Air Service in Troubled Times

This spring was a bad time to be an airline. With reported first quarter losses in the billions, shutdowns and mergers, the industry is on shaky ground, thanks to a lagging economy and record high fuel prices. The carriers are working to reduce capacity — get airliners that are less fuel-efficient out of the system, thereby reducing competition so prices can go up and profitability return. Bankruptcies force this; mergers can have the same effect. Regardless, airports across the country are waiting to see what happens next, with a billfold of experience in their back pocket.

Tim Sieber, vice president and general manager of the Colorado-based consulting firm The Boyd Group, says many of the airline bankruptcies were inevitable.

“ATA lost a pretty big military flying contract,” Sieber says. “So they were going to be dependent on their scheduled service, which was basically bottom-feeding traffic.”

Part of that traffic, he says, was in the highly competitive Hawaii market, which relies heavily on discretionary income — currently in short supply. He says Aloha Airlines shut down for a similar reason.
Skybus shutting down was also inevitable, he says. “Quite frankly, there’s a business plan that never made sense. That was just economic gravity proving it exists.”

He says he’s mostly positive about the Delta/Northwest proposition. “There’s not a lot of negatives to this one.”

In fact, he says, the flying public probably won’t see much difference after the merger. “A lot of what these carriers are proposing to do, they’ve already been doing in terms of code-sharing and frequent flier reciprocity. From the consumers’ perspective, a lot of the benefits have always been realized.”

In the meantime, airlines have to do what they can to weather the current economy. “Here we have some credit and weakness issues in the economy and then we have oil at record prices,” Sieber says. “Sort of like a perfect storm. Certainly the airline industry has gone through challenges and there’s been some pretty tough periods.

“But I think the restructuring and the positioning that the industry made going into this storm — or underwent going into this storm — certainly has put them in a better position to weather it than they might have otherwise been.”

Maintaining the approach
Sieber says the rules governing air service still apply — building a market at an airport, connected to international travel, remains key. Accommodating unconventional low-cost carriers is necessary, but Sieber advises against trying to rely solely on that type of traffic. “That business model will never be the bread and butter for an airport.”

Sieber says airports who have lost service recently to the bankruptcies are essentially no worse off than they were before.

“Everybody loves PSEs and concession revenue. But if you’re talking about building an air service market, you’re never going to build an air service network with a carrier like that. I think network access is really where they need to be focused on.”

Gary/Chicago International Airport had Skybus service — two daily flights to Greensboro, North Carolina — less than a month before the airline shut down.

Unfortunately, Gary is no stranger to losing air service, according to airport director Chris Curry. Curry says he was surprised Skybus was in enough trouble to declare bankruptcy, though he was suspicious when the CEO and vice president of operations resigned a few weeks prior.

“Two days before they went bankrupt, I talked to one of the senior managers of Skybus and we were preparing for events as far as a month or two out with our local Chamber of Commerce,” Curry says.

Overall, the impact to the airport — and its budget — has been minimal. Curry says the airport was purposely slow in changing or relying on revenue generated by Skybus. The airline wasn’t there long enough to really make an impact.

Curry says that there are upsides to having air service even only for a short time. “You accumulate the data that was proven by Skybus and you go out and you look for other airlines to fill that gap because that data will allow another airline to see the cities where opportunities exist.

“When an airline goes out of business and they’re not at your airport anymore, it’s not a total loss. They prove certain things that you may or may not have known,” Curry says. He cites routes that will work, and what the airport’s passengers will support as examples.

“Our plan hasn’t changed, because an airport is never built for one single airline,” Curry says.

Since the Skybus fallout, Mexican-based airline vivaAerobus filed paperwork with the U.S. Department of Transportation to begin daily flights from Gary to Monterrey, Mexico, as well as Las Vegas and Austin, provided the airport can secure funding for a Customs office.

Curry isn’t particularly optimistic about the current state of the industry. “All of us airports are on the same playing field,” Curry says. “As you watch the price of crude oil go up you just sit back and wonder who’s next. And unfortunately it’s a situation that the airports have no control over.

“Everybody’s taking the same risk. No airport is any different than the other and no airline is really different than any other in the way that they operate. I believe all these airlines, when they come in, their intention is to do the best they can. They’re all professionals.”

Edward Johnson, executive director of Piedmont Triad Airport Authority in Greensboro, NC, says losing Skybus after several months of service was a disappointment.

“We really hated to lose those guys,” Johnson says. “They were doing good business through our airport.”

Skybus was not the first low-cost carrier to come and go at Triad — Johnson points to Independence Air and AirTran as examples. “These guys that are trying to do something different in the airline business, there’s a certain amount of risk that goes with that.”

Johnson says the airport didn’t lose much with the loss of Skybus.

“We were not that deeply invested,” he says. Overall, he estimates the airline cost the airport a little more than $1 million in advertising — which he hopes might help attract other carriers — and the addition of switchbacks on some gates.

The Delta/Northwest merger
As of press time, Delta and Northwest were working to get their merger approved in Washington, and rumors of further mergers and alliances for US Air, United, and Continental continued.

Sieber says that due to the general lack of Delta and Northwest’s respective networks, he doesn’t expect a resulting merger to cause many cuts in service.

“It’ll be interesting to see how that plays out over time,” Sieber says.

“Certainly there will be some cost benefits and synergy that will be realized, but the real upside is on the revenue side of the equation. So I don’t think that near-term we’re going to see a heck of a lot service cutbacks. I’d be very surprised.”

Sieber says the hubs will also probably remain intact. The only one he thinks may be on shaky ground is Cincinnati.

“Cincinnati is somewhat of a weak hub to begin with, so they might be a bit on the vulnerable side,” Sieber says. He estimates that airports connected to the network via Cincinatti also have access through other connecting hubs, “so I don’t really see any loss of access to the system by any of those markets.”

Cincinnati spokesperson Ted Bushelman says the president of Delta came to Cincinnati shortly after the merger agreement to assure interested parties that the hub there will not be closed.

Bushelman says he’s confident about the airport’s position within the Delta network. “We have three things on our side. One is that we’re the most profitable hub that Delta has. Second is, that we’re in the center of population in the United States. Third is, we have more Fortune 500 companies than any city anywhere near our size.”

Still, that doesn’t mean Cincinnati isn’t looking at contingency plans. “We’ve discussed what we’re going to do if something would happen in the future. But you always do that.

“If the fuel prices don’t stop, they’re going to have to cut across the country. Everybody is.

“I’m worried more about fuel prices than I am about the hubs.”

Kevin Meikle, airports planning manager for the city of Fresno department of airports, says he’s not concerned — yet — about the impact the merger might have on air service with Delta there.

“We’re not seeing any impact to these potential mergers or bankruptcies,” Meikle says. Fresno is not currently seeing any additional service, he notes, despite high load factors.

Pensacola Regional Airport Director Frank Miller says his airport has lost Delta service before, when the airline went through bankrupcy protection, but has since recovered the lost seats. Delta currently operates nonstop flight to Memphis and Atlanta.

Miller says. “Right now, we’re all just trying to wait and see what happens with the proposed merger. If it goes through, then we’ll have to start working very closely with the airlines to try and get a feel for what that means here along the Gulf Coast.”

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