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Airline Mismanagement

Airline traffic has doubled in the last 15 years internationally, and in the last 25 years domestically.

So why is it that the number of different airlines is trending down at the same time the number of airline passengers is trending up?

 
 
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Airline Competition 1980-2010 R.I.P.

Part 4 :  The demonstrated lack of growth in airlines to date
 

You can see below the growth in passenger numbers, this chart (source) shows the growth in airplanes in airline fleets from 1965 - 1999.

Part of a series on airline competition - see extra articles listed in the right hand column.

 

 

One of the curious and contradictory things about the airline industry is that its basic fundamentals are enormously positive.  There is a huge growth in passenger numbers and passenger miles flown, both domestically and internationally.

But somehow, airlines lose as much money as they ever make, and while passenger numbers and airplane numbers double, airline numbers reduce rather than increase.

Airline History - A Demonstrated Failure of Competition

There's plenty of hypothetical stuff in the preceding articles in this series, and unavoidably, some over-simplifications too.  Our hypothesis is simple - that airline competition, at least across the Atlantic, is now dead, and that competition within the US is on life-support and dying.

How to confirm (or refute) this hypothesis?  The next article looks into the future, but to start with, let's look at what has happened in the past.

As a startling initial point of reference, in the 30 odd years since deregulation in the US, about 200 US airlines have merged, been taken over, or gone out of business (this includes many new startup carriers that have come and gone).

Here's a staggeringly long list of 370 airlines, dating back most of the way to the start of the airline industry, that have gone out of business in some form or another and which no longer exist in the US.  It is probably not complete.  The airline industry in the US is not quite 90 years old, so that suggests as many as 4.5 airlines every year are going out of business.

The good news is that clearly some airlines have been starting up over the last decades, but the bad news is that, equally clearly, most are not surviving and growing into major competitive forces.

Let's look at all airlines in the US with a 1% or greater market share (using the same Bureau of Transportation Statistics data used here) and see when each of them was founded.

Founding dates of US Passenger Airlines

Rank

Airline

Market Share %

Date Founded

  1

Delta & Northwest

   21.8

1924

  2

American

   15.2

1930

  3

United

   13.0

1926

  4

Continental

   10.1

1931

  5

Southwest

    9.3

1971

  6

US Airways

    7.4

1939

  7

JetBlue

    3.3

1998

  8

AirTran

    2.4

1992

  9

Alaska

    2.4

1932

 10

SkyWest

    1.5

1972

 11

Frontier (now part of Republic)

    1.1

1994 - 2009

 12

ExpressJet

    1.0

1986

 13

Hawaiian

    1.0

1929

 
 17


Virgin America


    0.7


2007

 

To summarize, of the thirteen US carriers of any meaningful size at all :

  • The four largest were all formed in the first decade of commercial aviation in the US.

  • More than half (seven) were formed before World War 2.

  • None of them were formed in the 1940s.

  • None of them were formed in the 1950s.

  • None of them were formed in the 1960s.

  • Two were formed in the 1970s (both prior to deregulation).

  • One was formed in the 1980s.

  • Three were formed in the 1990s, one of which is already no longer in business

  • None of the airlines formed in the 2000s have grown to the top 13 list

That is hardly the picture of a vibrant airline industry, is it, and is all the more bizarre when contrasted with the growth of air travel.

The following tables are from the Air Transport Association.

As you can see, half of all growth in US air travel has occurred in the last 25 years.

The growth is even steeper and more recent for international passengers.

As you can see from this chart, half of all international travel has occurred in the last some 15 years.

You'd normally expect these extraordinary rates of growth to be marked by some degree of growth of airlines too.  With the huge leaps upwards in passenger numbers, surely new airlines couldn't help but succeed, right?  Even if the existing airlines kept all their existing customers, there's still enough new business to allow a doubling in airlines. Doesn't a rising tide lift all boats?

Especially when one factors in the apparent complete lack of economy of scale benefit as airlines get larger, the stark absence of an explosion in airline numbers to match the same explosion in passenger numbers becomes a point of significance.

Something (possibly unfair competition?) is preventing more airlines from starting and surviving.

Lessons from Virgin America's Slow Growth?

In the table above, I also list the ranking for the one recent airline startup that shows promise for the future - Virgin America.  This airline is only sort of a startup, due to its linkage to Sir Richard Branson and his various other Virgin branded airlines around the world, so it has plenty of parentage, while being a genuinely new entrant into the US market.

Although now in its third year of operation, it still has yet to win even a 1% market share, whether by market growth or market share capture.

There are lots of reasons why Virgin America is not growing as quickly as one would expect (or as quickly as they would expect, either), most obvious of which are the tough economic times.  But while tough economic times might diminish a new airline's ability to grow by way of expanding the market as a whole, it doesn't impact on a new airline's ability to grow by way of simply taking market share from other airlines.

There are very few people who like and are voluntarily loyal to any airline for 'good' reasons, but as we can see from Virgin America's very slow growth, even a well run innovative and fairly priced new carrier such as Virgin America is struggling to compete against the massive megolithic carriers it flies against.

Growth Primarily by Merger and Acquisition

Let's now consider one other point.  Confining ourselves to the 10 largest carriers, let's see how many of those have grown, at least to some extent, by acquisition or merger with other airlines, as compared to those that started from scratch and grew 'organically'.

This table of merged airlines is incomplete, because some of the airlines that merged into the surviving top ten carriers are themselves the product/sum of previous mergers.  It is intended merely to indicate that the bigger the airline, the more its growth has come from mergers and acquisitions, and the less its growth reflects deserved success and strength in the marketplace.

US Airline Merger Participation

Rank

Airline

Mergers

  1

Delta & Northwest

Chicago & Southern, (some of) Midwest, Northeast, Northwest, (some of) Pan Am, Republic, Western, failed to invest in JAL, failed to buy Continental

  2

American

Was formed out of 82 (!) smaller airlines to start with. Air California, (some of) Eastern, (some of) Pan Am, Reno Air, Trans Caribbean, TWA, failed to invest in JAL

  3

United

(share of) Aloha, Boeing Air Transport, Capital Airlines, National Air Transport, (some of) Pan Am, has been (rumored) to have been in merger discussions with US Airways and Continental

  4

Continental

Frontier (1986), New York Air, People Express, Pioneer, Texas International, failed to merge with United (so far)

  5

Southwest

Morris Air, Muse Air, ATA Airlines, failed to acquire Frontier

  6

US Airways

Allegheny, America West, Empire, Lake Central, Mohawk, Piedmont, PSA, Trump Shuttle, failed to merge with United, failed to merge with Delta

  7

JetBlue

None, but now 19% owned by Lufthansa

  8

AirTran

ValuJet.  Failed to buy Midwest Airlines.

  9

Alaska

Horizon, Jet America, various small airlines in Alaska,

 10

SkyWest

Atlantic Southeast, Sun Aire

 

Why Aren't Airline Numbers Increasing

We're told (by the airlines) that there is a natural and inevitable trend towards airline consolidation, and that various countries and regions can't sustain the current numbers of airlines operating.

Such claims are nonsense for three reasons.

1.  There's no evidence that bigger airlines are more efficient or more profitable than small airlines.  Indeed, our analysis here suggests quite the opposite.  Smaller airlines have lower costs and better profits.

2.  Airline numbers have been artificially controlled and limited, particular on international routes, for many years.  One would consider that with these artificial limits and constraints being removed, there would be a rush of new airlines appearing, not the opposite.

3.  Look again at the two charts above.  Air traffic has doubled in the last 15 years (internationally) and the last 25 years (domestically).  Surely twice as many passengers would mean that the rapidly growing market for air travel can at least sustain the same number of airlines as before.  Maybe there's not a need to double the number of airlines to match the doubled number of passengers, but is there a need to halve and halve and halve again the remaining number of different airline entities?

The Impossible Challenge For New Airlines

Clearly, something is preventing new airlines from succeeding, even though the market as a whole is growing in leaps and bounds.

Please see the next part of our series for analysis of what these impediments to success may be.

Part of a series on airline competition - please see extra articles listed at the top in the right hand column

 

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Originally published 12 Mar 2010, last update 19 Dec 2013

You may freely reproduce or distribute this article for noncommercial purposes as long as you give credit to me as original writer.

 
 
Related Articles
Is Airline Competition Always Fair

Airline Competition Series.
1.  RIP, Airline Competition, 1980-2010
2. Bigger airlines are not better
3. The airlines are oligopolies
4. The demonstrated lack of growth in airlines to date
 
 
 

 


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