Strong Earnings Don’t Mean Airlines are Doing Things Right

You’re never as smart as you think you are when times are good, nor as dumb as you look when they’re bad.

If the price of fuel hadn’t dropped United would be on its next CEO by now. Ironically, if the Continental board hadn’t pushed out Larry Kellner prior to the merger it would might be a different story. He was a great student of Gordon Bethune — who incentivized and inspired the best from his employees and drove everyone to operational excellence.

Under Bethune and then Kramer Continental was the best airline in the U.S. That — and keeping United from merging with US Airways (which wasn’t really going to happen) — was the idea behind their merger with United. United had been badly run for awhile, and the thinking was that United’s problems would be fixed by that same leadership. But that leadership was already gone…

Lower fuel prices are making the management at American look amazing (to some) for the speed of the world’s largest airline’s turnaround… but a year and a half into the merger the airline is facing higher labor costs (US Airways pay was lower than American’s) and declining revenue per available seat mile as airlines lose some of the capacity discipline of the past couple of years (though they’re trying to hang onto it), as Southwest expands at Dallas’ Love Field with the expiration of the Wright Amendment, and with American most exposed of the US airlines to Latin America weakness.

I always believed that the merger would happen between US Airways and American to the extent that US Airways would overpay for the asset they’d be acquiring. It creates higher costs that can only be overcome through ‘synergies’. Those could come if American had planes that work better on US Airways routes, and vice versa. And there might have been some incremental benefit from the across the board codeshare between the two airlines that becomes a bit more seamless once the reservation systems are integrated.

But so far there’s been a lot of IT resources that have been ploughed into integration, far more than the fruit that integration has borne thus far. Indeed, if the merger hadn’t happened the airline would have been wildly profitable. The carrier simply could wait for better luck. That much was inevitable once American’s pilots decided they’d had enough of Tom Horton, and American’s unions threw in with Doug Parker — despite the latter’s far worse history of labor relations.

A year ago Qantas was losing $700 million and looking for a billion in cost cuts from their international routes. Next month Qantas is expected to report a $900 million profit.

Low fuel prices combined with a decent economy cover up a lot of mistakes in the airline industry. United is profitable even if they’re running a barely functional operation. And those are two drivers outside of any airline’s control.

Current profits don’t mean the industry is doing things right. It’s the profits earned during tougher times that some current managers deserve credit for, and could well again in the future.

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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  1. During the ’08 recession, Beans Babies kept many toy stores in business. When this fad passed, so did the weak toy stores aka Mom and Pops.

    E tu airline industry?

  2. I think it was Shell that just said oil prices won’t recover until 2020. It seems like the airlines are planning on low fuel prices. So they are really doing what they should.

  3. and losing money didn’t always necessarily mean that airlines were doing something wrong, either! High fuel prices, weather, terrorism, and economic conditions have always conspired against airlines.

    These rants against airlines are becoming ridiculous.

    The fact is that I fly UA, AA, DL, AS, and WN in the U.S., and UA, AA, DL, LH, TK, OZ, EK, CX, LA, KE, SA, SK, and others internationally. The difference between those is not as big as most would like to prefer thinking it is.

    UA has a very decent product even when compared with AA and DL, despite the constant barrage of negative media portrayals of UA such as this one. I fly UA more than anything else, actually. My UA SNA-EWR flights are always fine, with some being good and few being subpar. My UA LAX-LHR flights are among the best in that market…and comparable to BA and better than AA and DL in my opinion. VX was fine, too…but not any better than UA.


  4. @Bill, who is whining? You write, “and losing money didn’t always necessarily mean that airlines were doing something wrong, either!”

    I open the post, “You’re never as smart as you think you are when times are good, **nor as dumb as you look when they’re bad.**”

    I focus on the not as good because fuel prices are currently low, it’s the ‘now’ circumstance.

    As far as United having the best Los Angeles – London flights in the market, that’s kind of a stretch. Comparing BUSINESS I’d take American, Delta, or Virgin Atlantic over United in a HEARTBEAT for the better seat.

  5. The person whose opinion I value most when it comes to oil prices in Prince Al -Waleed Bin Talal.

    He said you won’t see $100 again in your lifetime.

    There are dozens of small producers going bankrupt in the next year.

  6. um, NZ has the best product in LAX-LHR in the J market, and BA has the best F. Of course, both are just my humble opinions

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