Airlines, Heal Thyselves

The International Air Transport Association released a statement today declaring the industry “in crisis” and calling on governments to “take responsibility.”

The IATA wants governments to hold back on taxes, upgrade airports and restrain suppliers. Oh, and unions should be more cooperative. (There’s an incisive dissection of all this by Dave Demerjian on Wired’s Autopia blog.)

So is there anything the airline industry can do for itself? Well, it can raise fares. Or can it? 

The real problem here is that the airline industry is still trying to eat itself. Companies are sustaining massive losses instead of raising fares because they still hope to vanquish their competitors. It’s an aviation death match.

Deutsche Bank analyst Chris Reid calls it the “last plane standing strategy.” A few weeks ago the British newspaper The Independent quoted a report he wrote thusly:

“Virtually all the airlines we cover have the same strategy to deal with a rising fuel cost base and downside risks to demand. They all plan to “wait out” the downturn such that either fuel prices will come back to acceptable levels or competitors, suffering more, will go bankrupt first.”

Fares have risen lately, but not enough to give the airlines the slightest chance at profitability at current oil prices. There’s one exception, of course. Southwest Airlines hedged its fuel costs and is still profitable.

That means Southwest can play hardball longer than anybody else, and it will be interesting to see how that goes. The legacy airlines fought fiercely to restrict Southwest in the early days after deregulation, and Southwest has no particular reason to play nice.


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