Seth Rosen
IFALPA Industrial Advisor
April 2005
Cape Town, South Africa
1

• Introduction
• 25 years since U.S. deregulation
• Three rounds of financial restructuring
• 1980’s – began process of industry consolidation
• Goals of U.S. airline deregulation
• What has happened in the industry?
• Where are we today?
• Unprecedented challenges ahead
• The missing link - labor
2

•
Some of the Goals of U.S. Deregulation included:
 Providing more service to the traveling public
 Providing lower fares
•
49% lower in real terms (adjusted for inflation)

Higher growth in traffic
•
RPMs have increased 223%
•
Enplanements have increased 154%

More competition
 Higher profits for U.S. Carriers
3

4

• Economic recessions
• The role of government
• Structural changes
• Increased competition
• IT and transparency of fares
• Cost reduction programs
• Fleet simplification plans
• Role of management
• Unforeseen events – terrorism, war, epidemics
• Consolidation
• Duration of cycles
5

• 1981 and the PATCO strike
• Fiscal and economic policies
• Regulatory policy (DOT/FAA/DOJ/PBGC/ATSB/TSA)
• Tax policy
• Labor policy (National Mediation Board and White House)
• National Security Issues

Gulf Wars

Aftermath of 9/11
6

U.S. Airlines Face a Ticket Tax Burden that is
Estimated to Have Exceeded $14 Billion in 2004
Taxes on a $200 Domestic Ticket
Single-Connection Round Trip w/$4.50 PFC
1972
Taxes=7% ($15)
January 2005
Taxes=26%($52)
Airfare 93%
Taxes 7%
Airfare 74%
Taxes 26%
Source: Air Transport Association
7

Single-Connection Round Trip w/$4.50 PFC
January 2005
Taxes=44%($44)
Airfare
56%
Taxes
44%
Source: Air Transport Association 8

• Economic conditions
• The role of government
• Increased competition
• IT and transparency of fares
• Cost reduction programs
• Fleet simplification
• Role of management
• Unforeseen events – terrorism, war, epidemics
• Consolidation
• Duration of cycles
9

• Corporate structure

Holding Company structure

Branding
• Global Air Systems developed
• Low Cost Carriers and regionals reach critical mass

1978 – 38 scheduled carriers

2005 – 150 scheduled carriers and 18 applications pending
• Consolidation

140 bankruptcies since deregulation
•
Continental and America West
 30 mergers
 Fragmentation (1990’s)
 Capital access
 Leveraged buyouts
 Employee stock ownership programs
• Role of Management
10

SAS
Braathens
Wideroe
Flyveselskap
Estonian
Air
SAS
Scandinavian
Airlines
AirBaltic
Snowflake
Blue1
Spanair
Ritz Carlton Hotel
Company, LLC
Horizons by Marriott
Marriott Convention Ctrs
Marriott
Courtyard by Marriott
Ritz Carlton Club
JW Marriott Hotels
Marriott
Hotels &
Resorts
Residence
Inn by
Marriott Delta Airlines,
Dublin, LLC
Renaissance
Hotels &
Resorts
Delta AirElite
Marriott
Execu-Stay
Business Jets
Song,
LLC
Fairfield Inn by Marriott
Townplace Suites by Marriott
SpringHill Suites by Marriott
Marriott Vacation Club Int’l
Delta
Comair
Holdings,
LLC
Comair
Inc.
Delta
Connection,
Inc
ASA
Holdings
Inc.
Atlantic
Southeast
Airlines
Qantas
Qantas
Freight Qantas
Marriott
Executive
Apartments
Marriott
Grand Residence
Club
Lufthansa
Air
Dolomiti
Transnet Limited
Lufthansa
CityLine
GmbH
Qantas
Link
Qantas
Holidays
JetStar
JetConnect
South
African
Airways
SA
Airlink
Lufthansa
German
Airlines
Eurowings
Thomas
Cook, AG
Bmi
British
Midland
Australian
Airlines
SA
Express
Airways
SAA
Cargo
Luxair
Globe
Ground

Capacity
2001
Capacity
2005
Big Six
81%
LCC’s
15%
Regionals
4%
Big Six
71%
LCC’s
21%
Regionals
8%
Source: Fulcrum Capacity Forecast March 2005
12

Asia-Pacific is the Next Region to be Affected as LCC’s are Emerging Rapidly
Asia
Air Do
Skymark
Skynet Asia
Japan Express
Air Japan
JALways
Air Deccan
Airone *
Crescent*
Air Arabia
Okay Airways Oasis Hong Kong Airlines
WOW
Australia
Orient Thai
Thai AirAsia
Diet Jet
One-Two-Go
SkyAsia**
Nok Air
Valuair*
Tiger Airways
AirAsia
Cebu Pacific
Virgin Blue
Australian Airlines
JetStar
Lion Air SkyConnections*
Paradise Int’l City Link
*Indicates airline is planned or ready for launching
Source: Orient Aviation Magazine, March 2004; various news sources
Freedom Air
Pacific Blue
JetConnect
13

• Economic conditions
• The role of government
• Structural changes
• Increased competition
• IT and transparency of fares
• Fleet simplification
• Role of management
• Unforeseen events – terrorism, war, epidemics
• Consolidation
• Duration of cycles
14

• Labor

Contentious or collaborative

Goals are well-defined

Outsourcing and job instability

Returns are limited and downgraded
• Other reduction programs less successful

Fleet simplification plans

Unwillingness of some lessors, airports, others to cooperate

Quality of service declines
15

Labor Rates Are Converging Between LCCs and the Network Airlines
Pilot Wage Rate Comparisons Small Narrowbodies – 2005
350
300
250
200
Low-Fare Network
150
100
50
0
AS WN F9 B6 FL HP NW DL AA CO UA US
Source: AIR, Inc., contracts, Lehman Brothers estimates.
Slides developed by Gary Chase & Winnie Clark, Lehman Brothers
16

• Capital access and the debt burden
• The tax burden
• Soaring fuel prices
• Increased competition and low yields
• Security issues
• The uncertainty of the next unforeseen event
• On-going restructuring/consolidation
• Which business model will prevail?

Southwest/Continental

Ryan Air
• Winners and losers
17

• Energy, Capital access, Yields and Government policy
• Marginal revenue improvement
• Absolute (not unit) cost reductions
• Consolidation

Capital access – a new twist

New entrants
 ATI
 Merger and fragmentation
• National Policy

Fiscal
 National security
 Aviation trade
18

• Service-intense industry

Customer satisfaction
• A balanced approach to collective bargaining
• Pension reform
• Consolidation and labor protective provisions
• Consistent government policies
• A final observation
19

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