As US carriers post record third quarter profits JP Morgan analyst Jamie Baker is asking the chiefs of those airlines to philsophize about a term used generously by airlines executives — discipline.
An underlying theme in some earnings discussions is another question — has the airline business model changed for good? That is, will carriers remain focused on return on capital as the good times seemingly return, or will they fall into the trap of vying for market share that will ultimately drive carriers back to the black? Now more than any time in the history of the airline business it seems like a strict focus on the bottom line is prevailing among management teams througout the industrsy.
Here’s what US Airways chief Doug Parker has to say —
Discipline. I think in the generic term, discipline is a focus on what you’re supposed to do and not succumbing to temptation. And those that are disciplined do just that, and those that don’t remain disciplined end up succumbing sometimes to temptation. What that means for business, for the airline business, I think what you’re supposed to do is clearly defined for us. It’s to work for the people that own the company – our shareholders – and to maximize their long-term value. And that’s what we’re supposed to do.
So those that are disciplined remain focused on that. Temptation, I guess, in our business comes in all sorts of different shapes and sizes from time to time. Sometimes the temptation is, as opposed to creating value it’s you know, wanting to be the biggest or caring more about market share than you do about profitability. We’ve certainly seen that happen in the past in our business. We’re competitive people and you don’t like to see someone else getting more share than you do sometimes – that’s temptation.
I mean the history of our industry has been crises forced discipline upon us. That’s certainly been the case for the past three years. And then unfortunately when the crisis subsides we tend to, at least sometimes, succumb to temptation. And I think that’s what everybody’s worried about right now. Is this industry going to do what it’s done in the past, kind of what I was getting at in my introductory comments, and succumb to those temptations? Or are we going to keep focusing, or have we finally learned that what we had to do to get through this is exactly what needs to happen in good times, too, to make sure that we actually generate the kinds of returns other businesses do instead of having survival as our objective?
I think that’s where we are this time. I think it’s dramatically different this time through. I don’t see the same sort of return to you know, to succumbing to temptation that we’ve had in the past. I do see some discipline as I’ve just defined it – certainly from US Airways. I can speak much better about us than I can about anybody else, but obviously in our industry it matters if others have similar views, or if the industry’s restructured, more importantly. I think that’s what’s happened. This consolidation that’s occurred is a huge issue, and that’s dramatically different than we’ve been before.
Delta’s Richard Anderson was the first chief executive to answer Baker’s discpline question, and he also dismisses trying to chase market share.
It is pretty much an overused term. I think it means that your growth, whatever growth you have in the business has got to be below GDP and can’t be at the expense of yield and RASM improvement. So basically you keep up with demand, don’t worry about chasing share, but instead focus on operating, what is going to increase the operating margin of the company.
The other piece you got to look at is fleet. The way for us to de-lever the business is to avoid big capital outlays if at all possible for modifications to equipment or buying new equipment, and so you’ve got to also take into account how your capital deployment is working and what the fleet plan looks like.