April 11, 2005

Panel Speaks About Turbulence in Airline Industry

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There is turbulence in the skies.

The industry serving millions each year is caught in a rough wind, according to a panel of airline experts invited by Hotel Ezra Cornell to speak at Statler Auditorium last Friday morning.

The group featured Paul Foley, president and CEO of MAIR Holdings, Inc.; Dan Garton, cxecutive vice president of Marketing for American Airlines; David Neeleman, CEO of JetBlue Airways; John Riordan, vice president of customer services for Virgin Atlantic Airways; Prof. Emeritus Alfred Kahn, economics; and Zachary Shapiro ’05 as moderator.

Kahn and the executives discussed current problems facing the industry, price versus service competition, the impact of deregulation, and strategies to revitalize the business.

“The issue that is so interesting is that the traditional legacy carriers like American, Continental, United and U.S. Airways who have always been top dogs are having a hard time surviving,” Prof. Mary Tabacchi, hotel administration, said.

In the early days, the government decided airline routes and fares. However, after the industry became deregulated in 1978 — in great part owing to the work of Kahn, considered by many as “the father of deregulation” — many of the legacy carriers that offered superior service struggled to stay afloat in the new price-competitive market. Low-cost carriers like JetBlue and Southwest, which offered few of the “frills” of pre-deregulation legacy airlines, became the success stories of the industry.

Yet as all panelists agreed, the airline industry as a whole has never been profitable and took an especially hard nosedive after Sept. 11. Executives today face numerous challenges such as rising fuel costs, labor relation difficulties and heavy government taxes.

“The current fuel spike is killing us,” Garton said.

Foley estimated that a one-dollar increase in the price of a fuel barrel costs the industry one billion dollars each year.

Unable to pass wage hikes to consumers in the form of fare increases, airlines are also seeing their labor costs shoot up relative to revenues.

“Labor is the industry’s number one expense,” said Neeleman, whose corporation JetBlue is one of the few that has never laid off a single employee.

He added, however, “The biggest problem in the industry isn’t pay, it’s work rules. We can’t efficiently use our people.”

With such high costs facing the industry, many executives said they believed a change in either fares or costs was necessary.

According to Garton, the airline industry is experiencing the highest load factor in its history despite profit losses. The increase in demand and fuel prices “make it obvious that prices could and should go up,” he said.

Of course, the burning question remains — would customers be willing to pay higher fares?

Riordan said travelers would pay if airlines offered sufficient product differentiation. Just as drivers were loyal to a particular car company, travelers identified with the airplanes they flew, Riordan said.

Others disagreed. Foley conceded that while a percentage of travelers opted for the premium brand, most people bought tickets based on price. Even frequent flier miles, designed to retain customer loyalty to a particular airline, are losing their appeal, said the panelists.

According to Neeleman, this loyalty plan has diminishing returns. Even extreme rewards, like American’s plan giving travelers a free ticket to anywhere in the world if they flew from Boston or New York to California or Florida twice in four months, did not affect JetBlue’s business at all, he said.

The executives also agreed that customers nowadays are not willing to pay for much in the way of amenities.

Instead, “dependability is very important,” said Garton, emphasizing that when travelers ride the plane to Disneyworld, they are consuming the vacation, not the plane trip.

Another question that often reemerges in the industry is the benefit of deregulation.

“The best estimates I know are that deregulation has saved travelers $20 billion a year,” Kahn said. “People now fly all the time.”

“I can’t believe we’re ready to reverse that,” he said in response to the possibility of regulating the industry again.

However, according to the other panelists, calling airlines deregulated is misleading.

Almost everything about the industry, from staff training to airplane maintenance to soapdish installation, is under government supervision, Garton said.

He continued, airlines are “very regulated but for price.” In looking to the future, panelists made it evident that no easy solution existed to uplift the plight of the airline industry.

Although some cited lower fuel prices as the key to improvement, others said a decrease in oil cost is not enough and that the pre- and post-deregulation carriers also need to converge in cost.

According to Foley, the industry’s entire infrastructure needed an overhaul. “It’s reckless to look at the aviation industry and run it on a year to year basis,” he said.

Airlines need to see the bigger picture, said Kahn.

“Why haven’t we developed more intercarrier relations?” he asked. “The market should be able to supply an integrated transportation system.” Audience members praised the choice of panelists.

“The interplay between the panelists was terrific,” said Pam Mariani, who attended the event with her husband John Mariani ’54. Gus Kim ’06, who stayed behind after the panel ended, said, “The reason I came is because the CEO of JetBlue did an amazing job of operating the company.”

The discussion about infrastructure was particularly interesting to David Butler, Dean of the School of Hotel Administration.

“It’s a critical issue that’s going to be very difficult for domestic airlines,” he said.

Like many of the guests, Butler was optimistic that the market would reach a new equilibrium. He continued, however, “As the panelists indicated, I agree that will only happen with a great deal of pain.”

The panel discussion was one of many events sponsored by Hotel Ezra Cornell.

Archived article by Xiaowei Cathy Tang
Sun Senior Editor