04.30.10 6:37 AM ET
Bad News for Fliers
They were a part of the infant airline industry. Continental Airlines was born in 1937 out of a small operation in remote areas of the Southwest; United Airlines was created in 1927 out of a mail-carrying operation with the fledgling Boeing company. Next week the two will merge and become the world’s largest airline.
Lost in the statistics of this huge deal is the way the history of the two airlines describes the astonishing trajectory of commercial aviation and America’s unique role in it. Starting as pioneers when flying was primitive, these two companies have survived many boom and bust cycles and are now demonstrating the prevailing wisdom of the jungle they inhabit: Size matters.
This year, domestic U.S. airline traffic will be lucky to grow by 0.4 percent.
They will be sluggers in an international combat. Like the recently merged Delta and Northwest, the United/Continental fusion is designed to take on the world. By combining their comprehensive domestic networks with international routes, United and Continental do two crucial things simultaneously: They can cut duplication and, at the same time, offer more extensive international routes.
It won’t be easy. Two European carriers, Lufthansa and Air France/KLM, have been building world-girdling routes. And carriers like Singapore Airlines and Emirates, based in Dubai, have been setting new standards where profits are highest, in the premium cabin markets. In today’s airline business, if you’re not global you’re not a player.
Then there is the always perplexing question of why anyone would want to be in this business at all. Losses for airlines worldwide this year are expected to be $2.8 billion. Admittedly that is a lot better than it was predicted to be only six months ago—$5.6 billion.
Forecasts by the FAA for growth in the U.S. domestic market keep displaying the characteristics of a mirage. In 2008, the last good year for airlines, the FAA said U.S. airlines would be flying one billion passengers a year by 2016. Then, last year, that target slid back to 2021. Now it’s moved again, to 2023. This year, domestic U.S. airline traffic will be lucky to grow by 0.4 percent.
Why, then, does the urge to merge press so hard? It’s a business where there are enormous swings in costs—particularly driven by the volatility of oil prices. Add the impact of economic recession plus the intervention of forces of nature like sudden volcanic eruptions and you can see that managers need to tighten their grip on what they can actually control, like capacity. And, indeed, by cutting flights and going to smaller airplanes U.S. carriers have been hitting an average load factor per flight of 81 percent, which means they have been flying with far fewer empty seats.
For passengers, this new merger will make the prospect of an empty middle seat even more rare. Superimposing the route maps of United and Continental shows an extraordinary amount of duplication. There are some areas, most of them beyond the domestic routes, where the routes are complementary. But the industrial logic of the merger is graphically evident: Fewer flights, more crowded cabins.
The elephant in the room is China. It’s becoming a huge generator of travelers, outward bound to the four corners of the earth. If you look at the route networks of America’s two new mega airlines, you’ll see their legacy routes in the Pacific. Given that international traffic is usually more profitable than domestic, they will be fine-tuning routes and re-aligning their Pacific hubs to maximize their ability to tap into that roaring wave of Chinese travelers, many of whom will be heading for the U.S. And, once they board a U.S. carrier, they will be locked into that carrier’s domestic network. Get ready for the wave.
The entrepreneurs who started these companies when pilots still had to navigate via a string of radio beacons across the country were not drawn into the business solely for profit. There was something intoxicating and glamorous about it that suspended rational behavior. That has never really changed. Great names like Pan Am, TWA, and Eastern have disappeared, all at one time the creations of visionary men. And even today, as the bean counters go pale at the spreadsheets, there are still visions of the beautiful birds to come, the Dreamliners and the Superjumbos and the… well, who knows?