-day US airline industry, which allowed people to fly all over the country for roughly the same price as a couple of steaks at Morton’s, died last week after a long illness. It was 30 years old.

The cause of death was oil. And irrational pricing. And low fare carriers. And the economy. And a shaky business plan. And expensive hubs. And a weak dollar.

Born in 1978 after deregulation, the industry grew quickly, offering lower fares to an ever-increasing number of destinations, which changed flying from an infrequent-to-once-in-a-lifetime activity to a part of the culture of the United States.

No airline in the early years encompassed this explosive growth more than Braniff. The Dallas-based carrier embraced the new open policy head-on, snapping up routes from Dallas, Boston and LA all over the globe in a bid to expand at a rate that was never before attempted at fares that were never before offered. There was a reason for both: they caused the rather portentous demise of a once-great airline. After growing too quickly and offering fares that didn’t cover their costs, Braniff shut down in 1982 after more than 50 years in business.

Braniff was one of the granddaddies of US airlines, and its departure was followed later by TWA and Pan Am, which also were a link back to the golden days of aviation. All three in their own way were unable to cope with deregulation, be it due to hypergrowth (Braniff), or a lack of domestic feeder network (Pan Am and TWA). With their exits, the remaining airlines fell primarily into two categories: lowfare airlines and hub-and-spoke carriers.

The brutal combination of unprofitable fares and poor operations plagued industry upstarts since the days of People Express, a promising and innovative lowfare airline based in Newark. Where its business once allowed people to fly around the northeast for $19, it grew extremely rapidly without an infrastructure to handle either the growth or the revenue management aspects of its business, leading to a feeling of chaos for passengers and an untenable revenue situation for the airline.

People Express was sucked into the Frank Lorenzo vortex that eventually swallowed and destroyed once great or promising airlines such as Eastern, Texas International, New York Air, Continental and Frontier. Lorenzo consolidated (barely) each of the airlines into the Continental brand, leaving, once again, a chaotic operation with untenable fares in its wake. Following a relationship with labor that could at best be described as absolutely horrible, Lorenzo sold his remaining stake in the combined carriers and left the industry. His Continental Airlines, like many other carriers after it, declared bankruptcy as a way to reorganize their operations.

Though the industry continued to survive, a trail of smaller upstarts came and went without causing a dent in the aviation juggernaut. Today, the industry doesn’t miss seeing Kiwi, Air Florida, Eastwind, Shuttle America, ValuJet or the many other once-promising airlines trying to make a go of it.

While the majority of lowfare carriers floundered as they tried to compete with the broader networks and frequent flyer programs of hub-and-spoke airlines, Southwest Airlines managed to survive by maintaining a reasonable rate of growth, a strong underlying operations, and a low cost structure. These three factors allowed them to thrive while every other upstart was unable to successfully create all three sides of that triangle.

Hub-and-spoke carriers, meanwhile, grew in large part through acquisitions and through a growing network of regional airline relationships. Acquisitions in the 1980s and 1990s took out many regional airlines that had carved a niche during the regulated era but could not sustain life during deregulation. American scooped up TWA; Delta took in Western; Northwest grew by encompassing North Central and Republic; US Airways augmented with Piedmont and Allegeheny. And on and on. With each of these acquisitions, the airlines saw their networks grow but saw their unique cultures dissipate, leading to the labor strife that has addled the industry.

These airlines also grew through relationships with regional airlines that allowed them to reach smaller cities without having to build a network that reached to all of the dots on the map. While this allowed for a deeper network and greater feed into hubs, until the mid-2000s the primary result of this was that regional airlines such as Mesa and Skywest were able to grow wealthy on the backs of unprofitable network airlines.

The combination of each of these historical factors – poor operations, overgrowth, and a pricing structure that basically forbids airlines from raising fares to a profitable level – led to an industry that by this year was essentially a house of cards. Until recently, US airlines were comprised of hub-and-spoke airlines offering a full-service product with a wide network; lowfare carriers offering a lesser product and more point-to-point service; and regional airlines. With the shutterings of three airlines last week, the industry entered a new era that features regional airlines (mostly profitable, though since they primarily just operate flights without the tricky pricing and marketing element they are radically different from other airlines), hub-and-spoke carriers offering a no frills product, hub-and-spoke carriers offering a high-frills transcontinental product, and point-to-point carriers offering a passenger-friendly product.

The hub-and-spoke domestic product was the backbone of US airlines until its death last week. Once portrayed as an upscale product-and-service-heavy experience, the hub-and-spoke airline experience has sunk well below what was offered by so-called no frills carriers. In a bid for profitability these airlines are de-coupling base fares from every other aspect of flying while simultaneously refusing to offer product enhancements that match those of so-called lowfare carriers. The pricing premium that these airlines were once able to command has disappeared as their product has sunk to levels last seen on a Greyhound. Match this product with the disappearing domestic networks as hub-and-spoke airlines shrink their capacity and move it to international flights, and the death of the industry as it was known was inevitable. Watch soon for the first discussions of whether airlines have ripped out too much capacity to feed its international flights with a fear of looking like Pan Am and TWA – lots of flights overseas with not enough people on them.

The airlines, of course, have not died, just the industry as it was known. The new industry, born last week, will likely find a greater amount of point-to-point flying as Northwest has toyed with in Indianapolis and Milwaukee; a greater focus on high-yield transcontinental flying by hub-and-spoke carriers that offer a solid premium product (with high fuel costs, these longer routes are challenging for point-to-point airlines with only one class of service); and, if a hub-and-spoke airline gets bold enough, a link-up between one of them with a point-to-point carrier, allowing them to offer a solid domestic feeder product to its perfectly acceptable international product. This would allow hub-and-spoke airlines to remove some of the unprofitable flying from their network and offer focus to their operation. Consumers have no idea what product they’re going to get on a given airline, with some planes offering in-flight video, some offering meals, some offering nothing, and so on. A distinct domestic product – offered through a partnership – would provide clarity to a muddled industry.

But that’s not going to happen. The upside down world of full-frills “no-frills” airlines matched with no-frills “full service” airlines will be the new normal. No advertising campaign can change what everyone knows – the industry as we knew it is gone. And nothing is going to change that because airlines, for the most part, are slow-moving beasts. Instead, as oil approaches $125 a barrel, the industry, even in its newer, more dead form, will simply continue to fade away slowly, slowly, slowly.

The US airline industry is survived by a slower, subsidized sibling named Amtrak, an innovative stay-out-of-the-way-of-competition sibling named Allegiant, and a sibling named not-traveling-at-all.

In lieu of flowers, the airlines ask that you send peanuts.

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  1. Well, that’s certainly a pessimistic view!

    I’m not sure you have it right — but I’m also not sure you have it wrong, either. There are too many variable to know. For example, oil right now is being propped up by a crazy speculative financial bubble. If it returns to “normal” — which most folks in that industry (as opposed to Wall St) think is below $60 — a lot of your assumptions fly out the window.

    In the meantime, what is certain is that you’re going to have to pay a lot more money to fly. Have you checked out summer airfares? Yowza! Even cheapie airlines like Southwest are trying to sell $500 transcons. Will people pay that? Beats me. But you can certainly write the obituary for the $99 transcon. At least as long as oil is above $99.

  2. I was actually hoping you’d comment on this…

    Oil is a huge issue, obviously. But there was talk of the supposed necessity of consolidation when oil was $50. DL/NW, CO/UA, DL/US, US/HP were all discussed before the oil issue came into play.

    I think the notion of the “full service hub-and-spoke carrier” is dead (which was my 1,300 word point). There are other models out there, tho it’s interesting that once JetBlue started to move a bit in the hub/spoke direction — even just a bit– it started to go to hell for them.

    It’ll be interesting to watch, but I don’t see how the industry in 2010 looks like it did in 2000…

    thx for the note,
    -jared

  3. I don’t know, I think a reasonable argument can be made that Continental is still a “full service hub and spoke carrier.” Their business model seems as good as anyone else’s right now.

    It does seem like there are too many airlines in America right now. Try to think of another $200 billion national industry with so many players. Logic suggests to me that, eventually, there will be fewer major airlines in our future. There are some smart guys out there who will figure this out. The smartest proponents of consolidation are at US Airways. Their competitive position is weak at the moment, but give it time, and they will start shaking things up.

  4. I completely agree — I’ve been saying for years that America West (now US) has the smartest management team in the business. I’m not sure if they regret the US Airways takeover, but it’s a moot point.
    And you are correct – Continental is a hub/spoke carrier that seems to be working as well as anyone. But they’re really the only one left that’s having any success at all with the model. And the fact that there’s 1 airline that can succeed at it doesn’t mean it’s a model that’s alive and well.
    I’m not 100% convinced that there are too many airlines. As soon as one goes out of business, another seems to pop up (or an existing airline fills the capacity). For reasons I still don’t understand, no airline will allow others to raise prices. As ridiculous as the fuel situation is, the yield situation is equally crazy. Given the cost structures, I’m not sure how it’s possible that I can fly transcon for the same $129 today that I could in 1981. The answer is, of course, because they’re losing money charging that amount. But why other airlines that are losing money keep driving fares to a point where they’re losing money too is beyond me.
    I remember listening to an earnings call 3 or 4 years ago from America West and they were saying that some other airline had dropped fares from Orlando to Seattle to $99 each way. They flew the route via PHX but decided that that was a crazy fare and they wouldn’t match it. They added that they would gladly charge $99 a seat from Orlando to Phoenix and $99 a seat from Phoenix to Seattle and fill up each leg of the plane with passengers who are actually paying something to fly. That makes sense to me…

  5. I’ve always had the impession (which I can’t prove) that current US Airways President Scott Kirby saved America West by being a brilliant pricing analyst. He took pricing off auto-pilot and outfoxed what was some pretty predatory pricing activities going on against America West at the time.

    Continental just always has their act together and will undoubtedly be the “last man standing” in any legacy carrier shake-up.

    I think the primary victims of low airfares is labor. That’s whose hide the savings are coming out of. Now you can argue that labor was overpaid as a result of regulation, but I think you can now also argue that labor is underpaid. Folks like Parker and Kirby were going to consolidate (monopolize?) and pay labor more, but Delta pilots weren’t smart enough to understand this.

    I still think the most likely outcome of the current “crisis” is that fuel prices go down and the industry soldiers on. IMHO, the distortion in the oil market currently equals the bubbles we’ve previously seen in NASDAQ and the housing market. But we won’t know until the bubble pops.

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