December 9, 2014

Keeping U.S. Airlines in the Black

Is the U.S. airline industry’s current profitability sustainable? That’s the question moderator Dave Krieger, ALPA’s managing director of Representation and Analysis, asked participants in a panel discussion titled, “Evolving Business Models in the Passenger Industry.” Five representatives from different sectors of aviation examined the state of the U.S. mainline and regional airline industries, and the role of global alliances and joint ventures in today’s aviation market.

“What we’ve focused on at United Airlines is making sure our capacity is very much in line with demand,” said Jim Compton, vice president and chief revenue officer for United Airlines. He talked about the recent stability in the mainline market for U.S. carriers and how capacity discipline and other practices have ultimately led to growth. The key to United’s future, he said, is the “continued focus on driving efficiency.”

And as this growth continues, Bruce York, ALPA’s chief negotiator and senior advisor, encouraged airlines to look at a different kind of benchmarking for success. “We plan for years on making sure we have predictable oil. Some people even buy refineries. We plan for years about fleet and fleet types and what we’re going to do. . . . But at least from my perspective, I don’t always get the feeling that we look at employee infrastructure the same way.” York suggested that airlines need a long-term plan for their employees to help them weather the various industry cycles.

Roger Cohen, president of the Regional Airline Association, talked about how his member carriers enable smaller communities to connect with the rest of the world. With the development of regional jets that offer greater capacity, he noted, “The product to the consumer has been terrific.” However, he acknowledged cutbacks in demand from mainline carriers and other varying issues, which have created challenges for the regional industry in recent years.

Helane Becker, managing director and senior research analyst for Cowen and Company LLC, spoke frankly, noting that investors were sometimes slow to embrace regional airline stocks because these carriers had “given up control of their revenue production.” In the current business model, these airlines have turned over many of their traditional operating decisions to their mainline partners. To improve stock performance, these carriers need to regain some of this control.

Although global alliances and joint ventures were largely viewed as profitable and important for competing internationally, Ted Reed, airlines reporter for TheStreet, issued a warning. “The alliances are threatened by the Middle Eastern airlines,” referring to the Gulf-state carriers that are state-backed and face little regulation or taxation. Reed observed that the real battle concerns connecting passengers—the financial lifeblood of the alliances. If airlines like Emirates and Etihad are not effectively challenged, they will likely divert more and more traffic away from traditional European hubs like Frankfurt and London and take flying away from U.S.-based airlines.

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