State of the Airlines

Friday, January 07, 2005

NEWS: Growth in the discount airlines

The Boston Globe posted an article on the effect that growth has on a discount airline and its actually got some good points. The point (in my mind) is that discount carriers need to be cautious with their plans. Additional aircraft need to be able to produce the revenue to pay for themselves. Single fleet types are generally the rule (though we see JetBlue and AirTran breaking this rule....hmmmm). The size of the organization needed to run the airline needs to be managed tightly as does the inevitable increase in wages with an aged payroll. The article leads me to ask a couple of questions.

First, is there a break point on the size of an airline? When does economy of scale advantage for being a big airline start degenerating into a yoke around the collar?

Second, is there a life limit on an airline? Is there a point where, no matter how efficient the airline is, the overhead associated with a well aged payroll/pension plan can simply no longer be supported? There are hints of this with the dearly departed Pan Am, Eastern and even TWA. We see it today in the major airlines who are, for the first time, making massive cuts in payroll to try to recover. And these cuts are going to be permanent. This is not a temporary "give-back" situation as has been seen in the past.

I don't pretend to have the answer. Southwest had to deal with one of these factors, increasing wages, just this year with two of its unions. Being successful has its price in the form of paying up to the labor unions. As mentioned above JetBlue and AirTran are breaking the single fleet rule, long seen as a key to efficiency and success for a discount airline. It looks like the answers will play out in front of our eyes...we just have to be patient (I hate that).