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US airline outlook: Fundamental restructuring is in the wind but will the industry revert to type?

5-Feb-2010
United CEO, Glen Tilton
United CEO, Glen Tilton

A simple question on the lessons learned from the downturn, posed during last week’s Continental analyst call, resulted in the clearest indication yet of the structural changes now under way at US carriers. They go far beyond capacity, revealing the task ahead for legacy airlines. It also reveals the implications for manufacturers, regionals and organised labor, as low cost airlines also restrain expansion.

“The airline business is crazy. I've not been enamored with the industry in general. You can't depend on anybody and anything. It's dog-eat-dog and one thing or another from one minute to the next. What I understand about it, I don't like what I see” - Robert Brooks, Hooters Air owner. Source: The Sun News, 21-Mar-2006. Hooters Air finally ceased trading on 17-Apr-2006, after operating for only 3 years.

The complex response, however, did not come from Continental Chairman Jeff Smizek, who pointed to changes related to technology and ancillary revenues driving structural changes that would force costs down and revenues up.

It came instead during last week’s United Airlines analyst call when UAL Chair Glenn Tilton, President John Tague and CFO Kathryn Mickells outlined a sea change in an industry mindset that has destroyed more capital than even the great depression.

With only two reasonably profitable years past decade, the US airline industry certainly needs some fresh thinking.

US airlines^ operating margin: 2001 to 2009*

Has adversity actually bred a new way of thinking?

It seems that finally the US airline executives are focused on breaking conventional wisdom that investing in airlines is only for short-term opportunistic gains. They want investments to be good over the long term as well. They also want to bury Former Continental CEO Bob Six’s worn-out aphorism: “To make a fortune in the airline business you have to start out with two fortunes.”

Of course the largest restructuring would be for the US industry to consolidate through mergers and the subject was touched upon during the recent analysts calls, as a hopeful analyst broached the question – after all, there’s money to be made with mergers. While everyone seemed to agree more consolidation was needed, many said the environment was not right and the best way to combine is to follow Delta’s lead: put together two networks that are complementary, not competitive.

As usual, US Airways’ Chair Doug Parker called again for such consolidation, saying without it, US carriers remain at risk of getting into the same trouble they did at the turn of the economy in 2007. However, he also noted that the industry was in the best shape it’s been in since all the actions it took to survive the recession.

But, in the absence of mergers, these nuanced changes really paint an intriguing picture one that constitutes the building blocks of tomorrow’s industry.

NB: This analysis is drawn from developments covered each day in America Airline Daily. Join the growing number of companies making the switch today.

United’s Tilton leads the charge to a new industry vision

During United’s analyst call, Tilton and Co did not even wait for the question on how the industry is being restructured. They had clearly been chomping at the bit all week to answer the question. Morgan Stanley’s Bill Greene, who began this conversation with his question to Smizek, has launched a spirited discussion in the C Suites across the industry and one that is highlighted by the measured responses from Tilton and his team.

Tilton agreed with Smizek’s response on the importance of unbundling, merchandising and technology introduction to streamline and improve the customer experience as well as to increase revenue-generating opportunities.

But listening to the 4Q2009 earnings conferences was indeed a watershed in how airline managements now think about the industry, passengers and market share as well as their fiduciary responsibility to stakeholders beyond Wall Street.

“We have to understand that the up cycle is just that, a cycle,” Tilton said. “But we have to challenge everything including the business model itself and we must continue to restructure the business.”

A seminal shift in attitude

Then Tague joined in, saying two things that were stunning, given the history of the industry. It was these two statements that really signalled the seismic shift.

“The financial community has every right to demand that we eliminate the components of cyclicality that are clearly self induced,” he said. “We better, as a business, start planning for what our decisions reflect in the bottom of the cycle and not the top of the cycle, and that may involve leaving some opportunity at the top, but when we spit back twice as much at the bottom, it’s not a very rewarding experience.”

Then, there was this. “We also can’t be induced in the up cycle to give away what the employees have paid for in the down cycle,” he said. “So I think we have to be cognizant of that always when it comes to production levels of the business. We have to take that stewardship responsibility equally as serious.”

This is the clearest indication of the newly emerging mindset.

“I think a significant lesson learned for us is, there’s no upside to decision avoidance, regardless of the cycle,” said Tilton. “So a lesson that we’ve learned here very well since the restructuring is no sacred cows. This is an industry that’s structurally challenged. This is a management team that understands that and will address those issues.”

He went further with the conversation on structural changes. “I’d say the structural changes (are) with respect to unbundling, and merchandising, and new sources of revenue, and challenging the business model itself,” he said. “It should continue, not only in times of duress, but just in the normal course of restructuring the business that obviously needs restructuring regardless of the cycle.

“I think, third, the partnerships and consolidation needs to continue as well,” he continued. “Regardless of what opportunity any particular carrier may have, you need to take advantage of it in the down cycle or the up cycle. In addition, we must continue to challenge the cost structure of the industry, it is too high. It is burdensome regardless of the cycle. We need to continue to take cost out, even in the most robust of times and one way to look at that is, we need to find new means by which we deliver the product to the market. I think we can apply technology here in improving efficiency and productivity in the business. We can also do that in concert with partners, which I think will enhance the industry’s ability to withstand down cycles when they come, as they will. So those are four robust lessons that we’ve learned. But it’s also frankly, objectives that we hold for ourselves and our Board to continue to pursue and we’re very aggressively pursuing all of them.”

Current conservative capacity policy should become permanent

No matter how many statements heard in executive suites about the recovery and forward bookings, they pale in comparison with the magnitude of what Mr Tilton and his team outlined. Above all, the call was the single most important discussion in a long time - simply because it reflected a quite different mindset in airline economics from that experienced early in the last decade. It is one that has been building since 9-11 and magnified by the 2008 fuel crisis, to be sure, but one that recognises a healthy bottom line is more important than market share.

US domestic capacity has fallen 16.5% since 2001, with legacy/regional carriers reducing their capacity by a remarkable 26.9% and the LCC segment growing its capacity by 29.4% over the same period.

US legacy/regional carriers vs low cost airlines’ domestic seating capacity (millions): 2001 to 2009

Legacy carriers have kept their international capacity levels steady over the past decade, with a low point in 2003 and a peak in 2008. LCCs have meanwhile dramatically increased their international capacity levels (off a very small base) to short-haul transborder markets particularly in Latin America and the Caribbean.

US legacy/regional carriers vs low cost airlines’ international seating capacity (millions): 2001 to 2009

Today, while legacies cannot afford to leave any passengers on the table, the new rhetoric could imply management is at last giving up on trying to be all things to all people, in favour of the high-yield passenger and high-margin revenues such as ancillary fees. Certainly, that the message their recent passenger service efforts send out.

That said, the failure of the most recent fare hike attempt delivers a mixed signal, illustrating just how tough a job industry executives have in transforming the industry into a consistently money-making business.

President John Tague attempted to put the failed fare hike in perspective, however: “Generally the rate of success over the last three to four months has been improving over prior periods,” he told analysts. “We will continue to do everything within our power to optimize the pricing that we see ahead. Look, I think there’s still some reticence. We’re very early in this recovery period. We have had quite a bit of success in the last several months with creating these peak pricing periods that are getting longer and longer and more frequent. So that’s working well on the industry. This artificial resistance, I hope, will go away in the second and third quarters, as we see seasonal demand improve against constant capacity levels. So that’s what we’re expecting, and that’s what we’ll be working hard to accomplish.”

Or is it because the LCCs are slowing their expansion too?

United’s comments went well beyond paying obeisance to capacity discipline that we’ve all heard in the past two years. While other airline executives have discussed snippets of what Tilton and Co were getting at, the United executivess put it into a neat little package that offers a vision of the future.

Comments on capacity discipline have been welcomed warmly, no doubt, but only with a grain of salt that says, “Let’s see if they actually mean it when the up cycle begins and they really start competing with each other again.” 

If current plans for 2010 are any clue, then perhaps they do mean it, but will they stick to that discipline if credit costs go cheap again and leasing companies and manufacturers dangle sweet deals? Or if some airlines break ranks and attack existing markets. Boeing and Airbus have some troubled programs such as the 747-8I, which may need a boost. Will capacity have to earn its way into the system, as suggested by JetBlue CEO Dave Barger during his call? The real test will come beyond this year.

Suggestions that the new way might be real

CFO Kathryn Mikells provided a partial answer, one that holds true today as the industry crawls out of the abyss. “I think what we’re all doing is seeking to repair our balance sheets, and the only way to do that is to actually get some sustained reasonable profitability,” she said. “I think that’s going to be another governor on behavior, but certainly we’re encouraged by what we’re hearing from others on their calls with regard to holding the line on capacity, which is clearly what the industry needs to do.”

Tague agreed. “If the industry continues to focus on all of the elements of lessons learned or the elements of cost management or the application of technology or the use of scope and scale and flexibility, then you don’t invite a cannibalization of the business as we may have had in times past. So all of the issues of performance form a barrier of sorts. Let’s face it; this industry is performing and consolidating.

“At United, we firmly believe that the only way the industry can fully recover and meet its financial targets is through capacity discipline,” he continued. “Capacity simply must be set at a level that allows for compensatory pricing. Despite the challenging revenue environment, 2009 truly represented a continuation of fundamental improvements across our business.”

Much of the improvement stems from industry capacity levels coming down, as the US LCCs finally played ball. Last year was indeed a watershed. Their share of domestic seats fell for the first time in decades, to 28.5%, having peaked at 29.2% in 2008. And this comes at the same time as the differences between the two categories of airline become increasingly blurred.

US LCCs domestic capacity (seats) share (%): 2001 to 2009

As they mimic the behaviour of full service airlines, the LCCs however continued to grow their share of capacity on international routes to/from the US, although their presence is limited only to short-haul, cross-border markets, in the absence of widebody fleets (which are not on the radar) or long-haul codesharing (which is at an embryonic stage, except eg for JetBlue).

US LCCs international capacity (seats) share (%): 2001 to 2009

As a result, US LCC shares of total domestic and international capacity slipped slightly in 2009 at 24% - and could stay around this level for the foreseeable future.

US LCCs systemwide (domestic and int’l) capacity (seats) share (%): 2001 to 2009

Southwest finally flatlining

Perhaps the real reason the US legacy airlines can now openly discuss this apparent radical change in mindset is that the low cost segment, led by the largest domestic US carrier, Southwest Airlines, is also holding the line.

AirTran and JetBlue are growing capacity more aggressively in 2010 (while Allegiant’s growth is surging, off its relatively small base), although capacity expansion rates are well below previous years. The legacy carriers are also moving closer to restoring growth in capacity, according to statements in their 4Q2009 financial results.

Selected US airlines capacity (ASM) expansion outlook

Airline

Capacity plan

JetBlue

1Q2010: +6% to +8%;

FY2010: +5% to +7%

AirTran

1Q2010: +7% to +8%;

2Q2010: +4% to +4.5%;

3Q2010: +2%;

4Q2010: +2%;

FY2010: +3% to +4%

United

1Q2010: -2.5% to -1.5%;

FY2010: -0.5% to +0.5%

Delta

1Q2010: -3% to -5%;

Domestic: -1% to -3%;

International: -5% to -7%

Southwest

No capacity growth expected for the full year 2010

American

1Q2010: -2.9%;

FY2010: +1.3%

Allegiant

1Q2010: +15%

Crucially, Southwest’s historic fuel hedging benefits are all but gone. The grandfather of the LCC industry posted a quarterly loss in 3Q2008 and shrunk its capacity for the first time in 23 years in 1Q2009. The Dallas-based airline narrowly avoided reporting its first full-year loss since 1972 in 2009 and is suffering from a growing weight problem, now with the highest LCC costs in the industry and fast-approaching Alaska Airlines, Continental and Delta.

Selected US airlines operating cost per ASM v operating cost per ASM excl fuel: 4Q2009

Across the Atlantic, and noting Southwest’s distress, Europe’s Ryanair (which modeled itself on Southwest) is also preparing to make wholesale changes to its strategy, shifting away from a high-growth operation beyond 2012 to a future of route rationalisation, low capex, profit maximisation and returning surpluses to shareholders. CEO, Michael O’Leary, seems intent on avoiding the excesses of its Texan counterpart and instead maintain the airline’s waistline at a reasonable level.

See related report: The party's over: Ryanair's ancillaries are stuttering, to raise fares, slow growth

Meanwhile easyJet is already pursuing a strategy of slower growth and yield maximisation, targeting business travellers – the bread-and-butter of its network rivals – as a result of boardroom brawling over the pace of growth.

Southwest, the market leader, is itself searching for the way forward

Southwest is undergoing an uncertain metamorphosis involving a focus on attracting business travelers and targeting hub airports. Its future necessarily involves codesharing with foreign partners, slow (or even zero) fleet growth and potentially a merger with a domestic rival.

It appears that since Southwest became a 500+ aircraft super heavyweight, strategic problems have emerged, as the airline exhausted profitable route expansion options; this unfortunately  coincided with the deepest economic downturn since the Great Depression.

Southwest, Ryanair and easyJet fleet growth: 1971 to 2012F and 2013-2015 scenarios

Southwest ended 2009 with roughly 535 aircraft – two fewer than as at 31-Dec-2008. It is looking at “flat” fleet growth in 2010 and future aircraft deliveries, stretching until 2017 could be used to refresh, rather than grow the fleet.

A commitment in earlier negotiations with pilots was to expand the fleet by 5% p/a, resulting in a targeted fleet of 568 aircraft by the end of 2012. That target appears to have been dropped in subsequent negotiations. The new pilots’ contract, reached in Sep-2009, included retroactive pay raises of 2% for 2007 and 2008, plus 2% in 2011. Raises for 2009 and 2010 will be based on Southwest's profitability (or lack thereof).

The airline also committed to capping ‘near-international’ codesharing with partners from an originally envisioned 6% (as per the tentative agreement rejected by pilots in Jun-2009) to 4% of Southwest’s ASMs. This is a key opportunity for legacy rivals to exploit – and Tilton has talked of increasing the use of partnerships.

That Southwest pilots are playing an increasingly pivotal role in the airline’s strategic development (eg effectively scuttling management’s moves to acquire Frontier Airlines over seniority issues) is playing nicely into the hands of its rivals.

With Southwest effectively knee-capping itself and most of the other LCCs showing more capacity restraint, the remaining carriers can begin to hope for better times.

US carriers’ domestic capacity growth (% change year-on-year) in 2009

Southwest CEO, Gary Kelly predicts the US economy will expand by approximately 3% in 2010 and that business traffic demand will grow at a “similarly modest pace”. The airline accordingly has a “very cautious expansion plan for 2010”.

The current fleet plan for 2010 calls for scheduled capacity reduction of 1% in 2010, but Mr Kelly stated this level can be calibrated through retirements and lease returns if industry operating conditions or capacity levels change.

Southwest retains considerable flexibility to manage its capacity, by tweaking utilisation rates, as well as tapping leasing market. It also has low (but rising) load factors, meaning the airline has the ability to grow its capacity with its existing fleet. But expansion into congested hub airports is more fleet intensive than operating from secondary points.

Leading LCCs preparing for a sustainable future

As noted in CAPA’s Nov-2009 Global LCC Outlook report, “it is now clear that a new plateau has been reached in the evolution of low cost operations and strategy. There are several reasons, with regional variations in the relative importance of each”.

The report also noted, “during four years of ideally fertile breeding conditions for new entrants - cheap fuel, cheap aircraft, easy credit and strong consumer demand – the low cost market grew significantly. And so did the intensity of competition for the short haul, low price passenger.

“Then, following a serious fuel cost shock in 2008, when jet fuel prices threatened to reach USD200, a credit and demand crisis replaced fuel concerns, accompanied by the flow-through of the previous three years of unprecedentedly voracious aircraft ordering. The sorcerer’s apprentice had turned on the fleet expansion tap, pushing capacity growth where prudence would not have dictated. All of these took their toll on any airline model which lacked resilience.

“The proliferation of low fare entrants – not always as low cost, or as well conceived as they should be – meant that the level of head-to-head competition among them became ferocious, where previously it had often been possible to avoid direct confrontation”.

The report added that high fuel prices, seen as “the main threat to the LCC model”, are “the most likely catalyst of change in the short term”. Future surges in price can be highly destabilising and one of the few risk management options that most low cost operators have to guard against this is to search for higher yields.

The report concluded that fuel prices - and other uncontrollable externalities, both in cost and demand “will relentlessly force most low cost airlines towards reconstituting the network model, domestically and internationally”.

Southwest, despite its protestations, will eventually charge for bags and its transition to the legacy carrier ranks will be complete.

As low cost competition eases, does this then presage more new entry?

What about new entrants? Will we see a new crop of wild cards, not educated in the airline industry’s school of hard knocks since 2000? Certainly lease prices for older aircraft have slumped to attractive levels in the past year.

But Mickells pointed out credit markets can act as a natural dampener on “what was, historically, problematic,” she said. “It’s not nearly as easy to get that capital today.”

In response to a question on whether that equation might change when the industry recovers, Tague said, “I think if you look at the mortality rate of the recent new entrants that, too, would form a reasonable barrier to entry. Look, while this is a risk that we’re all cognizant of, I’d say that actually new entrants flowing into the business have tended to be driven by excess aircraft available at unprecedented prices, and boy, if that hasn’t been the case over the last 24 months, I don’t know what has.

“So a lot of time we’ve seen those aircraft artificially reenter the market, and I have personally been relatively encouraged over the last few years,” he continued. “We’re not seeing that. I think the lessons-learned question has to go beyond the industry and go to the supplier and the financing base, and I think they’ve got their own set of lessons learned as well.”

That may just be wishful thinking, but conditions for market entry do still seem less than welcoming.

There is major cost reduction work still to be done – keeping a careful eye on fuel prices

It was Tague who suggested the industry cost restructuring is far from over. Further, he said that managers can no longer just endure down cycles in the hopes of making it to the up cycle. They must manage for the down cycle.

“Clearly, we don’t stand here today and suggest we have a lot of easy, low-hanging fruit with respect to incremental cost opportunities,” said Mikells. “That said, I think over the last few years, what we’ve really demonstrated is we’ve got a very strong focus on assuring that we maintain a competitive cost structure. We’ve done a lot of hard work to improve our relative position in this area and we’ve got a laser focus on that.

“We are driving accountability and also developing the book of work to see if we can actually better performance than what we’ve told you in our guidance,” she continued echoing similar statements throughout the industry. “So we’re seeing some clear pressures, but we’re very focused on this and I think you can expect that we’re going to continue to have very good performance.”

And, if fuel goes to USD90 or USD100 a barrel, expect quick decisions. “We will do what we have done before in making capacity adjustments,” said Tague. “We have the necessary flexibility whether it is on wholly owned aircraft or the regional fleet with fleet utilization running at all time highs. There is lots of opportunity to adjust down.”

Tague added that the company is always striving to beat goals. He maintained plans are in place or being developed for more cost reductions that won’t be realized until 2011, 2012 or 2013.

“There has been a cultural change on delivering cost performance,” he said, in yet another expression of the will to ensure that this time it really will be different.

But again the old plea to government…

Even so, Tilton voiced a cautionary note saying there are only so many structural changes that industry can make on its own. Putting on his chair-of-the-Air-Transport-Association hat, he said government has to change as well. “Structural issues extend beyond airlines and they play an important role in sustaining profitability,” he said pointing to excessive taxation, inadequate infrastructure and over zealous regulation, no doubt meaning the new tarmac rules. “These must be addressed as well if we are to succeed.”

Surprisingly, and perhaps it was his role as ATA chair that kept him diplomatic, Tilton seemed to put his trust in the industry advisory committee formed by the Department of Transportation last November. The latest task force is only one in a long string of similar federal efforts, mostly viewed as political theatre. Most end up gathering dust, but Tilton said that this time around it was an opportunity to “get all the issues on the table and develop a road map to address the barriers that impede airlines from profitability.”

Even so, perhaps this managing-for-the-down-cycle mindset, coupled with the excruciating pain the industry has endured in the last decade will conspire to force action this time

But then again, a decade ago few airline executives would have suggested that a healthy bottom line is more important than letting opportunities go, even during an up cycle. Another read of that, however, is that a healthy balance sheet allows airlines to compete better, as suggested by Alaska Chair Bill Ayer.

It is a no brainer that the signals are flying that if execs want to gain any traction on fares and profits, they have to focus on keeping capacity – and costs – low.

Strategic flexibility is now the keynote

The implications of this new manage-for-the-bottom-of-the-cycle outlined in last week’s United Airlines analyst call represent a tectonic shift for the industry, as evidenced by Mr Tilton’s insistence that there are no sacred cows.

It all comes down to a single word – flexibility – which, said United President John Tague, was the single most important factor in acquiring and sustaining profitability.

Thus, fleet acquisitions and code-sharing relationships will not be judged by cost and incremental revenues alone. Deals will be crafted with several scenarios in mind in order to get the flexibility needed to battle headwinds and take advantage of any tail winds. 

That has generally negative implications for aircraft manufacturers. Will the industry’s capacity reticence force manufacturers to dial back on their forecasts? Will this give Embraer and especially Bombardier a realistic foot in the door as the airlines look at restructuring fleets with this new flexibility prism in mind? On the latter, the answer is absolutely.

All the new programs developing around the world make for a lot of competition and manufacturers have been known to subsidize new aircraft just to get them into service. The question is, will the experience of the 1980s and 1990s - with the last generation of regional airliners - be repeated with new entrant narrow-body and regional aircraft programs buying their way into market share, despite international trade agreements.

This all suggests more risk for the regional airline industry

“We’ve got to be nimble in terms of capacity and constantly looking at our fleet plan, both our mainline fleet and our Express (regional) fleet that we operate through our contractual relationships,” said United CFO Kathryn Mikells, sending another shot across the regional industry’s bows. “To ensure that every year, we’ve got a number of aircraft that are coming off lease, that are coming out of financing, that we have United Express, regional capacity flexibility, both on the up side as well as in the other direction. I think those were all things that we managed very, very well, and certainly is something we’ll continue to focus on going forward.”

Regionals were put on notice last summer they would have to take on an increasing share of the risk. The sweetheart contracts of the post-9-11 period are now a thing of the past. That means the eight-to-10-percent margins that resulted may also be a thing of the past. This will be a test as to whether regional airlines really have been better stewards of the bottom line, or whether those contracts simply gave them an edge.

While legacy airliines refuse to make public what they actually mean by increasing risk, regionals have seen the writing on the wall and are looking at new solutions.

Examples include SkyWest’s deal with AirTran over Milwaukee. Although this is small, it keeps the aircraft flying and, even on a pro-rate basis, making money. The same applies to the ERJ170s which Republic’s Shuttle America has deployed with Mesa’s go! in Hawaii.

Republic’s answer has been to become a bank, lending millions to partners such as US Airways, Midwest and Frontier and ending up with a Frontier/Midwest branded operation along with some ERJ 190s to boot. It is unclear whether this will pay off, but it is seen as a risky, if not necessary, move for today’s environment.

And labor will have to join the party if these changes are to happen

Barclays Capital’s Gary Chase joined the analysts’ conversation: “I think about what the industry has learned in this cycle is that it’s far and away a flexibility issue,” he said. “You’ve got to be ready for just about anything, I think is what we’ve learned. To have the kind of flexibility that I think is consistent with the kind of volatility, don’t you need to rework labor agreements?”

The response from executives included frank language, sending signals to labor, which is working on open contracts throughout the industry. Indeed, all of United’s contracts are open although not expected to be resolved this year. Thus, watching what comes out of United’s discussions with its unions could prove a benchmark since it will signal whether its manage-for-the-bottom-of-a-cycle mentality is to gain traction.

“We have, what we believe to be flexibility that has been hard earned,” said Tilton. “We wanted to convey that, given the challenges of this industry, this management team and this board, have a fiduciary responsibility to take full advantage of every flexibility we have in our tool kits and when I said no sacred cows that’s exactly what we’re going to do. The industry has made expedient decisions, when it was seemingly affordable or comfortable to do so, and regretted them thereafter. So we understand the benefit of flexibilities that we might have to deploy competitively. We’re going to take full advantage of it.”

The success of such policies depends on whether or not labour buys that structural changes are necessary to not only maintain jobs but to ensure that what they have already paid since 9-11 is not squandered in typically blind competition for market share.. More importantly, will they buy the suggestion that structural changes which lead to a consistently healthy bottom line in both good and bad times, will actually achieve labour’s most important goal – greater job security?

Salary restructuring becomes a vital part of the “flexibility” goal

Regardless, the signal was very clear. Rather than complain about concessions that have cost members such acute pain, management needs to restructure compensation packages, one of the sacred cows to which Tilton was no doubt referring.

And a clear signal as to the path United wants to take came from Mikells. “I think that the variable compensation model has worked very well in highly cyclical industries,” she said. “Communications comes to mind. So I think as a benchmark for the industry where other industries have already moved, it’s a very worthy discussion.”

A big question is whether or not the trend toward creating incentive pay programs, allowing employees to share monetarily in success, will make much of a difference to the traditional labour mentality. Alaska’s incentive plan allows employees to share in up to 15% of profits. Clearly the airline considers people to be a good investment in achieving its goals and other airlines agree.

Continental began this trend and Smizek’s refusal to increase salaries unless the company is profitable is only the latest move. SkyWest Airlines has had it as part of its DNA almost since  inception, making it one of the most successful regionals in the world. The same can now be said for Continental, which is consistently in the top ranks in customer performance well beyond the JD Power award. This is likely why other airlines have climbed aboard that bandwagon. It is a strategy that works for the passenger, for the employees and for the company and its shareholders.

And the tasty pieces: preparing for the upside

United concluded this discourse by outlining how it is preparing for the rebound. Its plans are being repeated across the industry by low-cost, regional and legacy carriers alike.

If flexibility is the new touchstone for airlines, then everyone needs to be on notice that, assuming United’s strategy is successful – and United not only needs all players to sign on, it needs the industry itself to keep its discipline – this become a different airline industry.

Such discipline will be a signal that industry leaders have finally learned that most basic of economic lessons – the law of supply and demand.


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