Airline bankruptcy
Do Low Cost Carriers really have a better business model
Considering what the American Airline Industry has been going through during the last five years, the Chapter 11 bankruptcy filings by Delta and Northwest Airlines some time age, has turned the entire debate about the airline industry into another direction. More and more airline experts are saying that Low Cost Carriers (LCCs) are the future of American airline bankruptcy. These fraud experts, most of whom have never worked inside the airline industry, are peddling opinions as truths.
Ever since the Chapter 11 bankruptcy filings by Delta and Northwest airlines, a virtual deluge of experts have virtually inundated the American public with views which have very little relation with the reality of the airline industry. And the biggest myth being peddled by these phony experts is that LCCs are the future of the airline industry.
Here, we will discuss the issue of big carriers vs. LCCs threadbare and will see that it is not the business model of the big legacy carriers that is flawed; actually it is the LCCs where the next shakeout is coming, sooner rather than later.
Southwest may be profitable, but is it because of a better business model
A new, and suddenly all-too-visible breed of experts have being citing the profitability of Southwest airline to support their argument that LCCs are more profitable than these sick carriers. The hard fact is that the current Southwest model is just not profitable. But why the airline is still in airline bankruptcy profit then Because it is living on very cheap fuel. Its management made a very smart bet- a hedge really- that fuel prices will go up in the future. Thanks to that management farsightedness, Southwest is today living on fuel at well below market rates. But even then, the fundamental model of Southwest, on an all-up cost basis, is losing money.
The truth about Chapter 11 filing.
Note another point here. Filing for a Chapter 11 bankruptcy doesnt automatically mean that these airlines are very sick and are desperately trying to somehow survive. Actually, by filing a Chapter 11 bankruptcy, Delta and Northwest are trying to buy time to reorganize themselves. The route system of neither of these two is sick. In fact, if you look closely, you will also conclude that Northwests route system is nicely geared for the future. There is no need for the ticket-holders of an airline filing for a Chapter 11 bankruptcy, to spend sleepless nights. Travelers have this wrong notion that any bankruptcy filing is synonymous with total failure and that the company concerned is only a short time away from liquidating its remaining assets and going out of existence. Thats certainly not the case with a Chapter 11 bankruptcy filing. Struggling corporations use Chapter 11 not to fail quickly but to keep operating while shedding a part of their debt and other obligations. These debt shedding measures usually involve defaulting on pension obligations, a path many airlines have already traveled. Point is, Chapter 11 bankruptcy may harm airline employees, stockholders and debtors but may leave the customers untouched.
However, coming back to main focus of understanding how these Chapter 11 filings in no way mean that LCCs are going to be more profitable in the future. Let us ask our self where the real big future of American airline industry is Is it in convincing a few Americans to spend little money to take a low-fare LCC airline to Florida Or whether the future is between the fast growing US centers of Asian investments and points in countries like China where the current and future revenue streams will be huge Get real. If these big carriers die, it is doubtful that LCCs will take their place. Remember, the LCC market is geared for big markets, certainly not for small or medium size ones. Southwest and Air Tran have already made it clear that they are not interested in expanding into small or medium size markets.
As already mentioned, LCCs are where the next shakeout of the airline industry is coming. By and large, LCCs models are really not profitable and the picture looks even worse going forward.
The nonsense about capacity reduction.
Then there is another illogical argument about letting a couple of airlines go down as this will reduce over-capacity. Which over-capacity are these experts talking about In recent times, we have already seen capacity reduction. US Airways have dumped over 100 airplanes in the last three years. But in sectors where airline bankruptcy passenger numbers are huge, airlines are still fighting for share. Now, in these over-served markets, the failure or one or two airlines will never reduce capacity.
Let us talk about revenue side of things.
The future revenues growth potential is the best yardstick to measure the future prospects of an airline. The future growth is not on trying to get more and more families to make trips to Florida. Its trips such as these which happen to be the mainstay of LCC operations. The new growth in revenues flows will be between places such as Tokyo and Grand Rapids, Montgomery and Seoul. It is these and dozens of other such destination pairs where the future lies. And the LCC model mostly cant go to such places.
Point is there is no way we can consider LCCs as the future of the airline industry. If a few big airlines find themselves in troubled waters, it is not because airline bankruptcy there is any fundamental fault in their business model but because these airlines have been caught right in the cost cross-hairs when fuel prices sky-rocketed. Northwest chose the strategy of bringing other costs down first and tackling labor costs later, a strategy Continental also shared. But if the fuel prices had stayed within reasonable limits and had not chosen to break all previous records, all these airlines would have been much better off and there would have been no such clamor by all these airlines experts about the virtues of LCCs. The LCCs will stay, but its highly unlikely that they will replace all the big boys and become the main stay.
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