Airline bankruptcies: the next round
It may be a bit premature to be predicting the next round of legacy airline bankruptcies. After all, the airline industry has just reported an overall profit for the first time in years. But the writing is on the wall: As U.S. airlines slash domestic routes, downsize domestic aircraft and add international capacity and routes, they are once again moving in lockstep toward financial ruin.
The blueprint for disaster is not so different from the one that the major U.S. airlines followed in the late 1990s — until the events of 9/11 disrupted domestic air travel and sealed their Chapter 11 fate. This time, the market that will disappear for them will be the international market, which is currently their only bastion of profits.
Last time it was Southwest Airlines, AirTran, Frontier and JetBlue that made life miserable for the legacy carriers. Now a new crop of airlines is emerging that will make the big boys suffer. My advice to the executives at United, American, US Airways, Delta and Continental is this: Watch out for the upstarts on your international routes.
Open skies
One of the biggest changes in international air travel is the coming implementation of the Open Skies Agreement between the European Union and the United States. The former system of controlled schedules, which limited the number of flights between European countries and the United States, will be replaced with a new international paradigm that will allow more point-to-point routes between the Old World and the New World. These new routes will be decided primarily on economic factors rather than on today’s political and lobbying factors.
As I see it, the international airline order is going to face a change quake over the next three to five years. Nimble, low-cost carriers are going to move into the lucrative transoceanic markets and fly the larger legacy carriers’ profits into the ground.
Change is already afoot. Low-cost carriers full of vacationers have begun to fly international routes to the Caribbean, Canada and Mexico. JetBlue has launched its first international code share with Aer Lingus, one of the few European legacy airlines to adopt a low-cost, simplified pricing system. Virgin Blue is making plans to fly trans-Pacific from Australia to the United States, putting new pressures on Qantas and United. Jet Airways, an Indian startup, has already received approval for a new trans-Atlantic flight from Newark to Brussels and onward to Mumbai. Porter Airlines, another little-known startup, is plying the skies between Newark and Toronto, and Zoom Airlines, a Canadian bargain startup, is now flying from JFK to London Gatwick.
A business-class challenge
It’s not all bargain travel, either. Three airlines catering to the lucrative business-class traveler — Eos Airlines, Silverjet Aviation and MAXjet Airways — have already started trans-Atlantic service from the United Stated to the United Kingdom, and they are planning to open more countries. Major carriers like British Airways and Lufthansa have announced plans for their own business-only flights to stave off the upstarts. Such protectionist actions will work for a while, but once critical mass is reached, as it did within the U.S. domestic market, the legacy carriers will lose market share and pricing power.
The airlines I’ve mentioned so far are all relative newcomers, but the top tier of low-cost carriers is also getting ready to enter the international arena. For example, Ryan Air is rumored to be negotiating with Baltimore/Washington airport as well as with the airports in Providence, R.I., and Manchester, N.H., to begin service between its hub in Dublin and the U.S. East Coast. Southwest Airlines is also rumored to be considering expansion into the international fray through its partner, ATA Airlines. Both Ryan Air and Southwest have the financial wherewithal to weather monopolistic price cutting and so force a change in the economics of international travel. Once these experienced carriers bring their consistent service and focused management to bear on trans-Atlantic routes, the tide of battle will turn against the legacy airlines.
The dust is barely settling from the reconstruction of the domestic airline industry after the major airlines imploded under the weight of mismanagement, arrogance and spiking jet fuel prices. Next on the agenda will be the new world order for international air travel. If the legacy carriers don’t begin to change their international operations in anticipation of the coming new low-cost competition, they will be reduced to reacting after the fact and scurrying back to the protection of the bankruptcy courts.
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