12 April 2008

State of the State - Airlines are now reeling

The State of the Airline industry particularly in the US market is going to be tough for the next year probably 2. We have a large number of significant problems - structural to the market - that are going to be affecting the commercial environment.

Since we know what a lot of these are - there is probably no point in belaboring the issue. However it is interesting to speculate what will actually be an outcome.

Unlike previous recession cycles - there is very little (if anything) left to cut back. The failure to revolutionize the business model is quite evident now. The Airlines believed they had another full year of strong profits before the down turn. The mortgage mess and the other factors causing the US led recession caught them largely unawares.

Given the large number of chapter 11 failures - there are likely to be more - this means that the industry must reach inside and reform itself. Both individual companies and the industry at large.

There are no easy ways to cut costs. Cutting back flights in the vain hope that you can save yourself to survival is actually bad for the economy. Not letting people fly by pricing the product incorrectly is going to actually exacerbate the recession. Every one dollar that is not spent in direct travel has a knock on effect in the economy. Unlike 9/11 it is not going to be spent at Home Depot and Linens & Things as we are seeing.

I believe ardently that this represents an opportunity for the market to reform and to fix even things that were not fixed during the last round of Chapter 11 filings. In hearings held last week Senator D Inouye (HI) actually postulated that deregulation had not been altogether a good thing.

What an interesting question.

However we cannot indulge in a trip down memory lane. There is a pressing set of issues that needs to be addressed. Regulation is not the cure all. But also complete laissez faire is not good either as the recent events in the Hawaii inter-island market have demonstrated.

The airlines need to take another hard look at what they sell and how they sell it. This requires concerned effort to modify the model to be more efficient. That will not be possible using the old tried and true methods.

There is one fundamental issue that must be addressed. Making the airline revenue match the costs. Perhaps now the notion of a seat mile can be put to rest.



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