Five Airline CEOs Talk About Consolidation

I know, I know. You want to hear all about the Continental/United merger right? Well, I’m not writing about it until it’s officially announced even though that may happen by the time I wake up today. I’m actually working on a huge backlog of interesting material from last week’s Airline CEOsUS Airways Media Day and the Phoenix Aviation Symposium. Today, I thought I’d give you a peek at the final panel of the week, the executive panel. This is a long post, but it’s simply the first of three.

The Phoenix Aviation Symposium is a great event that gives really excellent access. I mean, I (and a few others) had a beer with British Airways CEO Willie Walsh while he talked about the volcanic ash situation. I also had a drink with JetBlue CEO Dave Barger later on. That sort of thing doesn’t happen very often in one place. Why are all these CEOs milling around? For the executive panel. This year, it was made up of US Airways CEO Doug Parker, JetBlue CEO Dave Barger, British Airways CEO Willie Walsh, Qatar Airways CEO Akbar al Baker, and Republic CEO Bryan Bedford.

Though recording wasn’t allowed, I typed as quickly as I could and got a pretty good transcript down. There wasn’t any huge news here, but I think the candid back and forth between the panelists makes for some really interesting reading. I’ve trimmed it down a bit to focus on the most interesting pieces. Let’s get on with it.

On Recent Industry Crises and Priorities
Qatar CEO Akbar al Baker: Unfortunately, this industry has been very unlucky – faced with either natural or national calamities. As far as Qatar is concerned, we have been a bit fortunate. Besides the premium yield taking a beating, we are not dropping our trousers to get passengers on the airplane. We are fortunate because we operate a very lean structured airline; productivity of staff is very cleverly measured. We have no unions so people are accountable to management and a CEO who is very ruthless.

We have one of the lowest aircraft/employee ratio of any scheduled carrier and a very clever fuel hedging structure in place. I know that people think I have an oil well behind my office and that we get very cheap fuel, that we get a lot of government subsidies. I am a businessman. I would be ashamed for someone to give me handouts to run my airline. We are very cash fluid generated by the ancillary business we have. The airline has the alcohol distribution in a country that people think is dry.

JetBlue CEO Dave Barger: I’m sure Willie will talk about dealing with volcanic ash . . . Talking about oil speculation. When oil runs to $147 a barrel, then it’s down to $37 or $38 a barrel, it’s very diffcut to run the business. And also worldwide climate change. The impact it has on the industry as well. This is an industry that’s incentivized to really be carbon friendly. It’s our number one cost.

The second issue as well – it was intriguing – the labor panel; it’s no secret we’re 12,000 crewmembers at JetBlue and we have no unions. It’s not pro or anti-union but the issue of labor relations at our company. It’s a different lens. It’s a second thought that we spend a lot of time on.

The third area is how that then leads into consolidation. Whatever happens with the industry landscape, the crewmembers are looking at consolidation. “Am I protected? What’s next? What does this mean with our interline agreement with American Airlines?” We’re really spending a great deal of our time on these.

Republic CEO Bryan Bedford: What did strike me about the panels is who wasn’t here. We had government, the regulators, labor. We have lawyers, we have airline CEOs, finance guys, manufacturers, but we didn’t have the customer here. It really struck me we didn’t have the customer here. It’s amazing how we do as a business moving people around at the highest degree of safety and yet people hate us. I wonder why is that? Maybe it’s all the bickering between management, between labor, between the airlines. For so many smart people, we could do better, maybe better telling our story.

The fact that we have to have legislation on the passenger bill of rights says it all. If I have a 15 minute line wait to check out of my local grocer, I don’t expect Congress to solve that problem. I take my business elsewhere. Where’s the incentive for airlines to outperform if the customer is going to buy based on price?

US Airways CEO Doug Parker: I think we’re in a really interesting time. This looks the same to the outside world, but I would argue that what we’ve gone through in the last couple years is phenomenal and unprecedented. We’re talking about $80 oil now. I vividly remember when we did the America West/US Airways merger. Part of what we’re telling people was we’re building an airline that would be profitable at $50 a barrel oil. So that’s where we were just 5 years ago. Nobody thought it was even possible to be profitable at $80 a barrel.

We also just went through a recession unlike anything our business has ever seen. Certainly more prolonged than 9/11 impact. We’ve never seen in one year industry revenues fall 20%, which they did and we weathered. If we had 2008 RASM [unit revenue] or $60 barrel oil, everybody would be talking about the record profits this industry is making now. So at any rate, I think the industry has made some major fundamental changes that still have us losing a lot of money. Unfortunately, to suggest that both would happen would not be something we’d think could happen. I just hope that we keep that discipline. I worry somewhat that things get better and we start to do the things we did in the past.

Finally, consolidation is happening and it’s huge into what it’ll do to our ability to make this industry long term profitable. All the issues in this industry are the things that make long term problems. Things like labor relations and government regulation become less of an issue because you have a business that can run like a business. The problem is we’ve never had an industry ever that has been long term sustainably profitable.

British Airways CEO Willie Walsh: My predecssor at BA used to say that he had a lot of luck in his role as CEO and all of it was bad. He left 5 years ago; he lied. You just cannot, if you read this script, people would say you’re making it up . . . We’ve seen a unique combination of cyclical impact and structural impact at the same time in a period that was incredibly tough to deal with. Oil is now structurally higher. The days of $20 oil is gone. It’s likely to be closer to $100. We have a big issue now in terms of financing – it’s much more expensive. Just when we think we’re getting our head above water, something comes along – volcanic ash.

I’ve read in the newspaper about the skies being covered in volcanic ash. We dealt with a computer model that said there was volcanic ash. That’s a scandal, but our industry has to deal with those issues and we look forward to the next crisis. The good thing is that we’re still here. To think we came through 2009 with all the challenges shows you how determined and resilient this industry is but things have got to change.

On Consolidation
Doug: The industry is destined to consolidate. There’s value in having a larger network with customers and shareholders by doing things more efficiently. I think it makes sense. I believe we’re headed to an industry, simply hub and spoke airlines, legacy carriers. We didn’t need 7 of them in 2005, we don’t need 4 of them now, we need 3 and that’s where we’ve always been headed. You have all sorts of guys, JetBlue, Frontier, etc flying around doing what they do well, making sure if you get your costs too high, they’ll steal your market share. I think it’s a good model. Generally these leaks have been accurate, so we’ll have another merger done on Monday.

[Doug later emphasized that he "wasn't trying to suggest that anything is going to go on with US Airways anytime soon. To the contrary, things are going great as a standalone and we can do that for as long as we want. It's years off."]

Bryan: We’re certainly acting as the networks are realigning. The synergy opportunities are just so significant. I think the industry is looking for ways to find stability. Labor wants it, customers want it, and financing teams want it. The struggle if you’re a regional is one of the ways networks drive synergy is they segment the market differently. If 70% of your market is willing to connect, it doesn’t matter where they connect, so those hubs become marginal. Pittsburgh, St Louis, Raleigh/Durham. And if you’re a feeder in those markets, you lose that flying. The best case was that it wasn’t growing and the worst case is that it was shrinking. We want to grow the pie. How do we get a bigger slice of it? We need to figure out ways to incent customers to pay more for the product.

Willie: Part of the problem [in Europe] is we still have to have a structure that complies with air service agreements on a global basis. . . . A lot of the complexity we’re dealing with there is that BA can continue to fly to Japan and China, and Iberia can continue to fly to Latin America. There’s still a lot of complexity holding us back. Who knows, 10 years from now we might be looking at genuine global consolidation.

Akbar: I know you’re pulling me into politics here, but I need to leave the United States this evening. Some airlines of course would like to block other airlines growing. I do understand maybe from their nationalistic point of view, but at the end of the day the world is deregulating. The commerce is becoming more, there are no borders, in this way we are taking advantage in our region by growing. If there was a real wish of consolidation or a political directive of consolidation especially since we are government owned, it would have happened between Etihad and Emirates. Emirates is a well established airline would have been ideal to be named as a national carrier. The same with Qatar, they have an economic requirement, want to make it an dominant hub in the region. We were part of Gulf Air, but Gulf Air was not serving the national aspirations so this is how Qatar Airways was born, but we also, I agree with Willie, maybe in 10, 15 years time, that consolidation wind will also blow toward us. But as of today I don’t think it will happen.

We are blessed with one thing; we are located in such an advantageous geographical region, at the crossroads of east and west. We have huge O&D potential: Africa, Russia, China, and this is exactly what we’re tapping. This is what’s making the airline prosper. We are one of the few carriers that span to all the continents. You note just 10 years ago, nobody had even heard of Qatar Airways, and I’m sure 99% of the people don’t even know how to pronounce my country. This consolidation in my region today I think will not happen for the foreseabble future, so we have to work independently very similar to US Airways.

Dave: I think a term we use internally is one of open architecture. I’m biased on Kennedy and it’s geography. The ability to associate what we started prior to our conversion to Sabre with Aer Lingus in that traffic over JFK and Boston; Lufthansa owns 17% of JetBlue. We’re not part of Star but the world seems to be changing. Not just the open architecture but contrarian relationship. The interline deal with American is pretty basic, but I do think we can put together networks to break the model. That doesn’t mean we won’t go into an alliance but this open architecture to connect to Doha or over to Heathrow or wherever, it’s pretty exciting.

From a labor crewmember perspective, it’s really hard because people don’t quite trust what this is all about. I do think for us, consolidation, hey we suppport it but we don’t plan to be part of it. We’re going to let the industry around us consolidate. Our model is different at this point in time.

12 Responses to Five Airline CEOs Talk About Consolidation

  1. Ken says:

    “Where’s the incentive for airlines to outperform if the customer is going to buy based on price?” – Bedford

    Wow, that says it all right there. Now, in my opinion, if you’re in a service industry, you need to provide good service because it’s the right thing to do. Providing poor service because you can get away with it is pathetic.

    However, I can see his point. Back in my ticket agent days, I couldn’t keep up with all the passengers who screamed “I’ll never fly ABC airlines again!” only to see them at ABC airlines the next week because they had the lowest fare. People who read this blog may choose airlines on service/schedule or whatever, but the vast majority of the flying public still chooses their carrier based on price.

    People love to complain about RyanAir’s nickel and diming and Spirit’s carry-on baggage fees….but yet people are still flying them. One can complain all they want, but until they stop choosing carriers solely based on price and start rewarding carriers who provide better service…it will never change. (Unless we can get some ethically sound, customer service driven CEO in the industry.)

    • JayB says:

      Nothing new to us here, but we’re getting to the point where price is becoming very hard to figure out what with additional fees and charges. The airlines have decided to do that, I believe, not that this is what the customers want, but simply to keep us in the dark about price, that apparently they think we place too much emphasis on.

      Used to be we looked at the fare and that was all we needed to know. Then, fares became so complicated…many, many for essentially the same flight service. Then, all the add-ons, many of which are becoming hard to avoid. The airlines might as well set every fare at $1…”Guaranteed lowest fare.” Great, but watch out for the other fees and charges.

      So, why can’t airlines get us to think about service differences? Tell us: “Fly us. This is why we’re superior to our competition.” If the airlines think we are too stupid to understand what superior service is, educate us. Of course, maybe the airlines think consolidation/alliances will make this all moot: “Take us. You no longer have a choice!”

      • frank says:

        So, why can’t airlines get us to think about service differences? Tell us: “Fly us. This is why we’re superior to our competition.”

        @JayB, The 1980’s was a perfect example of the airlines trying to get your business by service. Unfortunately, LCC carriers, which offered bare bone service for a BETTER PRICE became MORE POPULAR. Legacies, had no choice but to match fares and compete on COST.

        • Steve says:

          Airline transportation has devolved into the classic undifferentiated product. You sit in a seat and get there. No difference in planes, crews, service etc.

  2. oldiesfan6479 says:

    First post-merger announcement comment on the Cranky site?

    Well it’s that they can’t spell! On the AZ community map page of the UA/CO merger site:

    http://www.unitedcontinentalmerger.com/sites/default/files/communitymap2/factsheets/Arizona.html

    Chronic typo: “Tucson” is misspelled as “Tuscon” (as of 8:27am PT).

    I emailed both CorpComms about it, so we’ll see how long it takes them to correct the typo.

    And no, I’m not going to search through the whole site to see if there’s the word “lose” (opposite of find, or win) spelled as “loose” (opposite of tight). ;-)

    • Skinng says:

      Thats the first thing I noticed…as well as “Binghampton” and “Pittsburg”. Apparently Jamestown NY has United service currently as well (even though it is CO).

  3. Dan says:

    Funny, Ken, I clicked “comment” to comment on the same quote, just with a different thought.

    When airline management works with the assumption that customers *won’t* pay more for better reliability, I wonder how they came up with that. One of the problems in trying to generate those statistics is that it is really hard to conduct a fair experiment. (Surveys dont’ work in this industry, because we all know that customers say one thing and do another, re: “I’ll never fly this airline again.”)

    1. There isn’t a whole lot of difference in on-time performance within the “mainline” airlines. According to Travel and Leisure, in 2009, American was the worst legacy airline at 73.4% on time. US Airways was the best at 80.4%. So the difference between the first and last carrier is about 7%, not a lot to most people.

    (Side note that is really interesting: I had someone in the industry once tell me that on-time rankings are all but useless. Those rankings are “for sale” — if an airline wants to be #1, all they have to do is pad their block times a bit more. That comes with a cost, but if that’s what management wants to do, then that’s what it will do.)

    2. Very few non-stop routes have any competition, and non-stop routes already come with a premium anyway. Quite frankly, taking a delay on the non-stop is still likely to get you there sooner than an on-time connection, so it’s still a better bet. For one to infer that a customer is not willing to pay for better performance, the connection would have to have a better on-time rating AND a more expensive ticket, and even then, the comparison still doesn’t work, for the reason I just gave.

    3. In markets where the only option is a connection, it really does come down to an expected value proposition. If you’ve got a family of four traveling, and one airline is $50 more than the other, that $50 adds up fast. And the on-time numbers don’t justifying “betting” on the one with better performance — it’s not that much better than the worst of the bunch.

    4. As for the connection vs non-stop price difference, if you’ve got a family of four traveling on vacation, how much is the time worth? I figured once that given a choice, a connection generally takes three hours longer than if a non-stop is available. If tickets were $100 more for the non-stop, I’d probably save the $400 and take the connection.

    Bottom line, from this customer, is that if the airlines want us to pay more, they have to deliver more. If they want to race each other to the bottom in terms of service and quality, then fine, I’ll pay bottom basement prices. And truth be told, when it comes to flights of 2 hours or less (which is most flights in the US) all I want to do is get there as cost effectively as possible. I don’t need the bells and whistles, and I don’t want to pay for them.

  4. Steve says:

    I just finished a doctorate in organizational leadership which included a vast amount of research in the literature of what allows organizations to change and improve. Mergers are not one of them. Most research shows that 70% of mergers do not achieve the planned goals and most of them never achieve the advertised cost savings. In fact, in many cases the costs associated with combining the two organizations end up being far more than planned and often are more than the savings that are achieved. I am suspicious of any merger that is sold on the basis of cost savings – they never work out. Synergy is also overrated.

    What really happens is the stock prices of both companies go up, the options of the senior execs immediately vest as part of their change of control agreements and they make a bundle. Lower down in the ranks, people lose their jobs. The real question to be asked by the Boards is what will the merger do for each company that they cannot do for themselves? How will combining two legacy carriers with high costs and poor to average customer satisfaction and performance not create one big, high cost carrier with mediocre customer satisfaction?

    US Airways and America West merged and now there is a real question about whether US Airways will be viable. North Central and Southern combined to form Republic which was bought by Northwest which was bought by Delta. Too often these arrangements do not address the real root causes of the difficulties.

  5. The airlines trying to get your business by service LCC carriers, which offered bare bone service for a better price became more popular and larger network with customers and shareholders by doing things more efficiently.

  6. Pingback: Five Airline CEOs on Competing and Cooperating with Low Cost Carriers - >> The Cranky Flier

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