... in Denver, uncertainty is in the air but the mood is upbeat. If there’s one message that rings through loud and clear it is that the current airline operating model is broken. Some thoughts from a day of sessions that had a heavy focus on Wall Street, airline mergers, and airline/airport agreements ...
When it comes to the airlines, capacity is the issue. Consolidation is one way the airlines will address this problem. One Wall Street analyst suggests it’s the only way the airlines will ever get a handle on charging prices that turn a profit.
The airline industry, like many, is cyclical. In decades past, the airlines reaped great profits in the ‘up times’ to offset the coming losses in the downturns. After the airlines recovered from 9/11 and high demand returned, the carriers failed to realize the boom in profits of past cycles. That put them in a precarious position for this downturn. The good news is: In past up cycles they ordered airplanes – not this time. That, says one analyst, should put them in a good position for profitability when the industry rebounds. Of course, we’re not exactly sure who those airlines will be in the next ‘up’ cycle.
Expect more mergers.
The legacy carriers are working feverishly to get out of the regional jet business because of the fuel inefficiency of the aircraft. Regional aircraft were the rage of the ‘90s because for smaller communities served traditionally by turboprops they were a perception issue. People like the idea of flying jets. The impact of this trend is that alliances between legacies and regional carriers are changing or being eliminated, and small communities could be in for a shock when it comes to air service.
The problem with old airliners is that they don’t go away. It’s what has allowed various upstart carriers since deregulation in 1978 to get a leg up on the legacy carriers by buying older airplanes and entering the marketplace. That start-up model pro forma is probably gone forever with the high price of fuel.
Last Friday’s move by the U.S. Senate to finally get the aviation reauthorization bill moving through Congress is good news, especially for the Airport Improvement Program, but issues remain. For airports, at the top of the list is whether or not the cap (currently $4.50) on the passenger facility charge (PFC) will be increased. Airports argue that the current rate, at the least, hasn’t kept up with inflation.
Thanks for reading. jfi