Have US airlines lost the right stuff?

1105
May 19, 2015

The current heated debate between key US airlines and Middle East carriers over alleged subsidies is more about the fact that most US airlines are struggling to compete in the international arena despite the fact their highly protected home market is the world’s richest.

United Airlines, American Airlines and Delta Airlines have asserted that Middle East airlines Qatar, Etihad and Emirates have received subsidies – mostly in the form of interest free loans – of $40 billion over the last ten years and are urging the Obama Government to curtail the open skies agreements with Qatar and the UAE.
However the Middle-East airline have hit back saying the US airlines have received even greater subsidies and debt relief.
The reality is there is no such thing as a level playing field in aviation – never has been – never will be.
For instance the US airlines have an enormous advantage of a massive and wealthy home market locked in with frequent flyer programs, whereas the Middle East countries of Qatar and the UAE have tiny populations.
And countries across the globe have helped their airlines since aviation first started.
A confidential Congressional Research Service report RL30050 obtained through WikiaLeaks Document Release shows that the US government has supported the US airline industry to the tune of $155 billion in the 80 years from 1918 to 1998. And so it should have as most of the support was for aviation infrastructure and to establish routes.
And after the tragedy of 911 the US Government poured tens of billions more directly into airlines as many faced collapse.
Governments across the globe either directly or indirectly support aviation.
For instance in the early 1990s various European government tipped $3.7 billion into Air France, $2.3 billion to Olympic Airways and $1.1 billion to TAP Air Portugal.
And the Italian government has poured billions into its national airline.
In China the government stands behind its airlines, funding where necessary.
Thailand and Malaysia have also bailed their airlines out at various times.

Pirates or pioneers?

For decades the fortunes of countries have been linked directly to trade and the control of the trade routes with prosperity not always going to the strongest but more often to the most flexible to change.
In the 21st century with globalization – and thus open skies – in full swing, Middle East airlines, are not only financially strong but flexible because of their geographic location.
(And we must remember it was US airlines that pushed Open Skies to give their airlines access to new markets.)
While the boardrooms of United, American and Delta would like to compare the Gulf State airlines of today with the 16th century pirates – who gave the region its then name the Pirate Coast – who attacked ships plying the Britain-India trade routes – the reality is that they have replaced US airlines as the pioneers of the industry.
The last major innovation from US airlines was American’s introduction of the frequent flyer program in the early 1980s and the last cabin innovation was Pan American’s tourist (economy) class in 1952 – over 63 years ago!

The latest spate is a twist on events of the 1950s and 60s that saw European airlines trying to stop innovations from US airlines, such as economy class and giving music headsets free to passengers.
US airline Trans World Airlines was threatened with being banned from Europe unless it charged $2 a passenger for plastic headsets.
European airlines through the International Air Transport Association even regulated how many vegetables could be served to an economy passengers – no more than three!
In the late 60s and 70s it was then Malaysian Singapore Airlines and Cathay Pacific that snub their noses at convention daring to give economy passengers free drinks.
Those airlines emphasis on innovation and putting the passenger first dramatically change travel habits.
Emirates has won more awards since its formation that any other airline and its list of industry leading innovations reads like a chronology of passenger firsts – seat back videos for all passengers, fax machines, email and AVOD.
Interestingly, while Emirates, Etihad and Qatar appear to be the focus of envy and criticism, there are many other significant shifts of influence and unprecedented buying sprees around the globe.
In SE-Asia, low cost king Kuala Lumpur based AirAsia Group is set to become one of the world’s largest A320 operator, while Indonesia’s Lion Air has over 500 A320s and 737s on order.
Singapore Airlines with a home market of just 4.55 million Singaporeans has a massive fleet of 101 all wide-body aircraft while Cathay Pacific serving 6.9 million has a fleet size of 146 wide-body aircraft.
One of the major criticism by US airlines is that Middle East airlines have massive fleets of wide body aircraft with hundreds more on order. Without those massive orders aircraft like the A380 super jumbo and the new 777X would not exists and aviation and thus the travelling public would be significant poorer.

Deregulation devastates US airlines!

Whereas once US airlines launched all new major aircraft types that has shifted dramatically due to the lack of profitability of US airlines because of deregulation.
When the US de-regulated its airline system on the 24th of October 1978 it started a chain of events that has devastated the US airline system.
At the time, US carriers generally were regarded as world leaders in terms of service, networks, safety and efficiency, and had been profitable in 17 of the previous 20 years.


Every US airline (eight) in this production line picture of the Douglas DC-9 in 1967 has gone bankrupt or was force to merge since de-regulation in 1979.

However, a number of prominent economists, politicians and analysts, foremost among them Alfred Kahn, the chairman of the Civil Aeronautics Board, believed that economic regulation was generally bad for the American consumer.
It blocked new competitors from entering the market and stymied applications for new routes from existing carriers.
De-regulation allowed any airline to fly anywhere it wanted and to “cherry pick” the best routes.
Before its enactment, deregulation was opposed by nearly every major US airline. Once it was enacted, however, the airlines briefly welcomed their new freedoms. But initial optimism soon gave way to serious misgivings.
By the 1990s well-credentialed commentators were citing serious effects, including the loss of some of aviation’s greatest companies, the bankruptcies of all but one of the major pre-deregulation carriers, relentless downward pressure on airline wages, and a widespread view that customer service had declined.
In 2008 Robert Crandall, former president of American Airlines, addressed the Wings Club in New York and laid out his blueprint for stabilisation of the US airline system, which—not surprisingly—involved a reversal of deregulation—or rather a ‘dollop’ of reregulation.
“I feel little need to argue that deregulation has worked poorly in the airline industry,” he told members. “Three decades of deregulation have demonstrated that airlines have special characteristics incompatible with a completely unregulated environment. To put things bluntly, experience has established that market forces alone cannot and will not produce a satisfactory airline industry, which clearly needs some help to solve its pricing, cost and operating problems.”
For Crandall, none of these failures came as a surprise. As far back as 1977 he had berated a Senate lawyer: “You … academic eggheads. You can’t deregulate this industry. You’re going to wreck it. You don’t know a goddamn thing.”
And he was right. They did not know a goddam thing, as evidenced by comments made by the deregulator Kahn testifying before Congress a year later.
“The assumption that you are going to get really intense, severe, cutthroat competition just seems to be unrealistic when you are talking about a small number of carriers who meet in one market after another,” Kahn said. “I just do not see any reason to believe that the airline industry cannot prosper and attract capital.”
Kahn’s testimony was way off the mark. In fact, there has been nothing but intense, severe and cutthroat competition since deregulation and the airline system in the US is now arguably the worst in the industrialised world.
One of the greatest benefits claimed for deregulation is that fares have fallen since 1979 and passenger numbers have climbed. In fact, fares have fallen across the globe and have done so every year since 1929 when the first reliable records were kept. And passenger numbers have always grown.
The reality in the US is that since deregulation in 1979, air fare decreases have actually slowed, passenger growth has also slowed while airline margins have been slashed.
In 1988 Kahn, the architect of de-regulation, admitted that “there is no denying that the profit record of the industry since 1978 has been dismal, that deregulation bears substantial responsibility, and that the proponents … did not anticipate such financial distress—either so intense or so long-continued”.
While the US airline industry has not been re-regulated there have been three major mergers that have the big six to the very big three (merger partner in parenthesis) – Delta (Northwest), United (Continental) and American (US Air).
And all airline have been in Chapter 11 bankruptcy protection that has enabled them to shed billions of debt and slash salaries.
Now they are making super profits.

US subsidies!

That reorganisation has been now been detailed by research commissioned by Etihad Airways. The report has quantified a range of government and court-sanctioned benefits and concessions received by Delta, United and American and other airlines with which they have merged.
These US airlines have received benefits valued at US$71.48 billion, more than US$70 billion of which has been since 2000, enabling the nation’s three largest carriers to transition from the verge of bankruptcy to today’s industry leaders, each achieving multi-billion dollar profits.
Last year, the three big US carriers generated collective net profits of US$8.97 billion, equivalent to 45 per cent of the total US$19.9 billion profits achieved in 2014 by the global airline industry.
The trend says the report has continued into 2015, with all three major US airlines announcing strong net profits for the first quarter.
The international consultancy The Risk Advisory Group, which conducted the research for Etihad Airways, identified that the majority of benefits which accrued to Delta, United and American came from restructuring under Chapter 11 of the US Federal Bankruptcy Code, yielding them at least US$35.46 billion, and additional pension fund bailouts totalling US$29.4 billion from the US Government’s Pension Benefit Guaranty Corporation.
Etihad Airways and Emirates and Qatar have consistently denied claims by US airlines that they have received subsidies, and have stated publicly that they have received equity and shareholder loans from their sole government shareholder.
Releasing the findings by The Risk Advisory Group, the General Counsel and Company Secretary of Etihad Airways, Jim Callaghan, said: “We do not question the legitimacy of benefits provided to US carriers by the US government and the bankruptcy courts.
“We simply wish to highlight the fact that US carriers have been benefitting and continue to benefit from a highly favourable legal regime, such as bankruptcy protection and pension guarantees, exemptions from certain taxes, and various other benefits. These benefits, which are generally only available to US carriers, have created a highly distorted market in which carriers such as Etihad Airways have to compete.”
Mr Callaghan said the figures produced by The Risk Advisory Group were conservative, quantifiable and credible, and obtained from public records and statements.
Mr Callaghan referred to a 2011 interview, published by America’s National Public Radio, in which a former Vice President of Continental Airlines, Pete Garcia, was quoted as saying: “Bankruptcy, for the airline industry in particular, is just a way to refinance the business. It is a financial move to keep you in business and give you time to renegotiate with your lenders.”
The Risk Advisory Group identified the largest beneficiaries of Chapter 11 restructuring and bailouts from the Pension Benefit Guaranty Corporation as:

1. United Airlines, with combined benefits estimated at US$44.4 billion;
2. Delta Air Lines with combined benefits estimated at US$15.02 billion; and
3. American Airlines with combined benefits estimated at US$12.05 billion.

Of these figures:

1. United achieved one-time bankruptcy debt relief totalling US$26 billion, and pension termination benefits totalling US$16.8 billion;
2. Delta Air Lines achieved bankruptcy debt relief totalling US$7.9 billion, and pension termination benefits totalling US$4.55 billion; and
3. American Airlines achieved bankruptcy debt relief totalling US$1.56 billion, and pension termination benefits of US$8.08 billion.

These figures include restructuring and bailout benefits achieved by other US airlines, since absorbed by Delta, United and American.
Mr Callaghan said the current claims by United Airlines, Delta Air Lines and American Airlines that they were being harmed by Etihad Airways were baseless, and an attempt to obstruct higher-quality competition.
“There is no evidence whatsoever of any harm caused by Etihad Airways to any of the three big US airlines,” Mr Callaghan said.
“The US Open Skies policy has delivered more choice and better service for millions of consumers, more airline access to and from America, and record profits for the biggest airlines in the US. It is time to refocus on the real issue here – that the Open Skies policy is delivering the benefits it was designed to deliver, and that everyone is a winner.”
The lack of profitability – until recently – has left US airlines well behind the rest of the world in their ability to compete with new aircraft types and better in-flight product.
Were once US airline launched all new aircraft – today they are late adopters because of a scarcity of profits.


While the US accounts for 25 per cent of the world’s air traffic its airlines only make up a paltry 10 per cent of the orders for the revolutionary 300-seat A350 and Boeing 787 – planes that burn up to 20 percent less fuel than the aircraft they replace.


Compare this to 1980 when the 250-seat Boeing 767 rolled out, when US airlines accounted for almost 75 per cent of the order book.

The fleet age of US airlines is typically double that of the world average.
US airline face stiff competition from airlines across the globe such as Etihad, Emirates, Air New Zealand, Singapore Airlines and Cathay Pacific.
These airlines are innovative, vibrant and understand the customer and aviation – and thus the consumer – is far better off for their success.
And as Air New Zealand has proven you don’t have to be a global giant to lead the pack while making record profits.

The airline has won Airline of the Year awards in four of the last five years and created its own award winning seats. pIctured here is the revolutionary ‘sky couch’ for Economy Class.

US airlines need to rediscover the magic that made them great rather than point the finger at rest of the world.