US Airlines Enjoying Record Profits, but No Room for More Airlines?

The US airline industry had a great second quarter, making the third consecutive record second quarter, bringing in a massive $37 billion in gross revenue.

How much is that?  Well, by one measure, it is almost 76% up on the second quarter revenue of just ten years ago.  Ignore the sob stories the airlines pass out, along with the ‘we have no choice but to charge you ridiculous sums for everything that used to be free’ – they’re raking the cash in now.

To translate the term ‘raking in the cash’ to actual numbers, the airlines enjoyed total net revenues of $2.5 billion for the quarter, 25% up on last year’s $2.98 billion.  All airlines made a profit – even United and American.  This 6.6% net profit level is the highest profit margin since 2000.

Here are the results :

These results really do beg the question ‘So why exactly do US Airways and American need to merge to survive?’.

But that is an unfair question, because the two airlines don’t need to merge to survive.  They want to merge so as to be able to push their profit margins still higher, and to make the ‘big airline’ club even more exclusive.  When the two airlines merge, there will be three airlines, each with close to $10 billion in second quarter revenue, plus Southwest just under half their size, and then Alaska and Jet Blue, each one eighth the size of the three majors.

Apropos which, it is interesting to note that the latest entrant to the ‘almost big boy’ club – Jetblue – continues to struggle.  Not apparent in the table above are some of the underlying components of Jetblue’s result and problems.   The airline suffers the industry’s lowest profit margin, lowest unit revenues, and lowest passenger yields.  It also has the industry’s highest net debt ratio, and projects a paper-thin 1.8% profit margin for the full year.

Alaska Airlines has done a brilliant job of working with its so-called competitors, but Jetblue has been more on the outside looking in, forced to compete with rather than cooperate with the majors.  And when you appreciate that Jetblue is eight times smaller than each of the three majors, and almost 24 times smaller than the three of them if they close ranks against Jetblue, it becomes clear that the airline is very vulnerable.

So what can Jetblue do?  It is trying to go up market and get more of the ‘golden’ business type travel, at least on its trans-con routes.  Maybe that makes sense.  It seems to have an aversion to becoming another low-cost carrier – actually, these days, the new term seems to be ‘ultra low cost carrier’ – believe it or not, conventional wisdom is that by taking out the inclusions and now charging for anything and everything, the dinosaur and formerly full service airlines have become ‘low cost carriers’.

Amazingly, there is speculation that maybe there is no longer room in the US for further low-cost carriers.  Is that because the US is too small an aviation market?  Or because there are too many low-cost carriers already?  Or is there some other reason?

The Problem and Opportunity in the Industry at Present

The inability of Jetblue to do well – and this is not a new development – is puzzling, particularly in a market increasingly starved of competitively different airlines and of competition in general.

Are the dinosaurs correct and can the US only viably support three or four huge airlines, and no small ones?  And has something happened to make it impossible for other airlines to survive?

Don’t point to Southwest as an example of a successful low-cost airline, because it is not a low-cost carrier, neither in the sense of low fares (its average cents/mile revenue earned from tickets is comparable to and sometimes higher than the dinosaurs) nor in the sense of having lower than normal operating costs (its operating costs are among the highest in the industry).

Other airline startups have struggled to get much traction.  Virgin America is out there, somewhere, but hardly a major presence anywhere, notwithstanding their well-funded launch, enormously valuable brand name, and abundant hype.

Niche carriers like Allegiant and Spirit hover around the periphery of the industry, but survive mainly by keeping away from any direct fights with the dinosaurs on potentially hotly contested routes.  At a time when premium cabin coast to coast flights now cost as much as $4,000 roundtrip, the low-cost carriers anxiously avert their eyes and hurry past.

The question about the potential viability of another low-cost carrier is being asked at present due to the probable sale of Frontier to owners who formerly were invested in Spirit.

This article asks if there is room in the market for another ultra-low cost carrier, and hints that it suspects there probably is not.  The article tosses around a lot of facts and figures about Frontier’s current situation and the market as a whole, but doesn’t really focus on the main part of the challenge.

The main part of the challenge is to understand that a ‘low cost’ carrier does not in truth mean ‘an airline that it doesn’t cost much to fly on’.  It means ‘an airline with low underlying operating costs’, and in that respect, the dinosaurs truly have transformed themselves and significantly lowered their operating costs to a point where there’s precious little difference between them and the ‘cheap to fly on’ airlines.

This makes it easier for the dinosaurs to match fares with ‘cheap to fly on’ airlines if they feel the need to do so, and, by the same mechanism, makes it hard for ‘cheap to fly on’ carriers to profitably offer lower priced fares to either encourage people to switch from other airlines to the new airline, or to encourage more people to take to the skies due to the demand-stimulating effect of lower airfares.

Let’s answer the question ourselves, too.  Yes, of course there is plenty of room for another airline, whether it is an ultra low cost carrier or not.  We see two opportunities as being wide open.

The first opportunity is for a ‘full service’ airline that actually does provide good service.  Whenever I talk to readers about their air experiences, the thing that most people use to describe and distinguish one airline from another is the abstract notion of good/bad service.  Although we seem unwilling to pay more for good service, we appreciate it when we experience it, and miss it when we don’t.

The amazing thing about this – and the underlying opportunity –  is that providing friendly good service is close to free to the airline doing so, while the goodwill and loyalty it generates is extremely valuable.

An airline that didn’t just pay lipservice to good customer service, but which actually provided it, has a wide open field at present.  Never before has there been such a yawning gap between the pretended provision of good service and the ugly experiences we must suffer.

The second opportunity is for a Ryanair/Easyjet (or Spirit/Allegiant) type airline to aggressively start selling $1 fares, coupled with an outrageous litany of extra charges and fees for everything (yes, even including carry-on bags, drinks of water, and visits to the toilet).  Be shamelessly outrageous, challenge passengers to try to avoid all the exploitive fees, and go gangbusters with in-your-face promotion.  In other words, clone Ryanair.

The muted semi-apologetic efforts of Spirit and Allegiant have never broken into the mainstream of airline business, but an outspoken high visibility large footprint airline would do so.

The thing about Ryanair is that while everyone ostensibly hates them, almost everyone flies them, and the airline is wonderfully profitable.  It is the airline everyone loves to hate, and simultaneously, no matter how hard it tries, it is also dangerously close to the airline that people love.

So, is there room for another US carrier?  Yes, but only if it doesn’t try to clone the business model of the three major dinosaurs.

It needs to ‘dare to be different’.  Be over-the-top-good, or unapologetically rapacious.  An airline that doesn’t diffidently go for only half measures, an airline that makes a conspicuous virtue out of either being the Nordstroms or the Walmart of the air, would succeed the same way the two retailers have on the ground.  (Apologies to Walmart, unlike Ryanair, Walmart provides reasonably good service.)

We need a charismatic character to lead the airline.  The UK has both Sir Richard Branson and Michael O’Leary.  Alas, we currently have no-one.

So, yes, there is a huge opportunity for another airline.