How the Legacy Airlines Lost So Much Altitude Since 9/11 19 comments
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After losing over $5 billion last year, the airline industry is now on course to lose a similar amount for 2009. This projected loss comes after the airlines will spend over $13 billion less for fuel compared to 2008.
Losing money is nothing new for the old legacy carriers. But this year, even low cost Southwest (LUV), after 35 consecutive years of profits, is expected to lose money. Of significance for how serious the revenue problems are for the industry, Southwest’s load factor will be the highest in the airline’s history.
If you’ve taken a flight or read a newspaper lately, you’re probably aware the airline industry has serious problems, from customer service to record financial losses.
Before jumping to conclusions and attributing blame, let’s do a review of what has really occurred to the industry.
While this article focuses on the largest legacy carriers, over the past two decades over a hundred smaller airlines went out of business or have struggled to stay alive.
The following considers the 6 largest legacy carriers and their mergers / acquisitions before and after the September 11, 2001 tragedy.
These airlines – American (AMR), Delta (DAL), Northwest, United (UAUA), Continental (CAL) and USAir (LCC) – currently carry 58% of the US market share or approximately 65% after accounting for regional carrier affiliates.
Since 9/11, United, Delta, USAir (twice) and Northwest all filed bankruptcy. American and Continental reorganized outside of bankruptcy.
For the 8 years leading up to 2001 (1993-2000) the airlines noted above had cumulative net profits of $17.1 billion.
The same airlines had a cumulative net loss of $38.5 billion in the following 8 years (2001-2008). Note: Amounts exclude reorganization and goodwill write downs. See Chart 1.
Chart 1
While many billions of debt and employee pension obligations were abrogated through the bankruptcies and reorganizations, cumulative long term debt and capital leases are still 15% higher than they were just prior to 9/11. Note: Data includes impact from acquisitions and mergers. See Chart 2.
Chart 2
One of the most recognized losses to the airline industry and investors has been the large drop in market cap (share price times shares outstanding). This loss of shareholder value affects each airlines borrowing power and increases the cost for financing.
Over the past 8 years and not accounting for tremendous losses through the bankruptcy process, cumulative market cap for the airlines noted above dropped by over 52% going from $21.8 billion in the second quarter of 2001 to $11.4 billion in the most recent second quarter of which Delta alone claims half of the current market cap. Note: Change in market cap does not reconcile significant stock value losses from bankruptcy. See Chart 3.
Chart 3
As we approach the 8th anniversary of the 9/11 tragedy, here are some startling statistics showing what has really occurred since then to the legacy carriers that were once recognized as the best airlines in the world.
Comparing year 2008 to 2000 for the 6 remaining legacy airlines:
• Total Operating Revenue decreased by $2.3 billion falling from $89.2 billion to $86.9 billion.
• Fuel cost skyrocketed from $11.3 billion to $36 billion (+218%).
• The fuel cost for the average one way passenger fare increased by 402% going from $23 to $93.
• Capacity as measured by available seat miles (ASM’s) decreased by 14.3%.
• Employee wage/salary expense decreased by 33.5%.
• The average one-way passenger fare increased by 22% going from $162 to $198. This increase was below the 25% CPI inflation over the same time period. Note: This is revenue to the airlines and does not include taxes, airport fees, security charges etc. that airlines are required to collect but do not keep.
• While the average air fare increased by $36, the labor wage cost for the average air fare decreased by 36% to $41.
• Since 9/11, over 155,000 jobs for just the airlines noted above have been lost falling from 428,000 to 272,000 (-36%) total employees.
• The average passenger ratio to airline employee increased from 1,139 passengers per employee to 1,413. In other words, the reservation or ticket agent, flight attendant etc., on average, now resolve issues and provide customer service to over 24% more customers than 8 years ago.
• As employees worked more for less, the average revenue generated per employee increased by an astounding 53% as it went from $209,000 per employee to over $319,000.
• While 155,000 jobs were lost and the average revenue per employee increased by over $110,000; general management wages/salaries as reported on DOT41 forms, increased by 44% as it climbed from $243 million to $350 million.
The airline industry is vital to our economy and national defense. It is not going to go away.
Discussions and questions often revolve around why is customer service and morale so bad in the airline industry. It seems like a rather easy question to answer after you understand what has actually occurred in the last few years.
Disclosure: At the time of writing, the author and his family hold stock and derivative positions in AMR.
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9/11 was not a "tragedy", like an earthquake or tornado, it was an ATTACK.
I hate to see it characterized like some damn flood.
It was an ATTACK.
On Aug 31 10:30 PM Aer_O'Head wrote:
> Best to point the finger at the real -- but seemingly forgotten --
> cause. Deregulation. Everything else pales in comparison, and can
> only be considered within the context of it.
While ticket prices may be down, the cost of flying is not down, even when measured purely monetarily. Fees upon fees upon fees price airline travel too high for many people. Fees for bags. Fees for food.
Add to that the huge personal costs these days. Arriving way early to go through a degrading removal of shoes, for example.
At such time as the industry sees itself as trying to return to being attractive to its paying customers, things will start to improve. So long as the industry sees the goal as "doing no worse than the other guy", traffic will continue to decline.
What have they done to the customers,
Take away the food, ONE airline will do it and see how people react to it, how much they can get away with, then ALL of them follow suit.
Flying Coast to Coast, for family vacation so I used to bring quite some stuff for my siblings, friends.
1st) they start out by charging for the 2nd bag, now they even charge you with the 1st bag, so basically they are just telling you to take your carry on only.
Let say a few years ago i used to pay $380 on average flying from SFO to NY
Now the same ticket might cost you $306 based on a recent flight surch i just did(9/1/09) Let's take a look at the fares
$306 fares
$20 1st BAG, $25 2nd Bag so now it's $350, plus another $45 on the way back, and you are back to $390.
Paying $390 for a RT fares with less service, back with $380, you had let say breakfast, diner, Snacks,
what you get now, Salty pretzel if lucky and $5 for a snack box filled with crap.
I would say they bring it up to themself, now I try to ship stuff to the east east as much as I can instead of dealing with the headache, or I just save the money and buy the gifts when i reach home.
They brought it upon themselves by trying to gauge the consumers one after another, and now with the past downturns, the big businesses are not spending as much on air fares, we used to flight business class, now everybody fly coach, The airline should go back to basics, treat the customer right and they'll come back, don't see them as your next $$$ Bill that will increase your Gross margin.
In your amazing analysis of cost comparisons between "a few years ago" and 2009, you fail to mention the fact that fuel costs per avg passenger have increased 403%, inflation costs have increased 25%, and taxes and security fees that the airlines have to include in ticket prices (but do not receive) have increased dramatically. Yet you still complain the overall cost to "you" is about the same. Do you still pay the same as you did for groceries, gas, or health care as you did "a few years ago"? On top of this you complain the meal quality and customer service has gone down, I wonder why? Could it be due to the fact that airlines have been forced to reduce employee count by 36% just so they can lose less money then they would have otherwise? I am sure you will counter with “Southwest made money, why can’t the others”, but for the past few years they have lost money transporting passengers and when they have reported a profit it is only due to their brilliant fuel hedges and cash reserves. I feel most airline execs are grossly overpaid, but SWA execs deserver every penny they made.
If you are not willing to pay more money to compensate for all the airline's increased expenses, who do you think should? Maybe the Obama Administration should start a 'cash for clunkers' subsidy so the airlines can afford to trade in their less fuel-efficient airplanes for new ones. Or maybe they can provide 'airline food stamps' so you can afford to pay for a $5 meal on your flight. Maybe they should do this for all tickets we purchase, no matter what the venue. Wouldn't it be great if that $100+ ticket to sporting or concert events included "free" concession food and beverages? On top of that, if the event cancels or is late we should be entitled to free hotels and more food, isn't that the American way? Who would ever settle for their money back, that's crazy!
If this still doesn't work for you, we could do away with all modern transportation that you're unwilling to pay for and go back to horse and wagon, when it only took months to get across the United States. Think of the family bonding time, increased leg room, friendly Indians with casinos, and no TSA. I heard that worked out well for the Donner Party.
Here's a tip: If you want to take extra bags (more weight = heavier airplane = more fuel usage), eat a decent meal (because you didn't have the foresight pack a lunch), and be treated like you're not in steerage on a $99 ticket (Wal Mart prices = Wal Mart service), and sit comfortably (because overweight behind doesn't fit) ...BUY A 1st CLASS TICKET!
I'm personally tried of giving up pay and quality of life so you can afford the luxury of flying. By the way, in case taking off your shoes for security is "degrading", Greyhound will be happy to accommodate you.
Who's coming into aviation today? Starting salaries at the regionals are $16,000/yr after taxes. Military pilots aren't coming over either. They make much better salaries and have much better job security in their respective services. The major airlines are shrinking dramatically as well, so there is no movement to coveted Captain's paychecks in their ranks.
Bottom line, expect more Buffalo crashes in the future. $99 coast-to-coast...What a joke. It doesn't even pay the fuel bill. Keep demanding those prices and showing loyalty to the lowest bidder and you'll get what you pay for. Just don't cry to the industry when you go down in a ball of flames. That 250 hour newhire with your life in their hands won't have the tools and hard earned experience to save your cheap behind when it counts most.
P.S. Regional crews as a whole are very experienced these days - many of the crews have been in their respective seats for a long time and do a great job - many have additional income from other jobs or military retirements. But once these folks are gone the game is over. There's no one in the pipeline behiind them. The job just doesn't pay enough anymore.
I think this says it all
I have 40 years experience in the industry as a mechanic, supervisor and senior management and have watched the industry go from the piston driven to the current jet age. When we put the Avgas trucks to bed and traded all the frills and excitement of taking a trip on an aircraft to just getting from point A to point B and back as fast as possible we were in a death spiral.
Today with the need for speed and the rush to get the traveling done as fast as possible we get what we pay for. A seat on an aircraft is a commodity, you pay for transportation from point A to point B, if you need to take bags break out the credit card and buy space for the bags, if you want food get it before you get on, the frills are all gone.
The only way that we are going to get out of this crunch is to get ahead of the cost, and the cost of fuel is the first hurdle that must be cleared. There is a point in the real near future that the carriers are going to have to come together as a group and and decide exactly how many aircraft they are going to operate, how many gates they can support and a plan to replace fuel guzzling aircraft with more fuel friendly models.
As for today, they need to jack the price of tickets up by 15% so they don't have to turn into whores groveling at King Obamas trough of money for a bail out hand out.
In 1998 when I completed my GRP I forecast the demise of the industry due to the cost of quality and services in the industry and the airlines I predicted to be bankrupt are long gone. Not sure I would want to do a study on the legacy carriers but I do believe we will have less choices to buy a ticket from in the next 18 months.