Key points for those of you who don't want to read the entire article:
*
ATA was the most aggressive major airline in cutting costs last
year. Costs decreased an impressive 16.5%, while passenger traffic jumped
16% and revenue rose 19%.
*
Among the seven "network carriers," only Delta saw its costs
increase, despite cutting 4,500 jobs.
*
Delta spends an industry-leading 4.72 cents on labor for each seat
mile flown.
Discount Airlines Gain on Cost Front
THE MIDDLE SEAT
By SCOTT MCCARTNEY
>From the Wall Street Journal, 2/18/04
You buy your own food, fly on smaller jets, print your own boarding passes
and try to be sympathetic when flight attendants complain about their pay
cuts.
After all the rollbacks in service and pain faced by fliers in the past
year, which airline actually managed to trim its costs the most? United
Airlines in Chapter 11? Reorganized US Airways?
No. It was the low-cost carrier ATA Airlines.
The year-end numbers are in, and they highlight like never before the
changing choices that passengers are making. Consumers are increasingly
flocking to low-cost carriers and bypassing the big traditional airlines:
Last year, six low-cost carriers grew by almost exactly the same amount of
traffic that the seven network airlines lost -- a one-for-one shift.
Together, the six low-cost carriers now control nearly one-quarter of
domestic air travel. They also earned $730 million in net income, while the
seven higher-cost carriers posted total net losses of $3 billion.
The key is in how well the upstarts manage their expenses. ATA Airlines was
able to slash its unit costs 16.5% last year, more than anyone else. America
West Airlines, JetBlue Airways and AirTran Airways -- all low-cost carriers
to begin with -- also significantly reduced costs. For high-cost carriers,
the limbo bar just got lower. As a result, travelers will surely be seeing
more cutbacks in service.
Just look at US Airways Group Inc.'s bind. US Air dropped its unit costs by
10.3% last year, the most among high-cost airlines. (That's measured by
costs spread over how many seat miles flown, with a seat-mile equaling one
seat flown one mile.) Thanks to its bankruptcy reorganization, labor costs
at US Air were down 18%. But is that enough?
Two years ago, US Air paid 71% more to fly one seat one mile than Southwest
Airlines. But last year, US Air was still 49% more expensive on the cost
side -- a difference it can't make up on the revenue side. Unit revenue
likely will fall as competition builds and Southwest attacks Philadelphia,
US Air's richest hub.
In the long term, US Air Chief Executive David Siegel says the airline's
revenue advantage over low-cost competitors will be 10% to 15%. So costs
must come down to the same level.
That's why the airline is arm-wrestling unions for more concessions, and
threatening to sell assets, less than a year after emerging from bankruptcy.
Indeed, industrywide, future disruptive battles with labor unions may be in
the offing even if the business, overall, is recovering.
AMR Corp.'s American Airlines cut its unit costs by an impressive 8.9%,
which was better than the 7.5% drop at its archrival, UAL Corp.'s United.
United, of course, is operating under bankruptcy-court protection. Of the
cuts United did get, a bigger chunk has come out of labor. But United's
payroll was down 25% as it shed 19,800 employees, or one-quarter of its work
force. American shed 14% of its labor force and saw the total spent on labor
drop 13.4%.
American has improved efficiency, though, smoothing out its schedule at hub
airports so planes and workers don't sit idle as much and airports don't get
clogged, and it has simplified its fleet by renegotiating leases and
shedding aircraft. American also did better on the revenue side last year,
posting flat results while United's revenue fell 3.9%. Bottom line: AMR had
a net loss of $1.2 billion, while UAL had a net loss of $2.8 billion.
And what about Delta Air Lines and Northwest Airlines, both of which are
currently trying to win concessions from pilot unions? Concessions are a
hard sell when the economy is rebounding, losses are shrinking, and
bankruptcy, at least for now, isn't a credible threat.
Delta was the only airline among the seven network carriers to see its unit
costs go up last year. Delta shed 4,500 jobs, about 6% of its work force,
and slapped cuts and changes on nonunion flight attendants and others. But
pilots got raises, and top managers got big bonuses, too. Overall, Delta's
payroll was up 2.9% last year. The airline spends 4.72 cents on labor to fly
each seat one mile -- the highest in the U.S. industry. Delta had the worst
operating margin in the industry last year, except for UAL. A nasty fight
lies ahead between Delta and its pilots, who are the highest paid in the
industry.
Low-cost airlines, amazingly, are finding ways to become even more
efficient. They have benefited from cuts in travel-agent commissions and
cheaper distribution on the Internet. They've outflanked bigger airlines on
hedging against high fuel prices by locking in low prices long term.
Growth helps, too. At ATA, passenger traffic jumped 16% and revenue rose 19%
last year. The Indianapolis-based company, which has its major hub at
Chicago's Midway Airport, ended up earning $20.4 million last year, after a
2002 net loss of $169.3 million.
ATA, by the way, became the nation's 10th "major" airline, a noteworthy
accomplishment. By the Department of Transportation's definition, an airline
needs $1 billion in annual revenue from scheduled passenger service to be
considered "major." Four-year-old JetBlue darn near made it, too. JetBlue,
which grew a staggering 69% last year, had $965 million in passenger
revenue.
The choices for consumers will continue to grow -- while they continue to
get tougher for the legacy airlines.