July 6, 2009
Grounded for Takeoff…The Future for Legacy Airlines(Commentary by San Antonio entrepreneur and Webster University Global MBA Student R. Shelton Moynahan)
ST. LOUIS, July 6, 2009 – On the brink of a decade of stagnant growth, little to no profitability, bankruptcy pandemics, highly ineffective mergers, and some of the poorest- ranked customer service, what is next for legacy airlines? How do they weather this never-ending storm?
From the time I was a child, I was intrigued by the over-complexity associated with the airline industry—the routes, planes, bags, people, hubs and spokes; it was all fascinating. What I didn’t know was that this fascination would become not only my profession but also my inspiration. As an entrepreneur in the travel trade, self-proclaimed airline junkie, and global MBA student; I have firsthand knowledge about the decisions inside the U.S. airline market and their associated repercussions. I believe that I have the skills and abilities to be part of the solution to the many problems plaguing the industry; I am ready for the challenge!
For legacy carriers to compete in the modern airline industry they must employ a level of innovation never used before. Airlines must embrace the potential of the incoming workforce. We are young, willing to take chances and push the envelope on what being an airline means. It’s not about cutting costs and charging for bags, drinks or phone reservations; it’s about creating something of far greater value and charging for it. Competing on price alone is not enough. You have to be outstanding…bring something else to the table.
Legacy airlines are learning they cannot successfully compete with financially superior LCCs, one of the most complex problems plaguing the industry today.
America West and U.S. Airways merged in 2005, becoming one of the lowest-ranked carriers in the areas of customer service, baggage handling and profitability. The consolidation of two unrelated airlines, with their conflicting cost structures, cultures, histories and operational procedures, just didn’t work; full synergy may never be achieved. The outcome of this merger halted talk of further consolidations, leaving no other avenue but bankruptcy for United (2002), Northwest (2005), and Delta (2005).
In 2008, the fuel for consolidation was ignited once more when Delta was given the green light to merge with Northwest, creating the world’s largest airline. Officially united in October 2008, Delta/Northwest learned the most valuable lesson from their predecessors…Nothing happens without the labor unions. If the new Delta achieves synergies and increases efficiency, we may see a trend toward further consolidation. Conversely, there is a lack of beneficial merger partners and the most recent opinions coming from the new administration regarding Continental’s intent to join the Star Alliance are less than encouraging.
Large legacy carriers are riddled with inefficiency, the slow-moving pandemic that cripples financial position, operational flexibility and innovation over time. The airline industry has to face these problems full force, find the people who share in a passion for innovation and change, the people who will do the right thing, and give them the power to do it. It’s not going to be a quick or painless change, but if the market continues as it is now, there are rough skies ahead.
Legacy carriers have more than 50 years of experience, infrastructure and exposure; today’s challenges will require all of that experience to prevail. Airlines need a renaissance, a time to redefine their very existence. Now is the time to stop fighting a war on price that cannot be won and develop a new strategy that provides sustainable, long-term, competitive advantages.
It has been proven that younger carriers with significantly lower labor costs, newer aircraft, fewer top-level executives, flatter organization, and a generally lower cost structure have an advantage over international long-haul carriers in the domestic market. Is there a plateau at which further expansion does not have added benefit? I believe there is. The long-haul airline industry suffers from ‘dis-economies’ of scale: continually high unionized wages, loss of effective union rules, and aging fleets that are too inefficient to compete in a cutthroat domestic market. Profitability through specialization is key to long-term success for the legacy carriers.
Maintaining two separate cost structures is one of the only options to remain profitable and competitive in the domestic segment. Delta and United failed to do this with their LCC subsidiaries Song and TED. Both attempts failed because LCC models are radically different and management was not able to operate as such. Legacy airlines will have to either outsource their domestic needs, reaping the benefit of efficient operations or reinvent their domestic structure while still providing their signature international service.
If airlines choose to operate in the markets where they are most capable they can achieve a competitive advantage through specialization. By spinning off, developing, or acquiring LCC’s, airlines will be in a position to leverage their strengths and help ensure a more efficient and effective organization in the future. With consolidation and specialization, airlines will be better positioned to service the customer, while accomplishing corporate goals and more effectively serving their stakeholders.
Positioning will only allow for the potential for future success, not solve the problems plaguing the industry. Legacy carriers must seize the opportunities presented, innovate their way through the challenges and revolutionize this antiquated industry. Tomorrow’s problems cannot be solved with yesterday’s solutions. The airlines that embrace change and innovation first will reap the greatest rewards. I look forward to being that catalyst for change in the coming months, and contributing the “redefinition” of the industry.
If we have learned anything from the path to destruction followed by Detroit’s big three, proactive change is the only way to succeed in capital intensive, unionized legacy industries. The market will eliminate inefficiencies, those who embrace change now, and innovate ahead of the market, will succeed.
[Editor: Theresa M. Maier]
An ambitious young entrepreneur from San Antonio, Texas, Shelton Moynahan will graduate from Webster University with a globally-focused MBA in July 2009.
With its home campus in St. Louis, Webster University (www.webster.edu) is a worldwide institution committed to delivering high-quality learning experiences that transform students for global citizenship and individual excellence. Founded in 1915, Webster offers undergraduate and graduate degree programs through five schools and colleges, and a global network of more than 100 campuses. Its 20,000-plus student population represents almost 150 nationalities. The University’s core values include excellence in teaching, joining theory and practice, small class sizes, and educating students to be lifelong independent learners, fully prepared to participate in an increasingly international society.
Since opening its first campus overseas in Geneva in 1978, Webster has become a recognized leader and innovator in global education, with an international presence that now includes campuses in London; Vienna; Amsterdam and Leiden, the Netherlands; Shanghai, Shenzhen and Chengdu, China; and Bangkok and Cha-am, Thailand. Webster also has educational partnerships with universities in Mexico and Japan.
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R. Shelton Moynahan
Please contact Shelton@moynahan.us for further correspondence, opportunities, or comments.