U.S. Airlines

Flying on Borrowed Time

epa05464152 (FILE) A file photo dated 18 March 2009 showing a line of US airline 'Delta' planes lined up for take-off at Atlanta, Georgia, airport, USA, Delta's main hub of operations. Media reports on 08 August 2016 state that a worldwide system failure at Delta caused delays for Delta passengers on airports all over the world. The airline did not immediately had any further details on the system outage, the reports added. EPA/JIM HOLLANDER *** Local Caption *** 52701924 +++(c) dpa - Bildfunk+++
U.S. airlines such as Delta have older fleets than their European counterparts.
  • Why it matters

    Why it matters

    U.S. airlines are under growing pressure to spend more on inward investment, a move likely to lower future profit margins.

  • Facts

    Facts

    • The most profitable U.S. carrier, Southwest Airlines, has an operating margin of 21 percent; Lufthansa’s is 5 percent.
    • Four carriers – United, Delta, American and Southwest – make up 80 percent of the U.S. airline market.
    • Critics say the big four do not invest enough in new aircraft and staff.
  • Audio

    Audio

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For U.S. airline Delta, it was more than just a case of the Monday blues. A computer shutdown grounded some 1,000 flights at the start of the week, and on Tuesday, the carrier was still in recovery mode, forcing it to cancel 250 departures. What started as a simple power cut near the firm’s HQ in the U.S. city of Atlanta cascaded into system-wide paralysis.

Delta’s IT troubles represent more than just a PR problem; they point to an increasingly dangerous trend across the entire U.S. airline industry. American airline executives have been skimping on investment in their pursuit of double-digit operating margins – and it’s starting to show.

Delta isn’t the only U.S. carrier to struggle with technical glitches. Just last month, an IT problem forced Southwest Airlines to cancel more than 2,000 flights.

Meanwhile, American fleets are aging, especially compared to their European counterparts. Lufthansa, Europe’s largest airline, flies a fleet that is little more than a decade old on average, but for Delta, the figure is over 17 years.

Lufthansa’s 5-percent margin pales in comparison to the double-digit figures enjoyed on the other side of the Atlantic.

Gerald Wissel of Airborne Consulting told Handelsblatt that U.S. carriers have some catching up to do. “American airlines have made hardly any investments in recent years,” he said. “Not in the product, not in IT and not in personnel.”

This imbalance hasn’t gone unnoticed among pilots and cabin crew. Since the financial crisis, when bankruptcy proceedings allowed many U.S. airlines to slash wages and pensions, carriers have recovered – and their personnel are demanding a share of the profits.

The Southwest Airlines Pilots’ Association has accused executives of spending money on re-purchasing company shares rather than investing in their workforce. Since 2011, the carrier has spent more than $3 billion (€2.7 billion) on stock buybacks. Southwest chief Gary Kelly has denied the allegations.

Since 2008, a wave of mergers – Delta with Northwest, United with Continental, and American with US Airways – has consolidated the U.S. aviation landscape. Together with Southwest, these four carriers now control about 80 percent of the market, a level of dominance that has driven up ticket prices.

Those sales have spelled profit margins the likes of which most European airlines – besides budget carriers such as Ryanair and EasyJet – can only dream. With an operating margin of 21 percent, Southwest ranks as the most profitable airline in the U.S., followed by Delta at 19 percent.

Lufthansa’s 5-percent margin pales in comparison to the double-digit figures enjoyed on the other side of the Atlantic. Even state-subsidized carriers, including Emirates and Turkish Airlines, have barely reached 10 percent.

In light of all the money U.S. airlines are making, Lufthansa pilot Markus Wahl told Handelsblatt that he can understand why his American colleagues would expect their fair share, alongside investors and airline customers.

“What never works long-term is when, in this triangle, only one or two corners benefit from the success,” said Mr. Wahl, who is also a spokesman for pilots’ union VC.

European airline executives, meanwhile, have mixed feelings about the Chapter 11 bankruptcies that have reshaped the U.S. aviation sector. On the one hand, the reorganizations kept American airlines afloat – but critics say they also hurt consumers.

“These options don’t exist in Europe, which is why we still have an enormous range of competition,” the head of one continental carrier said.

There is little incentive for Europe’s airline bosses to speak out, however, considering the value of their partnerships with U.S. airlines, such as Lufthansa’s deal with United. “Lufthansa has benefited from, among other things, the low costs at United after the Chapter 11 went through,” said Mr. Wissel, the aviation consultant.

These alliances are growing more fraught, as American airlines face renewed pressure to raise wages in order to stave off worker strikes. While some industry experts warn that pay hikes would cripple U.S. carriers, labor representatives disagree.

“What is in no way true is the contention that it’s solely due to personnel costs if an airline is having trouble,” Mr. Wahl told Handelsblatt.

The tug-of-war over worker wages comes at a critical time for U.S. airlines, as competition from Gulf carriers pushes down ticket prices in the country. In recent months, average flight costs have decreased by 6 percent.

 

Handelsblatt’s Jens Koenen covers the airline industry. Thomas Jahn is the paper’s New York bureau chief. To contact the authors: koenen@handelsblatt.com, jahn@handelsblatt.com

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