Forbes had an interesting diagnosis the other day of what ails the airline industry based on financial disclosures. The article featured an insightful prognostication by independent airline analysis Robert Herbst of airlinefinancials.com of which airlines might be around nine months from now.
While load factors (filled seats) have never been higher, the largest U.S. air carriers still are having problems generating a profit – or even a smaller loss, for that matter. Even those baggage fees we hate haven’t been the panacea for all their troubles. The nine largest air carriers lost a combined $1.5 billion in the recently completed second quarter.
As Forbes explains, the airlines are currently facing a perfect storm of escalating costs, less (way less) consumer demand, and too little competition. That’s why Mr. Herbst and others believe we may see another wave of bankruptcies and consolidations soon.
Although airlines are cutting flights to reduce exposure, the industry’s desperation for bottoms to fill those that remain has resulted in a bit of an ongoing fare competition. So, while it’s a personal boon for many of us to find a really cheap fare to Orlando, its crippling the whole industry to have to offer flights on knife thin margins.
In the world of retail, there are only two ways to make more money and survive, cut costs or increase revenue. Most airlines are operating pretty close to the bone, having already asked for wage concessions from unions, closed certain gates and eliminated flights. Most don’t serve meals anymore and just about all charge for items that were previously complimentary, like reserved seats, or even transporting your luggage.
When it’s impossible to cut costs anymore and passengers will cancel even more discretionary travel if faced with more fees, the only other answer is to give them fewer airlines to choose from. This will reduce the loss from fare war price cutting and allow ticket prices to find equilibrium in a more normal competitive environment. To re-quote Mr. Herbst, some airlines “…just have little to offer that you can’t find elsewhere.”
What does this mean for travelers? Well, in the near term, it might be wise to listen to Mr. Herbst and book tickets with caution on the carriers he considers at risk. In the chart below, red means that airline has the real potential to cease operations within the next nine to twelve months, yellow means book with caution –it’s unlikely but not impossible, and green means that airline seems like a safe bet.
(The analysis was based on such variables as the strength of an airline’s routes, liquidity, market cap, fleet age, yield/margin, labor relations, and passenger satisfaction).
| POTENTIALLY GROUNDED? | CAUTION | FLY! |
| United | American | Delta |
| US Airways | Continental | Southwest |
| JetBlue | Alaska Air | |
| AirTran |
