Airlines have always been horrible businesses. However, here are seven main reasons their businesses are about to get a lot worse:
As the reasons below come into play, unions will not understand why workers will need to compromise. This will create unnecessary administrative costs to negotiate and prevent strikes. If workers don’t accept the waning health of their employers, ill-timed strikes could catalyze a negative feedback loop.
Airlines are laden with more debt than the average American household. Continental Airlines (CAL) has twice as much debt than cash, while American Airlines (AMR) and United (UAUA) have almost three times more debt than cash. So long as ticket revenues are being siphoned to huge debt payments, airlines will always fall into dire straights when the economy recesses.
5. Commodity Prices
Commodity prices have rebounded strongly since the Great Crash of 2008. As old planes are retired and replaced with new ones, steel and other commodities such as aluminum will drive up the costs of refreshing and maintaining fleets of the metal birds. This means the company will get the same amount of plane at higher costs.
4. Oil Prices
Have you noticed gas quietly crept back to $3 a gallon? Airline executives have not. Travelers have continued paying an additional fuel tax because executives knew expensive oil would return like a recent college graduate. If the global economy recovers (or at least China and India keep growing at break neck speed), the cost of gas will continue to crunch margins.
3. Baggage Fees
Psychologically, ala carte sucks because it makes us feel like trapped shmucks. After paying for tickets online, the additional $25 per bag is a huge buzz killer on the exciting day of travel. Now, Spirit Airlines is charging for carry-on baggage. This is not ala carte! What percentage of people have no bags to check or carry on? Just raise the ticket price and stop pissing us off.
2. The Death of Business Travel
Have you seen those awesome Cisco (CSCO) commercials where business people are having an HD video conference with partners on the other side of the world? Apparently, executives in the airline industry have not. This is what it must have been like when the passenger railroad business was blind sided by airplanes. The bell is tolling, and I can already see the airlines’ bloodline being diverted to digital.
In the history of airlines, very few CEOs have effectively run an airline. In fact, only one CEO in recent history, Herb Kelleher of Southwest Airlines (LUV), has been successful. Every other airline CEO in recent history has mismanaged during their short tenures, only to take large bonuses and golden parachutes on their way out. With idiots and thieves running the show, airlines are doomed to crash. (Hat Tip: Commentators Below)
Do you have additional reasons airlines are in deep trouble? Let us know in the comments below …