Increasingly competitive market prompts carriers to eye oil sourcing, spend management

 

The airline industry has undergone a consolidation over the past few decades, and with American Airlines' recent bankruptcy filing, that trend looks to continue.

The airline industry has suffered over the past decade, as airline companies have had to endure a number of cataclysmic shocks. The September 11 terrorist attacks prompted a precipitous decline in airline traffic. The resulting shocks to the economy over the next seven years, coupled with volatile energy prices, ate into companies' profits, hurting growth and spurring large carriers to merge or buy competitors.

Oil sourcing helped Southwest to weather the airline crisis better than its counterparts, but even the Dallas, Texas-based airliner has shown weakness over the past few years. Company officials have reentered supplier contract negotiation talks with Boeing, among others.

Southwest recently placed one of the largest jet orders in aviation history with the aeronautics giant, Bloomberg reports. The deal, worth a reported $19 billion, will help Southwest upgrade its aging fleet, but the company is not immune to systemic factors plaguing the airline industry.

NPR reports that in the wake of deregulation in 1978, the airline industry as a whole has lost a substantial amount of money. Though deregulation has helped companies operating in other sectors augment revenue and boost operating margins, it has not – at least thus far – fueled a rise in airliners' earnings performance.

"The industry in aggregate has lost about $60 billion over the 32 years since deregulation," University of California at Berkeley economist Severin Borenstein said.

High barriers to entry and exceedingly high operating costs are hallmarks of the airline industry, according to Borenstein. Indeed, it is difficult for airline officials to effectively prepare for volatile energy prices because of the precipitous price swings witnessed over the past 12 years. It is less of a science and more of an art to predict demand, gauge oil prices and entice customers, experts say.

The so-called legacy airlines, which include holdovers Delta, American Airlines, United and Continental, have fared particularly poorly in the wake of deregulation, according to an analysis Borenstein conducted. American Airlines famously filed for bankruptcy in late November, and other legacy airlines have done so in the past – some twice.

Low-cost airlines such as JetBlue and Southwest have an advantage over their higher-cost competitors, as many are relatively new and are therefore not constrained by many of the variables affecting their legacy counterparts. Borenstein noted low-cost carriers "get much more productivity out of their workers," as their "jobs are defined more broadly and their workers tend to be able to cover more of the work load."

Union workers at legacy airlines vehemently deny such claims, but Borenstein and many other economists note the troubles plaguing airliners are similar to those that contributed to the downfall of the U.S. manufacturing sector: in automaking, competitors increasingly entered the sector who were able to offer superior products at a cheaper price, winning market share.

Airline carriers are also notoriously poor at supply chain management. For example, after Delta merged with Northwest Airlines, company executives struggled to integrate the two carriers' varied operations systems. Some consumers, fed up with the airline's inefficiency, opted to fly instead on the company's competitors.

Experts assert the ongoing consolidation among airliners could negatively impact consumers, especially those who travel on less popular routes. American Airlines is expected to end service between some of its unpopular destinations. Business and leisure travelers will also feel the pinch as the company could increase prices and fees to offset mounting expenses.

Nevertheless, unless American Airlines - and many other airline carriers - successfully overhaul spend management and implement business cost reduction initiatives, they will likely continue to bleed money - and customers.