TEMPE — US Airways chairman and CEO Doug Parker opened the airline’s annual media day with remarks on the state of the airline industry, pointing out financial, political, and labor-related challenges in the year ahead and calling on airline managers to change the way they think about industry competition.
Parker has long been an apostle of consolidation in the industry, leading America West to take over US Airways in 2005 and attempting to take over Delta in 2006-07. He pointed out today that no single airline has more than a 25 percent share of the U.S. airline market. “In a network business, that’s a lot of fragmentation. It’s a fragmentation that makes it hard to produce returns for shareholders,” he continued. “More [integration] will produce even more value.” He said that US’s hostile takeover of Delta attempt spurred the Delta-Northwest merger, and he added that whether US Airways is in mergers or not, the airline will benefit: “Where the real value occurs is the reduction of fragmentation.”
As for government affairs, Parker said that “this is a business that is overtaxed, that is in many ways overregulated.” In what I interpreted as a veiled reference to House transportation chairman Jim Oberstar (D-Minn.), who has declared war on airline consolidation and networking, he said: “We have many in congress who view aviation as a public good.” Airlines have to focus on little issues like service to individual congressional districts. Congress, he said, wants to harness the industry to serve its own interests. [Not unlike most other industries, these days –ed.] The regulatory picture looks bleak, he said. “This one is probably not going to get better. . . . The best we can do on this one is hold the line. . . . Our message through 2009 is ‘do no harm.’ Let us compete, leave us alone.”
These challenges somewhat contradict the conventional wisdom on airline industry profitability in 2009, which Parker said is a possibility because the high oil prices of 2008 forced airlines to cut capacity and impose ancillary fees that, combined with reduced oil prices, will allow airlines to outperform the general economy. “But the problem with this story,” he said, ” is that it implies a level of comfort with what we’ve done so far that I don’t think is sufficient.” Some people think “if we manage this business to profitability, we’ve done enough” — but Parker said that he wants to move toward what he called “real returns” to shareholders, which will enhance stability for employees. Pointing to a chart showing airline profitability (see this post) versus other industries’ profitability, Parker said that airlines operate on a vastly different performance standard than other industries, especially since the late 1990s, when, “as times got good . . . we put in more capacity, we negotiated labor contracts we couldn’t afford.” This divergent performance has caused many observers to say that airlines can never be profitable, or that there’s no way to generate profits. “We don’t accept the notion that we have to be different from other businesses,” Parker said. “Conditions are right for us to get this fixed.”
“This is an industry that needs to get fixed. . . . It’s important to all of our constituents,” president Scott Kirby added.
“Real returns” will also benefit airline employees, Parker said. He points out to his labor groups that highest-paid line employees in the airline industry are FedEx and UPS, which make their home on the general profitability line, not the airline profitability trend. Airlines’ poor performance “is not labor’s fault. This is management’s fault. We have to figure out ways to get contracts that allow us to ride through cycles.”
Parker pointed out that his airline’s “customer focus” includes ramping up revenue from ancillary fees. (They can be customer-friendly, I’ve argued.) “We have a product we sell – we don’t need to give it away.” Ancillary revenues “are a step in the exact right direction. . . . By charging $15 per bag, we have seen bags checked drop by 20 percent.” Fewer bags lead to better bag service. Kirby also emphasized that US Airways is moving toward expanding ancillary revenues for bags, seat selection, and inflight service, which brought in $165 million in 2008.
Ending with a controversial point, Parker said that airline managers “focus far too much in this business on our performance versus each other rather than our performance as a business. . . . We work so hard to be the best of the worst.” But, he said, “beating each other up doesn’t work.” He is optimistic that the current crop of airline leaders can change the focus of competition in the industry, because they are CFOs or external people who are focused on “real returns,” not necessarily on the romance of aviation or the thrill of unnecessary expansion. I plan to ask Parker later this afternoon about how current law would inhibit or could be amended to promote the kind of competition he thinks necessary.
UPDATE, later today: I asked Parker whether he has any specific policy, regulatory, or statutory changes in mind that would enable management groups to focus more on competing with industries and less with each other. He replied, “No, it’s a management focus issue.”