The Hole Truth

By Capt. Duane Woerth, ALPA President
Air Line Pilot, March 2005, p.5

When you find yourself in a hole, the first rule is to "stop digging." You might not be able to climb out right away, but you won't make the hole deeper than it already is.

In March 2005, we are more than 3 years removed from the 9/11 tragedy, when passenger airline demand collapsed in the face of security concerns. For well over a year now, however, demand for air travel has reached record levels. Yet passenger airlines continue to squander the concessions that their employees have made and seem dedicated to digging even deeper into the hole, using ever larger shovels. 

In 2004, airlines charged $15 billion less to carry more people than they did in 2000. That's why I think that every airline employee should put on his or her car a bumper sticker that reads, "It's the Revenue, Stupid!" 

For several years now, network carriers have blamed low-cost carriers as the sole villains behind airline pricing problems. With a 30 percent market share, LCCs certainly have an effect on the market. However, LCCs are far from the whole story behind the airline revenue "hole story." The facts are increasingly clear that much of the network carriers' revenue problems stem from their own shoveling: 

Shovel 1--Adding too much capacity and slashing prices in small and medium markets where they compete only with each other, not LCCs. 

Shovel 2--Giving control of their distribution systems to Internet wholesalers, such as Price Line and Hot Tickets. 

Shovel 3--Refusing to pass fuel costs on to consumers. 

The most difficult to comprehend is Shovel 3, the failure to pass on fuel costs. Every other industry in the United States, and around the world, passes on the costs of raw materials to consumers--all except the airline industry. At least three of the major U.S. network carriers said, in their year-end reports for 2004, that they would have been profitable had fuel prices remained at 2003 levels. Hello! Fuel prices went up--pass it on. Southwest hedged 85 percent of its fuel at about $26 a barrel, or it, too, would have lost money. 

Shovel 2 also stands in stark contrast to the Southwest management approach. Southwest controls its distribution system and the price of its tickets-all of its tickets. Southwest does not use Internet wholesalers. You want to buy a ticket on Southwest, call Southwest reservations or use its website. Any questions? Dumping massive quantities of tickets on Internet wholesalers is as ruinous to revenue as all-out fare wars. 

Lastly, adding too much capacity in small and medium markets (Shovel 1) cannot be laid at the feet of the LCCs. Some network carriers relentlessly added capacity in small and medium cities not served by LCCs, trying to "poach" traffic from a network competitor's hub. The competitor returned the favor, and they were off to the races in a scramble to the bottom in terms of revenue per seat mile. 

The airlines' excuse of excess capacity is wearing a bit thin as it becomes increasingly obvious that this problem is largely a self-inflicted wound. Furthermore, two important airline constituencies--Wall Street and Capitol Hill--have recently weighed in with their frustrations with airline managements. 

After dramatic labor-cost cutting throughout our industry, most airline analysts were moving more airline stocks into their "buy" recommendation status. However, because of the persistent and seemingly endless stream of revenue-killing strategies by multiple carriers, Wall Street has once again downgraded most airline stocks to "sell" or, at best, "hold." 

Even our closest friends on Capitol Hill, all of whom recognize that the airline industry needs and deserves tax relief, are sincerely concerned that if they lower fees and taxes, the airlines will simply lower prices, and we will have achieved nothing. They agree that many of these managements have wasted employee concessions, and they are afraid to waste government tax concessions in the same way. 

With managements' track records, that argument is hard to refute. The bottom line is this: Airline pilots have sacrificed greatly to get costs under control. Every management team needs to be put on notice that its abysmal revenue performance is unacceptable. The hole is getting deeper, and pilots' backs are straining.