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AR October 20th, 2005 09:49 AM

Airline woes
About a week ago, somebody commented here that they didn't get fed on a recent flight from Hawaii, and that movie headsets cost them $2.

Today, in announcing a $153 million dollar loss for the third quarter for AMR (American and American Eagle), CEO Gerard Arpey made a few interesting observations.

1. The loss is in spite of significant year-over-year increases in every metric that is traditionally used to measure success: passengers carried, on time performance, load factor, the works.

2. The loss is due almost entirely to skyrocketing fuel prices. And he makes this point: in order to compensate for fuel price increases, ticket prices would have had to go up an average of $75 each over the last two years. But market forces have only allowed them to rise an average of $15.

Now, of course it's those market forces (in other words, newer, discount carriers) that were basically allowed to take hold because of terrible management at the old-line carriers during the "good" years. So in many ways, the inability to raise fares is their own fault.

But the fact remains that, as I've said before, air fares today are a ridiculous bargain by any reasonable standard. It's interesting that American and Continental are the only two "legacy" carriers that are still flying and that are not in bankruptcy. It's tough to compete against both the discount airlines and the airlines that have gained significant strategic advantages by going into bankruptcy. I actually admire those who work hard at competing without using the bankruptcy laws for leverage in blowing off their debts and abrogating their contracts.

So, I would respectfully suggest that the next time you're flying to your cruise and you don't get a meal, just be glad that the fares are not so high that they prevent you from taking that cruise.

And hope they stay that way, because the chances are that they'll eventually rise across the board pretty significantly.

Kuki October 20th, 2005 10:12 AM

In the news here yesterday, they say that the Canadian and U.S. Governments are in talks to set up an "open skies" policy.... allowing each countries carries to fly domestic routes within each others borders, as well as easier and more frequent (presumably) cross border routing.

I'm not sure how that will eventually affect the financial well being of the airlines in the long run. Airfares in Canada are significantly higher in Canada, and choices of airlines here more limited.. and those that do exist, even with higher prices, are not all that financially healthy.

One thing I heard, that I found interesting, is that Air Canada's frequent flyer program, was one of the companies more profitable divisions.
Alliances with credit card companies which earn frequent flyer miles seem to more popular up here than in the U.S., especially with consumers.

If this program is so popular, and profitable for the airlines, I presume the credit card companies are paying a pretty fair dollar value, when consumers redeem their "points" for flights.

Cruise Cynic October 21st, 2005 08:50 AM

I have never been able to understand why the so-called "legacy" carrier has not been able to adapt to the market. They have had a good 10 years to do so. 9-11 was just a catalyst.

Rather than make the necessary changes, the corporate philosophy is to spend millions in re-branding, often with the exact same planes (each re-painted at substantial cost). Just changing operating procedure costs way less, and you don't have to have two booking systems, two fleets, two ticket counters and two administrations.

There is precious little difference between the product offered by the major airlines when compared to discount operators (from a client's viewpoint) so I must make the assumption that the problem is with structure and attitude. So I repeat, they have had a good 10 years (and maybe 3 or 4 collective bargaining sessions with their unions) now to implement internal change.

They need to do more than just stop serving crappy but free meals.

AR October 21st, 2005 10:13 AM


Those are good points. Here are what I believe are the answers:

1. As I said in the original post, the legacy carriers did an absolutely terrible job of managing their companies in the "good" years before the tech crash and 9/11. They ran outfits that were full of waste, they signed absolutely ridiculous labor agreements, many of which are either still in force (at the non-bankrupt companies) or have been reduced only somewhat as a result of bankruptcy filings. Pension plans? Don't even go there. But all this bad management was essentially masked by a period when the economy was robust, tech stocks were making everybody rich, and everybody was in the air.

2. Meanwhile, Southwest and its clones were running a very different business model, with good management, reasonably good labor relations, a "keep it simple, stupid" business plan, and a somewhat different target market than the legacy boys.

3. When 9/11 hit, the bottom fell out of the business, as everybody knows. But the legacy airlines got hit hardest because their expenses were greater than the discounts, and they didn't have any cash. Only the fittest survived. TWA got eaten by American, and now USAir has been eaten by America West. United has been the Cal Ripken of bankruptcies, and Delta and Northwest have recently succumbed. The better managed legacies (and "better" is definitely a relative term here), went on tremendous cost cutting programs to bring their companies more in line with the "new" business model that had succeeded so well for Southwest and its clones.

4. And then the fuel thing happened. Really cruel, because the surviving legacies had just started getting it back together. But because the old-line boys still didn't have any cash to speak of, they came out on the bottom again. That's because Southwest and some other discount carriers saw the fuel thing coming (like everybody else), but they had the cash to let them arbitrage their fuel purchases out for a number of years. In other words, if you've got cash money you can pre-purchase the fuel and lock in it's price. And that's what they did. They're paying three-year-old prices for fuel, while the legacies pay today's prices because they didn't have the cash to do the deals. I understand that Southwest's deal is so robust that it extends through 2007 or 2008.

5. The surviving legacies have altered their business models to the point that, absent the fuel issues, they would be back to profitability now. The discount boys are still profitable because they're getting cheap gas. And, by the way, on a percentage basis, the price increase for Jet A is considerably more than the increase in unleaded at the local gas station. Something to do with refinery capacity, as I understand it.

6. Because the discounts are still making money and charging low fares, the legacies can't raise their fares to meet their fuel costs, so they're stuck, despite the fact that their managers and their business models have improved. If they hadn't improved, they'd literally be gone by now. If the remaining legacies survive until the discount carriers' arbitrage deals run out, the playing field will be much more level, and it will be interesting to see what happens at that point.

So, bottom line, you're right in that the legacies were very late in understanding and adapting to the new industry model that was introduced by the likes of Southwest. They were arrogant, stupid, poorly informed and poorly run. In other words, they were typical big American companies. If they'd caught on sooner to the sea change in the air, things would be different now. At the same time, their inability to prosper despite coming to their senses, however late, has everything to do with the double whammy of 9/11 and fuel.

It's interesting, isn't it, that nobody has ever complained about not getting a meal on Southwest. It's all about what I call the implicit contract that you enter into with a discount airline. It goes something like this:

"OK, here's the deal: we give you a safe and reasonably reliable plane ride for a very fair price. In return, you don't bust our chops about the small stuff. You're just renting the seat for a couple hours, you're not marrying it. So sit down, smile, eat the peanuts and drink the Coke and we'll all get through this together. If you want music, bring your ipod. That work for you?"

And we all said, "Yup. Sure does."

The irony is that even though all lines' prices are now bunched pretty closely, we still want our meals from the legacies. It's all about conditioning and perceptions.

venice October 21st, 2005 10:50 AM

AR..excellent presentation..which legacy carrier did you work for ? The funny thing is back in the 70's the legacy carriers did not take southwest seriously and in fact made the statement that no one would fly southwest across county with stops along the way..southwest also has a different relationship with their unions, there seems to be more of a willingness that if all parties are not greedy, everyone benefits in the long run

AR October 21st, 2005 11:54 AM


Thanks for the compliment. I have never worked for any airline, legacy or otherwise. But over 40-plus years I've flown millions of miles with them, and have always been fascinated by the industry.

Plus, one of our sons is a pilot at a legacy that's headquartered in the Dallas/Ft. Worth area.

Brenda in Canada October 21st, 2005 12:20 PM

AR-Although I have not flown much, I agree with what you say- that most people are looking for a safe plane,reasonable price,no meal is really needed flight!

KimJack October 21st, 2005 12:55 PM

That was a great presentation indeed, Al. You've really got your **** together.:) And I had no doubt that you had nothing to do with any legacy airline. If you had been sitting on one of their boards, they wouldn't be in the terrible fix they're in today. Thanks for your insight into this thorny issue. When I fly domestically I always fly Southwest if they serve my destination. And I never break their chops about anything!


scubagirl30 October 21st, 2005 01:08 PM

I think anyone who flies southwest is really brave..I enjoy watching the show on a and e called airline it profiles southwest terminals at certain airports and with all of the problems people have had I would never fly that airline. I also fly a few times a year and my husband flies on average 70-90 segments a year for his job and we like flying Continetal or Northwest these are our personal preferences. Howver we did take a American flight to Hawaii which was very enjoyable!! I love flying it is one of my favorite things to do!We went a year ago to Africa many many flights and Kenya Airways, Continental , KLM very interesting airline!! We had rather limnited choices on which airlines we flew!! Anyway we will be flying Northwest 2 days after Christams to visit family in Utah looking foward to it!! I hope tha airlines make it out of theri problems for those of us who like to travel and fly!!

venice October 21st, 2005 01:33 PM

AR...I knew there was a "connection" there somewhere because you had a great deal of "insider insight"

Mike M October 21st, 2005 03:01 PM

Southwest's ability to purchase fuel future's is what is keeping the airline profitable and flying high. If they had to pay the same fuel costs as the other airlines they would be losing more money then American, Delta or United. Once their fuel price futures run out in 2007 they will either have had to restructure or they will be in serious trouble. Their employee pay structure is the highest in the industry and hopefully they will be able to retain that for their employees or they will have to take pay cuts like the other airline employees and pilots have had to do.

In regard to judging Southwest in regard to the A&E show Airline is like judging Miss American on how she looks when she wakes up in the morning. The show is looking for every negative incident or positive incident to highlight. It would be pretty boring television to sit at the gate and show the thousands of passengers per day that board the planes with no issues. You'll see the same things on all airlines.

I do enjoy seeing some of the misinformation that gate attendants do tell people when there are problems. However I have heard the same things from ground staff on all airlines. "If it's a mechanical problem we don't compensate you." "It's FAA regulation that you can't take an animal on board."

Take care,

scubagirl30 October 21st, 2005 03:11 PM

no offense meant I apologize to anyone my post offended I was just stating that I would never take southwest.
I also have heard of things in real life that have happened not just on the tv show.
I know we all respect individual opinions on these boards and again did not mean to offend .
I just thought these boards were for posting individual opinions and thoughts .
I am out sick from work today very sick I will blame to cold medicine since I took some when I posted LOL

Mike M October 21st, 2005 03:17 PM

Scubagirl don't sweat it; you were expressing your opinion and you are correct, that is what the boards are for. Please don't think that I took offense at what you said and I hope you didn't take offense at what I said. Southwest is never my first choice in flying. I am not fan of cattle call boarding. I prefer assigned seating.

I too like Northwest because it's my hometown airline. The best flights and worst flights I've ever had have been on Northwest, because it's the airline I've flown hundreds of thousands of miles on. LOL

Take care,
Mike (Who is enjoying this discussion)

scubagirl30 October 21st, 2005 03:21 PM

No thanks for caring I did not take offense I have a very thick skin and it takes a lot more to upset me this I have learned as every birthday continues to come again and again. I just am new to this board and would hate to upset someone and get kicked off I really enjoy these postings..I have learned a lot from everyone being myself a first time crusie in 29 days..still cannot fingure out the countdown closk but ooh well maybe I will before my cruise leaves next month. I also enjoy talking about other topics and have enjoyed a lot of your pstings MIKE. Thanks just wanted to make sure!!

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