"Survival of Fittest and Leanest Becomes Strategy for the Airlines"

Saturday, October 30, 2004

Survival of Fittest and Leanest Becomes Strategy for the Airlines
By MICHELINE MAYNARD
The New York (NY) Times

 
CHICAGO - After half a decade of turmoil, a picture of air travel in the
United States is starting to emerge, and it is far different from the caring
image the airlines like to present. 

In an artsy television commercial for United Airlines, for example, a
cosseting flight attendant gives an excited traveler water for a rose he is
taking home to mom, while in American Airlines' advertising landscape,
travelers are flying for happy reunions. After all, the airline declares,
"We know why you fly."

In truth, Americans fly because it is cheap and often the fastest way to
travel as planes have become not luxury liners but subways of the sky. 

"This is the way the world is going," said Robert F. Tumminaro, a manager at
an auto parts company in suburban Chicago, who checked himself in at a
Southwest Airlines kiosk at Midway Airport recently, bypassing a skycap and
carrying his own rolling suitcase and computer bag.

Just four years ago, he said, he would have taken United, where he had
accumulated thousands of frequent-flier miles. Fed up with United's high
fares and numerous delays out of the nearby O'Hare International Airport,
Mr. Tumminaro said, "I flipped my United card back at them" and switched to
Southwest.

Planes, many of them fully packed, are set to carry more than 600 million
passengers this year, masking the fact that the big airlines are in a
financial free fall, having lost $30 billion since 2000, with expectations
of losing another $5 billion this year and next. 

The airline carrying the most passengers within the United States is now
Southwest, according to the Transportation Department, far outstripping its
roots as a regional carrier from Texas. The growth of Southwest illustrates
why fares keep dropping, pushing 3 of the industry's top 10 airlines into
bankruptcy.

The average transcontinental trip, which set travelers back more than $400
each way four years ago, now costs closer to $200, according to Back
Aviation Solutions, an industry consulting firm.

All this has sent the big airlines scrambling to devise strategies that will
keep them in business, a process of creative destruction that is akin to the
chaos that afflicted the telecommunications industry in the 1990's. While no
one expects airline seats to be sold like minutes in a telephone plan - at
least not yet - it is clear that the full-service approach that United and
American would still like their customers to think is the norm is fast
vanishing from the American scene.

"The traditional structure of being a one-stop shop for all the travel needs
of your customers is not going to be the future at all," said Jagdish Sheth,
professor of marketing and corporate strategy at Emory University in
Atlanta.

The upheaval is the climax of a process that began with deregulation in
1978, and that has accelerated this decade because of a business slump, the
September 2001 attacks, the onslaught of low-fare competition and high fuel
prices. And like the transformation of Ma Bell, the status quo has been
flipped on its head in the airline industry with upstarts like Southwest and
JetBlue leading the way.

At Midway Airport and at Baltimore-Washington International Airport,
Southwest has installed its self-service kiosks, which print baggage claim
tags, along with the usual boarding passes and credit card receipts. As a
result, one customer service agent can oversee two check-in stations, said
Virginia Bona, Southwest's assistant station manager at Midway.

What is good for the passengers may not be good for workers. Elnora P. Hamb,
64, who sat watching customers using the kiosks at Midway recently, said, "I
think it's putting people out of jobs."

Mrs. Hamb, national president of the Women's Missionary Council of the
Christian Methodist Episcopal Church, like millions of other American
consumers, is avidly participating in that process anyway. Instead of
calling airline reservation lines, she said she regularly goes on the
Internet to shop for cheap tickets, bent on saving travel costs for her
church. 

Most often, she said, she flies on a low-fare airline like Southwest, which
lets her amend her itineraries at little or no cost, thus avoiding the fees
charged by the big carriers for last-minute changes.

The transformation in the industry is rewarding companies like Southwest and
JetBlue that are thinking up new ways to meet their customers' needs with
few frills and low fares on popular routes. But that model is hardly the
global industry's leanest.

An even more extreme model is Ryanair, serving Europe from its base in
Ireland. Ryanair charges minuscule ticket prices and makes passengers pay
for everything else, from checking bags to drinks and food. It has ordered
new planes without window shades, magazine pockets and reclining seats.

Nothing quite that drastic is planned by airlines serving the United States,
but the trend for basic travel is already clear. 

Though the big airlines still pay lip service to the idea of competing with
the low-fare companies, in truth they are casting a desperate eye on the
last corners of the market where they can still charge top prices for
tickets, namely flights where passengers still want first class seats.

That approach is being followed by American, Delta, Northwest and United,
which said recently that they would cut domestic service and expand
international flights, including the first service to Vietnam by an American
carrier in three decades.

"We want to focus our efforts on those markets," said John P. Tague, an
executive vice president at United. "There is a very strong residual demand
for that kind of product. We are confident it's going to work."

At the same time, United has introduced what it calls p.s., for premium
service, on flights between New York and California, which features seats
that turn into beds, gourmet food and the kind of style that brings back
visions of the glory days.

A new survey by the Brookings Institution suggests that many customers may
simply not care about the opportunity for luxury flights. The survey
measured each of the major airlines according to the value that it provided
passengers, in terms of low fares and the number of cities served.

Far and away, the study found, the most value was provided by Southwest,
distantly followed by United and Delta. American, Continental and US Airways
actually provided negative value. That indicated customers felt "getting rid
of them would be good" because their absence would allow better airlines to
take up the slack, said Clifford Winston, a Brookings economist.

The survey leads him to believe that in the industry's next phase airlines
will have to be efficient. Otherwise, "they will pay for it in not being
able to survive," Mr. Winston said.

Getting there, however, is proving existentially painful. 

Shrinking has become a way of life for the big airlines, which cut 110,000
jobs after the September 2001 attacks and have even more cuts on the way. 

American, Delta, United and US Airways all have announced plans to eliminate
jobs of pilots, mechanics, flight attendants and customer service agents.
Most are taking planes out of their fleets and at the same time, sharply
cutting benefits like vacation time, post-retirement health care and
pensions that have added billions to their costs.

"The harsh reality is that our world has permanently changed, and we must
change with it," Delta's chief executive, Gerald A. Grinstein, told
employees in September. 

Southwest is not immune either. About 1,100 workers took an early retirement
plan this summer. And the airline filled its last two flight attendant
classes from its own ranks including some of the gate agents who once worked
at Midway, Ms. Bona said.

But the cuts are coming from a position of strength. Even as the major
airlines cut back, the healthiest low-fare carriers are expanding their
route systems and ordering hundreds of new aircraft. Granted, they are not
completely immune from the problems buffeting the industry.

ATA Airlines, a low-fare airline based in Indianapolis, filed for bankruptcy
protection this week, after its aggressive expansion plans were stymied by
high fuel costs. And JetBlue disappointed analysts in the third quarter,
when its earnings fell, prompting Standard & Poor's Ratings Services to
assign a negative outlook, meaning its debt rating could be cut if it cannot
make improvements. 

But JetBlue still made money and like Southwest, it is striving to be
efficient. Southwest now employs just 75 employees per aircraft, compared
with more than 100 at each of the major companies, and only slightly more
than the 70 employees per aircraft at JetBlue, whose workers are not
represented by unions.

"The companies are doing their downsizing and the workers and unions are
being left behind," said Gary Chaison, a professor of industrial relations
at Clark University in Worcester, Mass.

Whether entire airlines will be left behind is a matter of intense debate in
airline circles. 

Given the intense pressure from high jet fuel prices and stiff competition
from low-fare companies, some say it is inevitable that old names will
disappear - a prospect that US Airways raised repeatedly this fall, as it
successfully pleaded with a federal bankruptcy court judge to grant
emergency pay cuts.

Others point out just how hard it is to kill an airline. Vanished names like
Eastern, Pan Am and T.W.A. floundered for years in the 1980's and 1990's
before finally going under. And even as US Airways, Delta and United are
mired in bankruptcy or close to it, new carriers like Virgin America are
poised to move into the American market, assuming they can find financial
backing and win regulatory approval. 

Moreover, JetBlue and Southwest are each buying additional planes. JetBlue,
which started in 2000 with a single New York to Florida route, now serves
more than 30 cities, and expects to add dozens more over the next few years
as it adds hundreds of Airbuses and regional jets to its fleet.

What is evolving may end up being better for the country and certainly will
be for passengers, said Herbert D. Kelleher, the chairman at Southwest. "I
don't see it as dark and foreboding and bleak," Mr. Kelleher said in a
recent interview. "Every time we go through one of these harrowing
experiences, the industry has endured, it has survived and it has
successfully provided what I consider to be an essential service for the
American public and American business."


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