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US Carriers Versus Asian, European and Mid East

Former American Airlines executive tells US carriers: stop making excuses

Nelson Alcantara  Nov 21, 2008

No matter what I suggest, the outcome can’t be worse than what has already happened, Robert Crandall said within the first minute of his keynote address at the recently-concluded Airline Strategy Summit in London. Organized by Airline Weekly, Crandall was invited to deliver a keynote speech on the subject, “Suggestions for a Troubled US Airline Industry.”

Crandall’s insightful keynote address touched on the day’s current top issues, including the unknown impact of the growing US debt, a worldwide recession, energy shortages, global warming, a funding crisis for both Medicare and Social Security, and severe geopolitical tensions – all of which, according to him, are “bound to bring even broader changes to the world order.”

He said: “At this point, of course, none of us know how the world’s effort to rescue itself from financial collapse will come out. However, it is now very clear that things are going to be very bad for a long time. We also know that the crisis and its aftermath will have a profound impact on every major industry, including the airlines.”

But, as he was not invited to speak on these aforementioned issues, he briefly discussed each as they relate to the current conditions beleaguering the airline industry in the US. According to the former American Airlines CEO, the airlines, and particularly the US airlines, are about “as poorly positioned for major upheaval as any industry could be.” However, he acknowledged that since the industry had a mini crisis of its own last spring, “it may be that the impact of the financial crisis will be less profound for it than for many others.”

Crandall said: “Surprisingly, given the cataclysmic financial events of recent weeks and the worldwide decline in demand for virtually all goods and services, the US airline industry may actually be taking a turn for the better. The extreme fuel price spike of last spring seems to have frightened the industry into implementing the sharp capacity reductions that normal circumstances have prevented for many years. More or less simultaneously, the industry has moved aggressively towards what has come to be called ‘a la carte pricing,’ which is shorthand for the implementation of lots of fees for services that were once regarded as part of the base price.”

According to him, the capacity reduction has reduced total costs and stabilized load factors, thus making it possible for the industry to maintain ticket prices. “At the same time, fee revenues have become substantial. The combination – offset to some degree by diminished demand attributable to financial uncertainty – may well produce numbers lots better that what was expected only a few months ago.”

He also noted that the recent merger of Northwest and Delta should, over time, have some favorable impact on the destructive competition attributable to having too many hubs. “Can it be that the submarine has leveled off – or might even be climbing towards sustained profitability? Unfortunately, I think not – although I am encouraged by the industry’s temporarily-improved circumstances and hopeful that the turmoil of the times will encourage business, labor, and political leaders to think more carefully about the industry’s future than they have in the past.”

To fix the ongoing troubles of the US industry, Crandall said several new initiatives are required. “First and foremost, we need a national transportation plan that recognizes tomorrow’s energy and emissions realities, that incorporates higher quality of service expectations, that establishes good jobs and successful companies as primary objectives, and which recognizes that lower ticket prices may not be the best metric by which to measure the success or failure of transportation policy.”

He added: “Today, the US has neither a national transportation plan nor an integrated vision around which a plan could be formulated. I think everyone who thinks at all about macro economic and political issues must realize that liquid carbon fuels will be in shorter and shorter supply as the years pass, and that as the world’s economies recover from their recent problems, both demand and prices will inevitably increase sharply. And I don’t know anyone who thinks that the 4 percent of the world’s people, who live in the US, can continue to consume 25 percent of the world petroleum.”

For all these reasons, according to the former American Airlines executive, energy policy will inevitably become a major preoccupation of the US government, and since transportation is a big user of energy, making our transport system more efficient should be a major part of our energy planning. “Doing so will involve adopting lots of policies which differ sharply from past and present practice. We need to do far more to raise the efficiency of our automobile fleet, even if mom and the kids have to squeeze into a Prius instead of an SUV [Sport Utility Vehicle]. We need to create bus and streetcar systems in our cities, even if our commutes get a bit longer. We need to build intercity rail systems where there is sufficient density to sustain them, and to encourage their use, ought to think about prohibiting airlines from serving short haul routes with good rail alternatives.”

Too many hubs
According to Crandall, the first problem for US carriers is that there are too many hubs. He said: “Virtually all industry observers will acknowledge… that the US has too many hubs. Hubs work and are the only method yet developed to efficiently connect smaller cities to the network. A surplus of hubs, on the other hand, has an adverse impact on system efficiency. Their existence encourages destructive competition, which in turn undermines the industry’s ability to price its product above cost, causes carriers to use small, inefficient aircraft, and wastes large amounts of fuel.”

In his view, a national transportation plan needs to provide for optimizing the number of hubs. “Given the political difficulty of regulating which cities should and should not function as hubs, I’d guess – particularly in light of the approval recently granted for the merger of Delta and Northwest – that the method of choice will be more relaxed standards for consolidation of the industry into fewer players. Assuming that is the case, and further assuming some additional consolidation occurs, it seems probable that the industry will evolve towards a leaner, more efficient structure by allowing secondary hubs, like old soldiers, to just fade away.
Finally, the nation’s political leaders, together with industry leaders from both sides of the bargaining table, should make a serious effort to establish and sustain better labor relations.”

Air Traffic Control needs fixing
The retired former American Airlines CEO also recommends that US airlines need to find ways to eliminate the delays and congestion. “The most important thing we can do is build and implement, without further delay, a new air traffic control (ATC) system. Nearly one quarter of all US flights were delayed during 2007. The average delay was 55 minutes and when you add it all up, passengers wasted 112 million hours or 12,785 years of their time waiting for airlines to get their act together! And those numbers do not include the delay already baked into airline schedules. On average, US airline flights were scheduled to take 15 minutes longer in 2006 than in 1997. According to the schedules, it now takes 25 minutes longer to fly from New York to Los Angeles than it did 10 years ago.”

To Crandall, the impact of this is staggering. “Delays cost the airlines more than US$8 billion in 2007, mostly because they burned more fuel and paid their crews for more time than would be true were they able to schedule more efficiently. That’s more money wasted than the industry has ever earned in a year.”

In this regard, the former American Airlines CEO bluntly said: “It’s time for the US to stop making excuses and get on with the job. Fixing the ATC system would generate a very high ROI while simultaneously satisfying many other national goals. Cutting delays will boost productivity, reduce emissions, encourage more travel, reduce the amount of oil the US needs to import, and dramatically improve airline financial performance.”

But even that is does not instantaneously bring resolution to the problem. He said: “Even if we decide to go all out to fix the ATC, it will be a few years before it has any real impact. In the meantime, there are things we can do to improve results immediately. One is to use the power of government to require energy-efficient use of our available resources. It makes no sense, in my view, to permit airlines to schedule more flights into a given airport than the airspace, terminals, and runways can readily accommodate. Eliminating both inbound delays and runway conga lines would save lots of fuel, reduce airline costs, and spare customers the irritation and delays about which they justifiably and vociferously complain.”

Regulate the Federal Aviation Administration
Crandall also recommended that the US airline industry should also muster the political will to separate the operational and regulatory roles of the Federal Aviation Administration. “The US is one of very few advanced countries that have not separated the air traffic control function – in today’s world, the FAA effectively regulates itself. The experience of other countries has been that third-party providers have been more efficient than governmental entities and have the additional advantage of being able to sell long-term bonds to meet their capital needs. It’s time we fixed this organizational problem, and thus put our new ATC system in the most capable possible hands.”

Better technology
In Crandall’s view, the US airline industry can also encourage travelers to take to the sky again by pressing the Transportation Security Administration (TSA) to get on with installing the technology needed to make security inspections quicker and easier. “In a world of technological marvels, I simply cannot see why everyone in the world must remove their shoes, pack tiny tubes of toothpaste in plastic bags, and expose their computers to satisfy security requirements. When we fix the system so that travelers don’t have to arrive half a day before flight time to be sure of getting aboard, lots of people may once again regard travel as more of a joy than a burden. While those steps will all help, the big issues are the industry’s operational structure and its labor relations.”

Labor versus management
Finally, the dissonance and sometimes adversarial relationship between labor and management is another problem. “I have been in and around the airline business for nearly 40 years, and I am continually astonished by the level of animosity that exists between labor and management at virtually every airline. Almost every day, in some newspaper somewhere, there is news of some airline union in serious conflict with the airline’s management.

“While labor-management conflict is common in many industries, I think it is unnaturally intense and widespread in the airline business. For one reason or another, airline managements seem unable to earn the continuing trust and cooperation of the labor unions that represent the company’s employees. And union leaders, for whatever reason, seem to believe they are duty bound to criticize both management’s character and its plans.

“In my judgment, the industry cannot hope for a stable and secure future until this matter is resolved. Thus, I hope the new US administration, which has a heavy debt to labor but which also needs to do all it can to encourage a US economic recovery, will make a real effort to bring airline labor and management together.

“The people on the front line are an integral and very important part of the airline product. Reservations people, ticket agents, and fight attendants interface often and directly with the public; pilots and maintenance personnel have an enormous impact on both efficiency and timeliness, and the folks on the ramp manage the problem of getting bags and people to the right place at the right time. To make things work; to provide the first-rate service the public wants; to earn the returns investors require to assure the wages, working conditions, and satisfaction airline people want; management and labor need to learn to work together.

“In a time of real crisis, cooperation will be more important than ever before – for the industry as a whole and for every individual carrier. It’s a tough job – but it needs doing. And since a crisis is a terrible thing to waste, I hope those in a position to initiate a new effort will do so.”

During the question and answer portion that followed Crandall's speech, eTN asked the former American Airlines CEO to compare the level of customer service by US carriers to their Asian, European and Middle Eastern counterparts. He said: “Well, I think they [US carriers] are very poor… If you give, the customer will always choose the lowest price, and the customer is going to get the kind of service that is defined by the guy who operates at the lowest price. So, obviously, the European airlines and the Asian airlines have much higher levels of service, which means much less competitive markets… We have to get to the point where the level of competitive propensity is the same, and you will find that people will choose the lowest price, and then you will have to make up your mind. In fact, we see many of the Asian carriers, particularly the Asian carriers much less than the European carriers, can provide a relatively high level of service at a relatively low price… So in answer, service levels are not that competitive, but that’s because the public has said it doesn’t matter.”

Former American Airlines executive tells US carriers: stop making excuses
Photograph by Nelson Alcantara

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