Airlines in the 21st Century

ИА recession is when you have to tighten your belt; depression is when you have no belt to tighten. When you’ve lost your trousers—you’re in the airline business, w

Sir Adam Thomson

|l| s the airline industry approached the end of

t I the millennium, during the first half of the 1990s, there was no consensus that deregulation was an overall success. Economic deregulation was clearly a boon for mass transit; air fares had plummeted as predicted. But the industry was in disarray. Between 1990 and 1993, airlines in the United States had lost an amount of money equal to all the money that had ever been made in aviation in this country since the first commercial flight. If this was what deregulation had wrought, then deregulation was obviously a tragic mistake.

Deregulation had clearly exposed the sen­sitive nature of the U. S. airline industry. This sensitivity results primarily from fluctuating eco­nomic conditions, often driven by geopolitical factors that affect fuel prices and travel demand. While deregulation gave air travel to the masses, it did so at the expense of the airlines’ flexibility
and any financial cushion in the industry. Com­petition had shaved profit margins so razor thin that almost any economic hiccup translated into severe problems for air transportation. The industry has high fixed costs (the cost of labor, aircraft, and facilities) that cannot be reduced quickly during these adverse economic times. Since fuel and labor costs account for over 50 percent of all airlines’ expenses, spikes in the cost of fuel are particularly debilitating to the airlines.

The last decade of the 20th century was quite representative of the plight of the airlines: boom or bust. Jet fuel prices doubled in just four months in 1990 due to the invasion of Kuwait by Iraq. Eastern Airlines had been liquidated, fol­lowed by Pan American. Thus deregulation had taken out the venerable airline of Eddie Ricken – backer and as well as the “Chosen Instrument” of America. The remaining legacy airlines took on crushing debt trying to stay in business. The economic downturn produced huge losses for the airlines until 1995. The state of the airline indus­try was so fragile that a presidential commission was established to look into ways to ensure the survival of the industry. There was talk of nation­alizing the airlines.

9 Southwest Airlines

Only Southwest Airlines seemed to understand what was going on. While the major airlines were trying without much success to stop the bleeding, Southwest was raking in record profits; it was also expanding. USAir had acquired PSA in California, and then began to cut back service on the north-south corridor. Southwest came in to fill the void, but at offbeat airports like Oakland and Burbank, and at seemingly ever decreasing fares. Then Southwest entered San Jose to chal­lenge American Airlines. When told that South­west was coming in, American did not even wait for the discount carrier to arrive; it withdrew, anticipating the losses to come in a one-on-one contest with Southwest.

«If the Wright brothers were alive today Wilbur would have to fire Orville to reduce costs. 99

Herb Kelleher, Southwest Airlines, USA Today, 8 June 1994

Southwest was also headed east, for the first time in its history. Now Southwest would be in Baltimore (BWI), next to the seat of power in the District of Columbia. Southwest then was the eighth largest airline in the United States (United was first, followed by American, Delta, Northwest, Continental, and USAir), but it was different in at least one highly signifi­cant way: it had point-to-point routes (the 100 city-pairs most frequently traveled), and did not waste time getting in and out of large hub terminals.