Accessibility links

Traditional Airlines Strive to Survive Low-Cost Competition - 2004-07-07


The world airline industry is headed for its fourth year of staggering financial losses as air travel continues to be adversely impacted by the threat of terrorism, recession, and rising fuel prices. Established airlines worldwide are scrambling to cut costs to compete with new low-cost rivals.

It is a time of unprecedented turmoil for airlines. In the United States, the biggest carrier, United, continues to fly but remains in court-protected bankruptcy. Despite government grants and wage give-backs, United has lost nine billion dollars in the past four years. The company's latest request for more government aid was turned down.

In Europe the post-September 11 travel slowdown led to the collapse of Swiss Air and Sabena. Alitalia was threatened with liquidation last month and says it must have further government assistance to keep flying.

Airline analyst Ron Kuhlmann in Oakland, California is not optimistic about the survival chances of United or U.S. Airways, which recently emerged from bankruptcy protection. Mr. Kuhlmann says established airlines must slash costs and drastically change their business model.

"I don't think the revolutionary nature of the challenge has caught up with them yet. And I don't think the management of either those two companies and of most of the major carriers has really grasped the nature of the need to dramatically recast their thinking and establish a new corporate culture," he said.

Mr. Kuhlmann says the competitive challenge comes not only from new startup companies that pay pilots and staff half the industry rate but from the Internet. Consumers worldwide have become adept at using Web sites that list all the fares in any given market. Mr. Kuhlmann says consumers are choosing the lowest fare even if there is no food or beverage service.

About the only airlines making money are low-cost carriers. In Europe Easy Jet and Ryan Air, based in Britain and Ireland respectively, are profitable and winning market share. Several new low-cost companies have been launched in Eastern Europe. Here in America, Southwest and Jet Blue are the clear winners with all of the traditional airlines still losing money. Jet Blue President David Neeleman says his New York-based company is fending off competition from traditional airlines.

"Our operating margins are down not from competition from other low-cost carriers but from the legacy carriers that are increasing capacity and trying to fight back,? Mr. Neeleman said. ?I think they're fighting a very difficult and probably losing battle. Because they're continuing to lose more and more money and we continue to make money."

Jet Blue will soon be taking delivery of 100 new aircraft, which it will deploy against the competition. Southwest, determined to retain its market share, this week touched off a new round of fare cuts. A low-cost carrier in the Washington, D.C. area has forced big fare cuts at financially vulnerable U.S Airways. Atlanta-based Delta says it could be forced into bankruptcy next month unless pilots take significant pay cuts.

The air travel market has picked up in recent months. It is the first significant upturn in four years. However, say analysts, intense competition and higher fuel costs make the recovery very fragile.

XS
SM
MD
LG