Costs Buffer Airline Industry
Paul Lim - December 15, 2004

Since the attacks on September 11th, the airline industry has been hit hard. Costs went up and ridership went down. It has since tried to gain some balance, but with the rash of airlines filing for bankruptcy, the industry still looks to be in trouble. Business analysts say that with rising oil prices, lowering ticket prices to help encourage more travellers is simply not an option. What is interesting is that plane tickets prices have increased on all but the budget carriers.

JetBlue, a popular budget carrier, has been booming from the latest airline whirlpool the major carriers have been engulfed in. United Airlines claims that the major carriers are focued on balancing their international network - rather than being able to zero-in on the domestic network, which the budget airliners are capitalizing on.

Regardless, major carriers like United and US Airways have filed for bankruptcy and prices are still just as high. United has since reduced its domestic travel schedule. As a quick comparison, what would a round-trip ticket between New York City (JFK) and Las Vegas run about on various American carriers? Checking their respective websites, these are the best prices offered on the suggested flight:

	JetBlue	$99.00	(Non-Stop)
	United Airlines	$503.40
	Delta	$253.40
	U.S. Airways	$370.40	(Non-Stop)

Many say the rising oil prices are contributing to the handicap suffered by the airline industry including U.S. Airways, which claims that it is the reason why they have filed for bankruptcy. While oil prices are major component in the problems airlines are facing in their effort to revitalize the industry, according to a report by ABC News' Betsy Stark, oil comes in behind labor costs as the airlines' biggest expenditure.

According to the Philadelphia Business Journal, U.S. Airways reached a tentative deal with their pilots union that would shave $300 million in annual expenses. Unionized labor has cost many American industries their economic edge. Just this year in the United States, the top three selling cars were not GM, Ford, and Chrysler. Toyota has become the third highest automobile manufacturer, an unprecedented accomplishment for a foreign-owed automobile company.

Delta Airlines has also been able to reach a deal with their pilots union which includes pay cuts. Recent figures show that Delta pilots are among the highest paid in the country, earning anywhere between $100,000 and $300,000 a year. The Casper Star Tribune reports that the contract cuts their pay by 34%, providing Delta a $1 billion cut in costs, which will be used to help save the airlines. This $1 billion bonus is a huge boom to Delta, which had reported a $651 million loss in the third quarter. Now it's not all loss for the pilots as this deal would also give them options to purchase up to 15% of Delta stock.

Airlines such as U.S. Airways have tried their best to make proper cuts in their budgets to save their companies from liquidation, but labor unions have made a habit of disagreement. In most cases, the labor union is concerned only with its own short-term needs, with no consideration for the future of the company. Without the tentative deal that was struck last Wednesday, the company might have just gone under - leaving the union employees jobless.

Early last month, according to "Aviation Daily", Air Canada has begun to dig itself out of bankruptcy, and their claims to success include longer working hours, more productive shift schedules, and more part-time employees. These are issues that union employees would be inflamed by. By hiring more part-time employees, they would claim that jobs are being eliminated, an "outsourcing" of sorts. Along with that, longer work hours would be considered deplorable, and another cause of protest and complaint. Air Canada sets an example of how to increase revenue and lower costs, all at the same time.

Currently, United States' Boeing is going to the World Trade Organization with complaints about their rival airplane manufacturer, Airbus. According to the BBC, there is an on-going flap about Airbus' fiduciary relationship with the European Union. According to a 1992 agreement, governments are limited in the amount of support they can contribute to an airplane manufacturer; the EU and Airbus say they have stayed within the limitations. One might argue that in recent years, Airbus has since met and surpassed Boeing's productivity, and at a recent convention, Airbus trumped Boeing in investments and sales for the year. According to U.S. Trade Representative, Robert Zoellick, "Airbus now has a 50% market share in large commercial aircraft", he adds, "Airbus now sells more large civil aircraft than Boeing".

Besides airline pilots, other airline industry labor groups have yet to settle on any kind of decision. Some airlines have hit some turbulence with staff, like ground crew, who are not on the verge of striking but are seeing the salary cuts and layoffs and are not too pleased with what may come in the future. With the pilots working out new contracts, other airlines’ team members may be in store for some revamping as well.

With United's plan to cut flights, George Novak of the George Washington University Aviation Institute, says, "When you reduce your fleet, you have the need for fewer pilots, fewer flight attendants, and fewer mechanics." Despite United already reducing their costs by $2.5, it is still requesting another $1 billion in additional cutbacks. If labor costs can afford so much cutting back, there must be a huge divergence between prioritizing the customer and "satisfying" the personnel.

Budgetary priority, especially in such a huge industry, does not survive in the conference room. International airliners are able to offer comparable fares that are equal or even less than domestic flights offered by major carriers. Air Canada's success came from rooting out labor inefficiencies and working towards a more volume based revenue, rather than value. United Airlines may suffer from their decision to switch focus to what they call, "more profitable international routes", with a drop in air travel altogether.

As of November 1st, CBS Marketwatch reports both Northwest and Delta Airlines stocks finished higher after trading. While their financial situation is still very precarious, and some of the other major airlines are already marked as "doomed", the upswing in stocks may bode well for the futures for the major airliners, but it is not an ultimate yardstick to judge their budget practices by.