Why are some airlines more profitable?

[murl]

Why are some airlines bankrupt while others seem to be making money? I know some of the discount carriers are doing very well, and it can't be that they just give you a half of a coke instead of a whole coke. Why don't other airlines that are hurting implement those same strategies and work off of a different business model? For example, what makes southwest more profitable than Delta etc? How did some airlines get in bad shape in the first place? Do some of them hedge the cost of certain things and others don't? These may be silly questions but I am sure the issue is much more complex than it seems?

[CFIse]

For SouthWest they had the cash to fuel hedge and fuel prices went through the roof. That's an advantage they had, over time, assuming that all the airlines return to similar hedging plans, that advantage will disappear. That's why everybody is waiting for SouthWest's fuel hedging to expire so that ticket prices can rise.

It's not about half a can of Coke. Mostly, and people here don't really want to hear this, but it's about labor costs. For most airlines labor costs are number 1 or number 2 on the expense line. In the good times the airlines allowed the unions to establish a baseline of wages and job rules that any sane and reasonable person would look at and call ridiculous. You can't blame the union, they asked and they received. The companies did it in the name of keeping labor unrest under control. If you think an extra $10 a flight hour and an average of 40 hours a month is expensve see what a strike costs you.

Of course it's more complicated than that, but in the end if airline A's cost per seat mile is $0.25 and airline B's cost per seat mile is $.10 then airline B has a lot more flexibility in what they can do and charge versus airline A. Changing airline A's cost per seat mile is a long term activity that can't be just done with the flick of a pen.

With bankruptcy many of the airlines have managed to slash labor costs - to the point where people will point out that SouthWest's labor costs are higher than many legacy airlines. See fuel hedging above. We'll see if SouthWest has a rabbit to pull out of the hat over the next few years. I would never predict the demise of SouthWest - I would predict that eventually they will succomb to the bright shiny lights of multiple aircraft types and feeders and all the other crap, and they'll just be one more struggling airline. JetBlue on the other hand - they've got an unsustainable business model - the chickens are coming home to roost there over the next few years.

I think Warren Buffet pointed this out, but if you look at the history of any airline over their lifetime they have lost money. The years they lost money and the amounts FAR out-weighed the years they made money and those amounts. It's just not a good business to be in - the fact that people persist on staying in the business is just proof that people will do lots of things that fly in the face of the facts.

[Doug Taylor]

The simplest explanation would be that it's a lot like being married for a long time. The bride and groom are the market and the company.

Some old couples will grow together and prosper long term (AMR)

Other old couples grow apart and get divorced but try to work it out (DAL)

Some newlyweds do well the first 5 or so years, preach about how wonderful things are and then end up exchanging death threats in divorce court (PeoplExpress)

Some newlyweds actually get thru the first 5 years, prosper and become and old wise couple! (SWA)

Missing link: Bankruptcy profiteering.

[mtsu_av8er]

Originally Posted by CFIse

. . . but if you look at the history of any airline over their lifetime they have lost money.

What about that company that's been making a profit every year since sometime in the 1970's?

[SteveC]

Originally Posted by mtsu_av8er

What about that company that's been making a profit every year since sometime in the 1970's?

And where do their labor costs align in relationship to the others?

[mtsu_av8er]

Originally Posted by SteveC

And where do their labor costs align in relationship to the others?

Steve, you're messing up my argument here . . .

You are absolutely correct, though . . . they've definitely figured out a way to keep those costs down. Depending on how you look at it (and where you sit at the negotiating table), that could be good or bad.

[murl]

Do the pension plans hurt many airlines, or is it just the cost of operation?

[Doug Taylor]

Hey, what news organization do you work for?

[kellwolf]

Let's also not forget that LCCs like SWA, AirTran and jetBlue can often cherry pick the most profitable routes whereas the larger carriers like Delta, NWA, CAL, etc often service smaller cities and lose money in order to feed the hubs.

[mtsu_av8er]

Originally Posted by kellwolf

Let's also not forget that LCCs like SWA, AirTran and jetBlue can often cherry pick the most profitable routes whereas the larger carriers like Delta, NWA, CAL, etc often service smaller cities and lose money in order to feed the hubs.

But Steve, isn't cherry picking SMART? I mean, what if a department store sold most of it's products at BELOW cost, just to get you in the door?* Wouldn't that be insane?

*Not considering promotional items, etc.

[surreal1221]

Originally Posted by mtsu_av8er

But Steve, isn't cherry picking SMART? I mean, what if a department store sold most of it's products at BELOW cost, just to get you in the door?* Wouldn't that be insane?

*Not considering promotional items, etc.

Not to get too off topic. . . but Wal-mart does just this.

They place the cheap objects in the middle of the darn aisles so you can't navigate around the beast of a women who is standing in the middle of the aisle. . . so you see the cool looking, cheap product. . . think about it alittle bit, and figure. . . well, let's see what other brands of this cheap product they have. You slowly drift into the section where said cheap product originates from, only find out that there are more expensive products that do the exact same thing. . . but since you're here, you get one of the slightly more expensive ones instead of returning to the cheap middle of the aisle blockade of original cheap product.

/end wal-mart rant.

[kellwolf]

Originally Posted by mtsu_av8er

But Steve, isn't cherry picking SMART? I mean, what if a department store sold most of it's products at BELOW cost, just to get you in the door?* Wouldn't that be insane?

*Not considering promotional items, etc.

Not saying it isn't smart, but it also puts them in a better situation than the bigger boys with a bigger route structure. IMO, it's hard to compare the two. Now if you said "Why is SWA more profitable than Airtran?" then you've got a good comparison. But until SWA starts service to GRR and Duluth, MN, it's hard to compare them to NWA. SWA is willing to let the market share since flying from CHA to MEM with a 737 wouldn't be profitable. With the hub and spoke system, you have to take the good with the bad. You can't fill up your MEM-MCO 757 flight without pulling the people in from the smaller towns like CHA.

And Lloyd, SWA HAS done the "below cost" thing to get people in the door. Why do you think so many people automatically assume they have the lowest prices when, in fact, they often are the same or more expensive? The branding has worked for them and is one of the reasons they profit so much. People say "Hmm. I wonder how much SWA is?" look on the website, buy the ticket and never even look at another airline. Whereas if SWA was on a site like Orbitz or Travelocity, they might actually NOT be the lowest price and lose that passenger. A lot of people say SWA isn't on those sites b/c of the fees, but I think that's only part of it. SWA management is crazy. Crazy like a fox.

[murl]

Originally Posted by Doug Taylor

Hey, what news organization do you work for?

I don't work for a news organization, however I wish I did because I would probably make more money doing that than what I am doing now. I was just curious as to how some of them got in bad shape financially, and how some see more profits than others. That does make sense as to how some carriers only pick the most popular routes. I guess many of them suffered alot after 9-11, as well as many other businesses.

Doug thanks for starting and maintaining this site, it has been very beneficial to me over the past few months. I am very thankful to have a place where people can speak freely about their experiences and ideas. I have learned so much from reading on your site and these forums. I feel much more informed about this industry and the different training programs available.

[mpenguin1]

Originally Posted by SteveC

And where do their labor costs align in relationship to the others?

Southwest has some of the highest labor cost in the industry, but, it is how they utilize their labor that makes them successful.

Southwest pilots are the one of the most productive in the Industry (No, an airline that has international operations, can not copy the Southwest business model)

Southwest Flight Attendants are also highly paid, but, they clean the airplane at rest points, saving the airline money with cleaning crews.

Southwest also operates one type of aircraft, the 737, saving Southwest on crew training, spare parts, & employees.

You can only purchase a ticket on the Southwest website or a Southwest ticket agent, saving the airline money without having to use Travel Agents type websites, & are able to keep tighter control on ticket prices.

[jtrain609]

I think FA's clean the airplanes at a lot of airlines these days.

[kellwolf]

Originally Posted by jtrain609

I think FA's clean the airplanes at a lot of airlines these days.

I can tell ya one where they don't. "This plane is filthy! Can you call grooming for me again? I'm gonna read this magazine....."

[killbilly]

Originally Posted by mpenguin1

Southwest has some of the highest labor cost in the industry, but, it is how they utilize their labor that makes them successful.

Southwest pilots are the one of the most productive in the Industry (No, an airline that has international operations, can not copy the Southwest business model)

Southwest Flight Attendants are also highly paid, but, they clean the airplane at rest points, saving the airline money with cleaning crews.

Southwest also operates one type of aircraft, the 737, saving Southwest on crew training, spare parts, & employees.

You can only purchase a ticket on the Southwest website or a Southwest ticket agent, saving the airline money without having to use Travel Agents type websites, & are able to keep tighter control on ticket prices.

That's not all they do. Just a couple things off the top of my head...

Whenever possible, a flight turns around in 30 minutes, door open to door closed - the open seating policy helps with that. Less time on the ground is more time generating revenue.

Their IT department, at one time, didn't buy a single computer. What they would do is set up a bunch of tables in a hangar, get a bunch of employees to volunteer (pizza and beer were included) and they assembly-lined building their own machines. It was cheaper to do it that way, and it was apparently a lot of fun for everyone.

Their marketing department has used the same ad agency for decades - GSD&M out of Austin, TX. I'm told they've managed to negotiate somewhat 'lower' advertising costs in exchange for a long, mutually beneficial relationship. Don't know if that's true.

They take care of their employees. My ex was a contractor at SWA corporate and she was astounded at how happy people are to work there, and as a very frequent passenger, it carries over into the service they provide - the attitude is simply unlike any other airline. Everyone that works there is proud to be there. That's so bloody rare these days.

But the most important thing they've done is brand it right. They have created a perception of a value-priced airline, and they've got us trained well, as passengers. They've made ticketing fairly FLEXIBLE (my favorite rant) - your $250 ticket on SWA often has no restrictions vs. another airline's. I harp on this over and over, but the main reason I use SWA as my preferred carrier for business travel is that they are reliable and give me excellent value for my company's travel dollar.

Kelleher always believed that prosperity would come from taking good care of your people and giving people a good product for their money. It really is that simple, and it does work.

Read "NUTS!" (can't remember the author, but it's got Kelleher on the cover with an SWA tattoo, flexing with a big ol' grin on his face) and you'll get an idea of their management model.

Bottom line - they're profitable because they make smart decisions, and take a long-term view.

What is going to be really, really interesting is to see how they do now that Wright is being lifted in phases.

[kellwolf]

Originally Posted by killbilly

That's not all they do. Just a couple things off the top of my head...

Whenever possible, a flight turns around in 30 minutes, door open to door closed - the open seating policy helps with that. Less time on the ground is more time generating revenue.

This was always a point of pride for me when I was working there. The over-the-wing stuff is pretty cut and dry: passengers on, passengers off. The under-the-wing stuff like loading, unloading, transferring bags, freight, mail, etc required a lot of planning to get everything done on-time. If you had all your bags dropped off as the plane came was unloading and didn't have a plan, well, you were in for an uphill battle. If you had a clue as to how many bags you had coming, freight, mail, what bags were coming off and did you have bags coming from other flights, you could get the gate set up BEFORE the plane got there. My planning normally started about 20 minutes before the plane got to the gate, and I still had to adjust on the fly sometimes. If done right, you can offload and load a 737 booked full in 20-25 minutes with TWO (yeah, I said it) TWO people. It sucks, but I had to do it on the MCO-STL-OMA flight DAILY. Agony, thy name is Flight 351......

They take care of their employees. My ex was a contractor at SWA corporate and she was astounded at how happy people are to work there, and as a very frequent passenger, it carries over into the service they provide - the attitude is simply unlike any other airline. Everyone that works there is proud to be there. That's so bloody rare these days.

It's a simple rule that too many airlines are not willing to follow, and it's the reason SWA is alive today. If it weren't for this, SWA wouldn't be profitable today b/c they wouldn't even EXIST. The sacrifices the employees made to keep the airline running in the early days were rewarded by management. Now, you've got employees that have been around a while retiring with hundreds of thousands of dollars in profit sharing. We had a few rampers that would get ticked if they found mail laying out in the rain. Why? B/c SWA would have to carry it for free, and that cut into the profit sharing! If you tie the company's success into the employees' pocket books, odds are they'll work hard and care more. If you do nothing but ask for concessions and give backs while patting upper level management on the back, you nurture resentment and anger.

Read "NUTS!" (can't remember the author, but it's got Kelleher on the cover with an SWA tattoo, flexing with a big ol' grin on his face) and you'll get an idea of their management model.

They actually GIVE this book to every new hire at SWA. At least, they did when I went through new hire orientation.

What is going to be really, really interesting is to see how they do now that Wright is being lifted in phases.

It fits. SWA has never been a "rapid growth" company, although it may seem like it at times. They've taken the "cautious growth" path. For example, when PHL opened, they set a schedule. They had to add flights before the station opened b/c of the response in ticket sales. Then they slowly grew the station. Phasing out Wright more or less plays right into SWA's hands so they can feel out which markets will work instead of diving headlong into a big expansion.

[killbilly]

It fits. SWA has never been a "rapid growth" company, although it may seem like it at times. They've taken the "cautious growth" path. For example, when PHL opened, they set a schedule. They had to add flights before the station opened b/c of the response in ticket sales. Then they slowly grew the station. Phasing out Wright more or less plays right into SWA's hands so they can feel out which markets will work instead of diving headlong into a big expansion.

I was wondering when you'd chime in on that.

Something else I've always loved about SWA has to do with the passengers...a small anecdote, if you will....

A few years back, I'd been hopping all over the country doing some contract jobs and was finishing up a six-week run that had me in a new city every two days. Because of storm activity, there was a whole bunch of re-routing that had me going from Little Rock to Nashville to catch a connection into Hobby so I could get back to Love. As I was waiting in Nashville, the power went out in the airport. No juice to power the jetways, computers, lights, anything. Planes were stacking up at the end of the runways and gate agents were getting the riot act from the pax everywhere....

...except SWA. The pax there just kinda shrugged, grinned at each other and waited...SWA agents started handing out drink coupons to everyone, joking with the pax and all 120 or so of us were pretty chilled out about the whole thing. It dawned on me right then that the passengers were as happy to be flying SWA as they were for flying us. One guy remarked, "Yeah - Herb's got us trained pretty well, but he'll get us home safe."

You just don't see that very often, if at all. Maybe part of it was that we were all mostly a Dallas-bound flight and we were a "home team" kinda pax load, but it was more than a little weird and pleasant to see that the entire flight took things in stride while the poor AE agents got clobbered.

And Nuts is a great book. There are telcom companies who are trying to duplicate the applicable parts of the business model that SWA does. In my opinion, it should be required reading for anyone trying to start a company.

I'm curious, though, about Wright. I've always just adapted to the system when I needed to go somewhere on SWA that was Wright-restricted. The cool part has always been that if I had to go to Austin, Houston or San Antonio, it was often CHEAPER for me to fly them and rent a car than it was for me to drive when I factored time into it. Now that Wright is lifting, I want to make darn sure that the convenience/value remains. Being able to get to MDW, LAX, and anywhere in NY from DAL would be awesome, though. It's SO much closer to my house than DFW.

Hmmm...now that I think of it...I wonder if their telecom group is hiring....

[skydog]

Southwest is successful for all of those reasons listed above. But I think there is also something more to it, and his name is Herb. Herb Kelleher differs from every other airline CEO in two ways. 1) He was the founder and first investor in the airline. He was not some Harvard M.B.A./ Wall Street tycoon who saw the opportunity to make a few quick bucks by running an airline. He put up a his own money, everything he had. He also had put in sweat equity. Back when the airline was just getting started, and running into opposition from American, Braniiff, and Texas International, he did all of their legal work for free. He was not even the president of the company for the first 10 years or so. 2) His way of treating people is not an act, or a business model. It's the way he is. He treats people the way they want to be treated, and he respects people for who and what they are. Contrast that with all the other airline CEO's to whom labor is nothing more than a few numbers on a balance sheet.

Look at all the other big names in airline management: Wolf, Lorenzo, Crandall, etc. These guys were not entrepeneurs. They were MBA business school types who knew how to cook numbers and leverage balances sheets. They had nothing invested in their companies. They were rich when they started working at the airlines, and they left even richer.

[killbilly]

Originally Posted by skydog

Southwest is successful for all of those reasons listed above. But I think there is also something more to it, and his name is Herb. Herb Kelleher differs from every other airline CEO in two ways. 1) He was the founder and first investor in the airline. He was not some Harvard M.B.A./ Wall Street tycoon who saw the opportunity to make a few quick bucks by running an airline. He put up a his own money, everything he had. He also had put in sweat equity. Back when the airline was just getting started, and running into opposition from American, Braniiff, and Texas International, he did all of their legal work for free. He was not even the president of the company for the first 10 years or so. 2) His way of treating people is not an act, or a business model. It's the way he is. He treats people the way they want to be treated, and he respects people for who and what they are. Contrast that with all the other airline CEO's to whom labor is nothing more than a few numbers on a balance sheet.

I hate to de-rail with further hero-worship of Kelleher, but I gotta add something...

• This is the guy who settled a lawsuit with an arm-wrestling match
• Testified before congress in shorts and a hawaiian shirt, back when he had the loooong grey ponytail
• He's the reason you can still smoke in certain places at SWA corporate

There was a running joke that when he stepped down as President, Colleen Barret and the other guy...ummm...(crap, I can't remember his name, but I sat next to him on an AA flight once) had to divide up the duties of smoking and Wild Turkey consumption between the two of them...

Herb Kelleher is my hero.

[mpenguin1]

Originally Posted by jtrain609

I think FA's clean the airplanes at a lot of airlines these days.

Nope, the Flight Attendants at many of the airlines do not, you can probably count on your hands the ones that do....

[Cruise]

It's not a big plane, but the F/A's at Colgan are required to clean up the Saab at the end of the night.

Why pay someone else to clean the plane when you can have your F/A's do it for free!

[CFIse]

Originally Posted by killbilly

I hate to de-rail with further hero-worship of Kelleher,

Which is both their advantage and their Achilles heel. When Herb is gone will the people who come behind him screw it up? I'm betting they will.

It wasn't Herb who started talking about adding a second fleet type, but I understand it was Herb who said over my dead body.

I can't believe it was Herb who decided that the "assigned seating" plan would be "you get assigned a seat, but you don't get any input into which seat" they tried out West which was a laughable failure.

So it'll be interesting to see, when he no longer has influence at SouthWest if they can keep that culture going - it'd be a shame to see it die, but if I was a betting man that's where I'd put my money.

[kellwolf]

He's more or less stepped into an extremely part time advisory role already. The last time he did anything, he wound up sitting down with the FAs and management and basically said "You're both being stupid. Grow up and fix this." FA contract was done two weeks later, and the acting CEO stepped down as well. Since then, he's pretty much let things take their course.

Honestly, if anyone stepped into a leadership position there and went against something that Herb was a supporter of, they'd probably get lynched before anything got too far. The employees would see to that.....