You might think, after seeing the barrage of bad news about the major airlines, that the entire industry is going to be stuck on the tarmac by Thanksgiving. But far from all the chatter about bankruptcies and cutbacks, a few enterprising carriers are quietly soaring. Discount pioneer Southwest is readying its first transcontinental flights, from Baltimore, Md., to Los Angeles, starting this fall, while New York City-based upstart JetBlue is adding more flights on the West Coast and in Florida. These and other discount carriers today account for 20% of domestic air travel, up from 10% in 1992.
So why haven't American, United, US Airways and the three other full-service carriers, which lost $11 billion last year and stand to lose an additional $5 billion this year, followed the lead of the profitable discounters by cutting costs and fares? Because that's not the way their business works. They have made, and lost, their money by providing the frequent departures, quick connections, spacious seats and other amenities that have been demanded by business flyers and charging them dearly for that service--more than five times the cost of a discount fare.
It's no wonder, then, that since 9/11, which accelerated the worst downturn in U.S. aviation history, the major carriers have been whistling in the dark, waiting for their business to return to "normal." But with US Airways' move last week to seek bankruptcy protection, United's warning that it was sliding that way and American's announcement of "fundamental structural changes," the majors as much as admitted that they can't wait any longer for the friendly skies to return. They have to start building a new business model--one focused on both leisure travelers and the growing ranks of business travelers who are mimicking their penny-pinching ways.
Recent events underscore how much more turbulence lies ahead for the beleaguered carriers as well as the disgruntled traveling public. Fares will drop on some routes and rise on others. More direct flights could open up, even as layovers grow longer at airline hubs. Satellite airports (Baltimore; Long Beach, Calif.) near metropolitan areas could see more traffic while service is reduced to smaller cities like Syracuse, N.Y., and Greensboro, N.C. And forget those promises of more legroom in coach. Those days are over.
Rather than cause brief setbacks to the airline industry's fortunes, 9/11 and the recession exposed a raft of deeper problems: high fixed costs, a convoluted fare structure, a boom in online bargain hunting by consumers and the growing disaffection of business travelers and their bosses. The full-service airlines' soak-the-rich business model, which has always prized maximizing revenue over operational efficiency, looks all but busted.
Rebuilding it will be wrenching for an industry that collected a record $22.7 billion in profits from 1995 to 2000. With the country enjoying an unprecedented economic boom, corporate travel managers were willing to pay the $2,000 walk-up fares for New York to Dallas or San Francisco to Miami. So it didn't matter how many vacationers were snapping up $400 deals to fly to Hawaii. From January 1996 to December 2001, business fares rose 75%, according to American Express Corporate Travel.