Strategies and tactics: April 2008 Archives

We’ve been puzzled for a few days now. Conventional wisdom - and it’s pretty good conventional wisdom - holds that one of the benefits of a merger is that it reduces capacity and that it reduces complexity. When America West took over US Airways back in 2005, for instance, it cut out enough capacity that it saved almost 10% of the system; it also combined fleets and IT systems, although this was not without bumps and took a few years. (We know that ‘bump’ is a euphemism; we were one of the many caught during the March 2007 “transition” from one IT system to another.)
So, when Delta and Northwest come out and say that they won’t abandon any hubs or cut many routes and that they’re not looking to reduce capacity significantly, you wonder. The whole purpose, they say, is to bulk up on revenues rather than trim on overhead. Fair enough. But then they come to the fleet and they say that no, they won’t be getting rid of any of their fleet, even though it has no single aircraft type in common other than the Good Ole 757, you sort of have to wonder.

Sometimes, beggars can be choosers, but should they be? With all this airline consolidation going on, and airlines falling like Eos from the sky, one would think, wouldn’t one, that a money-losing little operation would be glad of a buyer or an offer to buy. But no, that’s not the case. ExpressJet, which has been bleeding red ink badly, said no to an offer from SkyWest, the big regional group. ExpressJet lost $70 million last year, in large part through its independent or branded flying, which it undertook after Continental Airlines cut back on the flying that it was paying ExpressJet to do. SkyWest, which owns SkyWest (that was predictable) as well as ASA, the former Delta subsidiary, had offered about $185 million for ExpressJet - a 63% premium over the closing price of ExpressJet shares. This was not good enough for the guys in Houston, who said no. Well, sort of.

If American Airlines chief executive officer Gerard Arpey plans to fall on his sword, he has certainly started to sharpen it. Arpey took full responsibility for the groundings of several hundred of the airline’s MD80s, groundings that stranded and inconvenienced thousands of passengers whose flights were cancelled for safety inspections. "It's my fault. I run the company," Arpey told reporters in a hastily convened press availability. "I have taken full personal responsibility."
The strandings, groundings and passenger-re-accommodations will cost the airline "in the tens of millions," he said, acknowledging that the airline's investors will be "interested" in the costs. And so will be the travelling public, who have filled the airwaves, Internet and that old-fashioned thing, the newspaper, with their anger. But it's not likely that people will be sending this American postcard (above, left) with any kind of warm greeting.

Aloha also means goodbye. Forever. The troubled little Hawaiian carrier was too sick to be healed by Dave Banmiller, a well-regarded airline doctor, and shut down the other day, for good. A day or two later, a little airline that did a lot of charter flights, Champion Air, said it too would shut down. Both cited the intolerably high cost of fuel, but both are victims of changing airline business models. And both closures demonstrate the rapidly tightening credit markets and the dwindling interest of private investors for dabbling in airlines.
Out in Hawaii, Aloha Airlines had competed in an increasingly crowded marketplace, one in which a new, lower-cost rival was able to undercut it on its traditional local routes while increased competition on its transpacific routes to the mainland kept fares down – enough so that it could not recoup fuel costs. Banmiller, brought in by Aloha’s private equity owners to take it out of its first bankruptcy reorganization just two years ago, singled out an island newcomer for most of the blame: Jon Ornstein’s Mesa Air Group, which started a very low-cost local carrier he dubbed go!; Banmiller said that go! was the true culprit: “unfair competition has succeeded in driving us out of business,” he said, without using an exclamation mark.