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Do Airlines Have A Finite Life Span?  
User currently offlineJessman From United States of America, joined Jul 2001, 1506 posts, RR: 7
Posted (12 years 3 weeks 2 hours ago) and read 1523 times:

For the sake of argument I'm limiting this discussion to US based deregulated airlines with a decent business model. It seems that the market favors younger players in the airline business. Labor tends to be the biggest cost to an airline, and as employees gain seniority their salaries go up regaurdless of union/non-union status, so the longer an airline has been in business them more it pays its employees, all other things being equal. The next expense is the aircraft themselves. Aircraft have a finite lifespan, so every airline has to purchase aircraft from time to time, and as aircraft age maintenance costs go up, and newer designs of aircraft are almost always more efficient than the older aircraft in the same category, so the longer an airline is in business the higher its maintenance and fuel costs all other things being equal. On initial purchase of aircraft all airlines seem to be on equal footing. The final expense is technology, but all airlines neet to upgrade and develop technology about the same so I would count this as equal.

It seems that airlines with a good business model start off small; then grow fairly quickly acquiring aircraft, routes, and experience; then they level off for quite a while; then younger airlines come in with a similar or equally good business model and operate cheaper than the current airline, so the current airline shrinks, and may eventually die. Meanwhile the new airline consumes the old airline's routes and passengers and would grow until someone comes in to do it cheaper, thus starting the cycle over again.

It seems to work like about any ecosystem. The individuals are born; have an adolescent type growth; they stay stable for quite a while; then decline as other airlines actively devour their routes and passengers; then possibly fall to be divided among and absorbed into the surviving members during their growth phase.

I guess my real question, is this something that can be predicted? Over history could one assign an easily recogniziable status to an airline like "Birth" "Adolescent" "Mature" "Middle Aged" "Old" and "Dig A Hole"?
And if so, where would you place the current players in todays market?

6 replies: All unread, jump to last
 
User currently offlineJwenting From Netherlands, joined Apr 2001, 10213 posts, RR: 18
Reply 1, posted (12 years 2 weeks 6 days 20 hours ago) and read 1477 times:

Your thinking is wrong here.
If an airline has a decent business plan, they plan for all the negatives you mention so it won't hit them all at the same time.
Slow growth, staggered replacement programs, etc. so you never have a huge investment all at once but rather a steady stream of money going out that is more than offset by a steady stream coming in.

Don't grow too quickly, or your expenses in a certain period may be too high for the income over that period to cover.
Don't spend all the profit on nice new things, rather build up a respectable cash reserve that can form a buffer in rough times.

Don't replace aircraft every 5 years because a new aircraft looks cool in your livery or on TV ads. Rather keep them 20-30 years so they earn their living (maintenance cost goes up, but payments on the purchase go down so you earn back the money. Training cost also reduces as your entire staff knows the type already. Etc.).
Many airlines that fail fail because of overexpanding their network and finances, and not because of old age.



I wish I were flying
User currently offlineMUC-PIX From Germany, joined Aug 2002, 178 posts, RR: 0
Reply 2, posted (12 years 2 weeks 6 days 19 hours ago) and read 1465 times:

Hi Jwenting! I don´t think you´re right in everything you wrote. Keeping a fleet in a young age is a very important factor for good reputation. Also, by selling 10 - 15 year old aircraft a reasonable price can be reached on the world market or with the manufacturer negotiating the price of a fleet replacement. Continuing fleet replacement in my opinion ís a very important thing - if you see the economic side! For spotters of course, some remaining 727s or 732 are a fine thing, but not for the airlines. Same is valid for the airlines from the former east block - that ones being successful today are the same ones that first changed their fleets to new planes that are allowed to land everywhere, consume less fuel, pay much lower landing fees, have a better load factor because of the customers acceptance-look at LOT, CSA, Malev, Tarom - and compare to Balkan or the CIS-Countries. Most important thing may be a comfortable finance plan and system when the airline starts up - a kind of big pillow of money at the moment of starting. Without that, the company starts into a future that can not last long, it´s way to instabile. A good example is JetBlue, they started with lots of money and good, new planes. A good decision. Look at airlines like LH or other major carriers, they keep their fleet young, esceccially some european carriers. If there are finance troubles in this airlines, the reason nearly never is or was the fleet - it´s remainings from the days, where the flag carriers where state-run, problems with too much personel, too high costs of operations. LH is a good example for an airline turned into a private company very successful. But look at AF, AZ, IB? They´ve got older fleets-but more trouble. Can not only be the fleet, what do you think? May be this is more important in Europe because of the customer and the image of an airline, but I think it´s mainly the same in the US or somewhere else.

User currently offlineJhooper From United States of America, joined Dec 2001, 6204 posts, RR: 12
Reply 3, posted (12 years 2 weeks 6 days 8 hours ago) and read 1408 times:

"All good things must come to an end."


Last year 1,944 New Yorkers saw something and said something.
User currently offlineBucky707 From United States of America, joined Aug 2000, 1028 posts, RR: 3
Reply 4, posted (12 years 2 weeks 6 days 7 hours ago) and read 1386 times:

Airlines that get stuck on a certain business plan, and fail to adapt, will fail. Airlines that adapt, will survive. Simple as that. The problem is, the airline market has changed, and really, not one major airline has accepted this yet.

Never again will airlines be able to survive by charging businessmen $2000 for a roundtrip flight. Everyone looking for a low fare now. Southwest, Airtran, JetBlue, in the US, RyanAir, and Easyjet in Europe, Westjet in Canada, these are the airlines that have it figured out. The majors all make noise like they understand the changing market place, but really, they are just hoping to hold on through the tough times, then go right back to sticking it to the business traveler. This won't work. Times have changed.

Of all the majors, only Delta seems to be on the verge of total acceptance that the market has forever changed.


User currently offlineJessman From United States of America, joined Jul 2001, 1506 posts, RR: 7
Reply 5, posted (12 years 2 weeks 6 days 5 hours ago) and read 1354 times:

The market has indeed changed.
My point was; say for example two airlines have the same business model.
One airline has been around for 30 years, and has aircraft and employees that reflect that. The other just started, with new planes and new employees. Both airlines paid approximately the same ammount for their aircraft at about the same rates, give or take adjusted for inflation. The new airline pays less for maintenance of this new fleet and less for their young employees who are all starting at the bottom of the scale, so all things being equal this new airline is less expensive to run. Therefore the older airline can't really compete on price, so they will go into decline. This is to be expected.


User currently offlineB747-437B From , joined Dec 1969, posts, RR:
Reply 6, posted (12 years 2 weeks 1 day 3 hours ago) and read 1292 times:

Jessman has hit the nail absolutely on the head. His theory makes a fitting corollary to my thesis which states that "Without a complete overhaul of operating costs every decade, an airline cannot remain competitive in a deregulated environment."

Historically, this has proven to be very accurate. The first round of industry deaths was seen in the early 80s with consolidation being the fate of those unable to control operational costs, with a few shutdowns (Braniff). A decade later saw a spate of bankruptcies, some resulting in liquidation (Eastern, PanAm) and others in restructuring (Continental, TWA). This time round, the ranks are being thinned again with TWA already biting the dust, with the jury out on USAirways and United.

How do the survivors keep themselves viable? Their methodology varies. In the first round, some sought to survive by acquisition, seeking instead to increase revenue rather than cut costs. PanAm acquired National, TWA acquired Ozark, Northwest acquired Republic and Texas Air acquired pretty much everyone else. Others went the way of labor concessions, which took the form of B-scales at American, "Blue Skies" at United and the infamous Lorenzo bankruptcy at Continental. American's B-scales were the only truly long-term solution to the problem, which bought them an additional generation of savings and allowed them to consolidate their strong position. Similarly, Continental's abrogation of labor contracts achieved the same end, but killed the golden goose while doing it. In the second round, some achieved their targets by acquisition again (Delta acquiring Europe, AA acquiring LatAm), with United using ESOP as a means towards their target for that generation. Continental used bankruptcy yet again, as did TWA. Throughout this, USAir continued to acquire many small carriers and built themselves up into the major carrier than they became. Northwest played conservatively and chose to avoid major capital expenditures while increasing revenue streams through the introduction of the first comprehensive marketing alliance. Fleet renewal programs at most of the carriers also slashed direct operating costs.

In their own way, each of these carriers thus were able to overhaul operational expenditure every decade. Usually, this was done at the expense of the labor groups, but occasionally at the expense of creditors or other airlines.

As Jessman points out, with maturity comes seniority, and seniority brings with it the related pitfalls of higher labor costs and less efficient workrules. A new entrant, by definition, does not have any of this baggage. Additionally, a well-funded new entrant has the advantage of choosing the most beneficial markets for infrastructure investment and vendors for capital acquisition, benefits that existing operators utilized generations earlier and are now irrevocably tied into, despite possible changes in the operating environment. In the short term, provided sufficient capital exists, and provided the appropriate markets are targeted, it is very easy for a new entrant to be succesful, often to the detriment of the incumbent who is handicapped by pre-existing baggage outlined above. However, as new entrants themselves consolidate and become incumbents, the next generation of operational streamlining comes knocking and the cycle continues.


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