Thursday, March 28, 2013

More Airline Thoughts

I have been reminded by several correspondents, to whom I am grateful, that the Three Big Airlines are not the only ones flying the skies.

Indeed there are others, and a conversation recently with a Chicago-based United employee emphasised that point. She said that during a recent phone call, Jeff Smisek, United’s CEO, had made the point that as they watch over their shoulders at competition, Southwest was the carrier that most concerned him. Their growth was strong, their business model sharp and they were starting to make inroads to their lucrative commercial accounts. Presumably the same holds true for the other giants.

A glance at the following table will show why:

Carrier
Fleet
Passengers Boarded
Gross Revenues[1]
American / US Airways
955
170,330
34,786
Delta
722
164,572
32,797
United
699
140,441
33,601
Southwest
694
133,978
16,253
The next six largest carriers*
541
95,135
12,676
  Jet Blue, Alaska, Spirit, Frontier Airlines, Hawaiian and Allegiant

·        These are 2012 figures
·        It is important to note that these figures do not include Sky West; this carrier specialises in contract flying for the major carriers, and operates a fleet of 740 aircraft carrying 58,800,000 passengers, primarily (although not exclusively) for United Airlines.

 Now a quick glance at these figures will show a very interesting story. The three leaders, representatives of the three major global alliances are significantly bigger then Southwest plus the next six largest carriers. In these days of the dominance of market leaders, this position is important because it is the dominance of hubs, by the number of slots available that determines a carrier’s ability to compete.

Carriers’ growth is also determined by their ability to interline, that is to carry passengers on a through-journey between two or more unrelated airlines; while carriers such as JetBlue and in Canada WestJet have been looking at these partnerships as a vital way to increase revenues, others such as Southwest so far are resolutely sticking to a business model that has worked very well up to date.

Carriers with particular market niches, such as Alaska and Hawaiian, also have significant advantages, however their geographic benefits may be jeopardised by their isolation, and the inability of their home markets to grow as fast as they may wish.

Fuel is the primary cost concern for carriers, and to that end, in June 2012, Delta Airlines paid $180 million to purchase an oil refining complex from Phillips 66; this shrewd acquisition will certainly allow them more balance and strategic planning than either the current futures or spot markets will do.

Southwest is coming to the end of a very successful long-term fuel contract, and it will be interesting to see how they fare into the future, and for the smaller carriers, the current and future cost of AvGas will determine their futures.

We will see how this all spins out; clearly there is room for smaller niche carriers, and I for one am delighted to see them remain in the market. They have opportunities to contribute to the overall growth of the airline industry, and with it the growth in many related businesses and the health of the economy in its widest form.

As we all know, statistics are chosen by the writer, and this piece is not meant to be a detailed analysis of the contemporary airline industry; there are many, many other considerations, and profitablility is probably the most important.

Profits in this business have been elusive for decades, and perhaps this consolidation will allow investors to gain a return and passengers to feel confident that their airline, of whatever size, will actually be there to carry them on their next journey.

For those interested, there are many interesting sites that detail every aspect of airline activity; even to the point of revenue per flight attendant, a curiously important measurement. However, the overall numbers don’t lie; three airlines dominate with a fourth nipping at their heels. The rest are falling behind.



[1] Shown in millions of dollars

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