Aviation’s Most Exciting Period?

At least one person is enjoying the roller coaster ride that is the international aviation industry today and that is someone from the ivory tower – William Swelbar from MIT’s International Center for Air Transport.
Calling this the most exciting of times, Swelbar began his remarks by attacking the use of regional jets. In his view, airlines were over exuberant in flying small jets, something about which many would agree. Related Story
“While much as been made of mainline capacity cuts in the past few years,” he said, “much of it has been replaced by the regional sector. In my view, the industry failed to do much more than control the supply of capacity going forward.”
His solutions include reforming the Essential Air Service program. “Rather than scare people about losing air service, maybe its time to design an EAS program that actually works for airlines, airports and air travel consumers but that means a program based in commercial reality,” he said. “Networks have evolved but the policy has failed to morph along with the changed network architecture.”

His Thoughts
“I honestly believe we are in one of most exciting periods for U.S. commercial aviation,” he recently told an industry audience, adding airlines have not done enough restructuring.
“There may have been a lot of changes and more in the works during the past few decades during which we enjoyed strong economic good times, but that has masked the fact airlines haven’t done enough to restructure or rethink a business model we now know has been bound by duct tape and chicken wire. The industry now recognizes it cannot be everything to everybody. It has met its match, not with labor, government or even macro economics. It has met its match in the high cost of fuel. Without that, the industry would not have the will or pressure to make some of the changes now under way and would still be continuing the long-running, boom-and-bust cycles that characterize an unhealthy industry.”
Swelbar offered up his thoughts on the beleaguered industry. “In the name of competition, aircraft technology, airline marketing strategy and even airport strategy have all been designed to fragment markets,” he said. “This leads to destructive competition. At current fuel prices fragmenting markets cannot be sustained which is one significant reason why capacity needs to be cut. The boom-and-bust cycle is good for no stakeholder group.”
Swelbar redefined over capacity saying the correct term should un-economic capacity. “Airlines expanded too much during the up cycles and kept too much un-economic capacity during the down cycles all in name of market share,” he said. “This compounded over years and years and now oil is causing us to think about how to unwind this in the short term and it is a delicate process.”
He noted that in 2003, he said low-cost carriers would not inherit the earth, saying there are now few profitable growth opportunities for the sector, “absent a huge contraction in the largest U.S. markets.”
“[LCCs] are 26 percent of the domestic market today but how much will they be tomorrow after the attrition of the mainline capacity cuts,” he asked. “Is that what consumers want? This will begin to test not only elasticity of demand but also the true needs and wants of the air travel consumer as we come out of this period.”
He said the attributes of a successful industry is no different for airlines at which sound economic theory is being replaced by a sense of entitlement. “Instead of a diverse portfolio of financial assets, airlines hold a portfolio of routes,” he said. “Modern profitability theory suggests airlines not accept more risk without a commensurate increase in expected return that characterizes current airline thinking. However, parochial thinking on part of lawmakers, regulators and the Business Travel Coalition promote the theory that the airline industry accept more risk while accepting lower rate of return. This is driven by a feeling of entitlement all in the name of uneconomic competition. This is bad economic thinking from my perspective.” He called for reconnecting the “virtuous circle of airline industry prosperity because the current cycle has a disconnect.”
In discussing the fundamentals of the industry, he asked whether airlines would “finally make route profitability the rule and network contribution the accepted practice? Will we ever discuss profitability in the income statement or continue to assess survivors by relying on the cash flow statement of the balance sheet?”
Swelbar called revenue management a dark science. “It adapts but will not substract,” he said. “The days of 10 to 30 seats per flight being sold below cost are over.” He asked whether the concept of cross subsidization is also over as it now occurs across every airline network and across every flight segment.
“As we approach the 30th anniversary of deregulation, fuel costs have been the only power to force us to reset the legacy mindsets that have not changed in 30 years,” he said. “These mindsets include customers who believe they actually pay for all-in costs of air travel and are therefore entitled to multiple access points to air transportation system. It also includes the attitude that the entitlement is not limited to the consumer as there are many stakeholders. The truth is only one stakeholder group has been declared a winner since deregulation and that is the consumer. The consumer won on price and has come to consider safe and affordable air travel as an entitlement. I would expect an argument regarding reliable air transportation industry, but the industry can’t and won’t succeed in its current state and that is something we can all agree on. Simply, the virtuous circle can not be reconnected if there are no airlines.”