The Hindu Business Line : Airlines: The turbulence can be jolting

MAJOR airlines in the US are going through some tough times. The recent round of reports on their performance has left most investors fairly gloomy about a revival of fortunes in the near future. High fuel prices seems to be the handy external factor that most are using as an excuse for poor performance coming out of weak organisations and failing strategies.

United Airlines and US Airways are both operating under bankruptcy court protection and the last quarter's results further added to the red ink. AMR Corp., which runs American Airlines — the world's largest airline measured by passenger traffic — and Northwest Airlines, also reported losses during the last quarter.

Delta Air Lines is trying to avoid bankruptcy as it tries to deal with high fuel costs and heavy pension costs. In October 2004, it got a 32.5 per cent pay cut from the pilots union along with a wage freeze in return for a 15 per cent ownership stake in the company.

It is not just the big airlines stuck with legacy costs (such as pension commitments) and heavy overheads that are suffering. Even low-cost carriers are hurting. ATA Airlines, one such carrier, filed for bankruptcy in October 2004, when high fuel prices hit the already weak airline that was suffering from costly aircraft lease payments and also the severity of competition.

As part of a turnaround, it is selling some of its assets, including gates at Chicago — one of its hubs — and other airlines are turning up at the auction halls looking for bargains. ATA was reputed to have low operating costs but it was operating on such thin margins that it did not have sufficient reserves to tide over the present times. The only airline in the firmament that appears to be in a comfortable financial position is Southwest Airlines. It was also the only airline among the top-ten in the US that earned a profit in 2001 and 2002.

Airlines are scrambling to survive and are resorting to several short-term fixes. The bankruptcy protection gives some of them the ability to re-negotiate terms with lenders and also seek concessions from their unions. Many are cutting back on direct flights to major cities or switching to smaller planes to reduce costs.

Some have decided that their high costs of operations are a burden that cannot be easily shaken and have launched low-cost operations of their own to compete with the likes of Southwest. Delta Air Lines has started one called Song (because you can now fly for a song?), and United Airlines' parent company has started one called Ted.

These may go some way towards operating at lower costs but the actions do not seem to be the result of any deep understanding of the shifts in the industry or the expectations of the travelling public. Short-term fixes have a way of unravelling in the long run.

When I intend to travel and am looking for an air ticket, I go to Web sites such as expedia.com and lowestfare.com. My screen fills up with various combinations of departure and return flights offered by different airlines. I start comparing the options trying to balance a low price on the one hand with inconveniences like an early morning departure, late night return, long travel time due to connections, and so on.

When I embark on my travel holding my low-price ticket in my hands, I still look for convenient check-in facilities, I want my flights to be on time, and I complain about the poor leg room in the aircraft. I think the airline companies are cheap because they do not give me more than a packet of peanuts to munch on during the flights.

My low price has not prevented me from expecting the service and facilities that used to go with higher fares. (It is like the buyer of the basic car who complains that he is not getting leather seats and power steering.) Certain minimum facilities and services are expected of all airlines as the cost of staying in business. They have to find new ways to differentiate.

I am the kind of customer who, in large numbers, are now challenging the conventional approaches to strategy making at the airlines' headquarters. Some firms keep costs low, provide a basic service within a region, and offer low prices to seek your custom. Others build elaborate national networks, offer several flights a day for convenience, provide attractive services, and believe they can charge higher prices.

The latter would work only if the customer is prepared to pay more for all those facilities and service. Increasingly, airline companies are facing customers who want all the services they can get and yet want competitive prices. The success of the airline will depend on its skill in sifting through this and identifying the market segment (defined in terms of customer needs, and geographical areas) that will support it.

Southwest continues to remain profitable as it has carefully identified its niche as those who want to get the same low price whether they buy their ticket early or at the last minute, and looks at its competition as coming not from other airlines but from road transport. It continues to operate as a low cost carrier because it takes great pains to keep those costs low.

For years, it operated out of secondary airports and avoided the more crowded and costlier gates at the major cities. It expands gradually, and has kept maintenance and training costs low by using only one type of aircraft, the Boeing 737. The carrier does not assign seats, and they sell almost half their tickets on the Internet at their own Web site and not through travel Web sites.

But competition is rising even within the US for Southwest. Although the other low-cost airlines, namely Jet Blue, Air Tran, Spirit, Frontier and America West, do not always fly the same sectors, they are gaining market share as they try to emulate the Southwest approach. And they have added some of their own twists.

Frontier, in addition to low fares, offers assigned seats and live TV entertainment on its flight. Song offers low fares, sells food on board, and promises a video monitor at every seat.

Meanwhile, Southwest itself is changing, perhaps to stay a step ahead of the copycats. It started operating out of Philadelphia, the country's fifth largest city, in May 2004, changing its pattern of avoiding major cities. This is a direct challenge to US Air for whom Philadelphia is a major hub.

Southwest is said to be considering a smaller aircraft to expand into smaller markets, although this would raise costs. It is considering offering some in-flight entertainment. Reports suggest that its costs have been creeping up, affecting its margins, but at least they are not sitting on their laurels.

(The author is professor of international business and strategic management at Suffolk University, Boston, US. His Internet address is cgopinat@suffolk.edu)

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