July 14, 2011 - Here we will to analyze the chronic struggles of U.S. legacy carriers. We will see how playing on many fields led to the U.S legacy carriers to run contradictory and antagonist strategies and to eventually an unstable financial situation.  

The U.S Majors On The Domestic Market - On one hand we have the business travelers who incited the U.S. FNSC to establish hub at airports that are the nearest to the central business districts to attract them: New York- La Guardia, Miami Intl’ Airport, etc.  

Additionally by the past and before open skies agreements, only 1 or 2 airports in a metro area were allowed to handle long haul and intercontinental traffic. Also, carriers must establish base in bigger airports with greater expansion potential.

They have to concentrate their operations in airports that can offer connections to international travelers. They look to concentrate their activities in few points to obtain economy of scale. As a consequence, for all these reasons they must set up base in airports which fit those criterions and which are eventually the ones with the highest fees: Washington Dulles, New York LaGuardia, New York JFK, etc. Airports operators of the main U.S. airports aware of all the conveniences they offer charge a higher fee to carriers.

On the other hand, the U.S. FNSC must challenge the low cost expansion because their market shares are rising increasingly (30% now, from 9 % 10 years ago). They must protect their domestic market because the domestic market represents a larger portion their total operations (ex: 70% for United Airlines).  

The low-cost image is well established in the traveler’s perception; substitution is easy from legacy carriers. However the low costs presence is in different fields: less expensive airports (Fort Lauderdale, Long Island Mc Arthur, etc.).  

The legacy carriers cannot move massively their domestic activities for the reasons cited above. They have to match their domestic fares to the low costs fare levels as far as possible to retain the travelers while enduring higher costs in major airports where they have to maintain their presence, also for the reasons cited above.

The U.S Majors On The International Market - The U.S. legacy carriers cannot lower too much their class services because they face foreign legacy carriers on intercontinental markets: Air France, All Nippon Airways, Qantas, Singapore Airlines, Lufthansa, British Airways, etc. U.S. carriers currently provide less than 50% of traffic on the U.S-transpacific and U.S-transatlantic routes where foreign carriers offer more flights and more seats.

These foreign carriers are well quoted for their class services. International market is where the U.S carriers do better. Consequently they must look to stay in the race in terms of class services by fear to underperform.  

But the problem is that you cannot have a class service strategy at the international and neglect the service quality on the domestic field. You can’t have 2 images in one company. The customer who flies London-New York, also flies New York-Jacksonville. The traveler compares U.S carriers to foreign ones on both domestic and intercontinental routes.

As a consequence, the U.S. FSNCs must maintain a certain service level for both intercontinental and domestic services while the low cost carriers do not have to. Again that leads them to bear supplemental costs than the budget carriers don’t have while they have to match the low cost fares. You can’t have a Southwest Airlines and a Singapore Airlines image in the same company. 

This is how the U.S legacy carriers end up running contradictory strategies which increase their costs while bringing their revenues down. 

Why The Foreign Legacy Did Better - The low cost model penetrated Europe and Asia far later than the USA. Asian and European FSNCs have a higher proportion of long haul activity than U.S. ones. They have one or no credible national competitor contrary to what happens in the USA. They were more protected by the state since they had no substitute as national symbol in air transport.  

The states were shareholders and are still shareholders in many cases (Singapore Airlines, Air France, etc.). They profited from favorable national legislations, and the access to the most advantageous markets was virtually protected (Paris, London). Owing to the geographic size of the USA (very large), legacy focus on domestic where the competition is huge and faced the low cost.  

The USA has always had a policy against monopolies even in the air. They always had a policy to favor small companies against bigger ones, even if those large companies are national symbols (ex: PanAm). 

Moreover, owing to the smaller geographic size of many European and Asian countries, foreign legacy carriers focus more on the international travel, where they face little competition and where it’s more difficult to build a reliable and large carrier. Contrary to the USA, in highly centralized state it’s difficult to build a strong and large international network outside certain cities: Paris (France), London (UK), Singapore (Singapore), Tokyo (Japan), Amsterdam (Netherlands), Kuala Lumpur (Malaysia), Bangkok (Thailand), etc.  

There are few substitute points from which to build a sizeable international network. However, in the USA, you can have a substantial international network from Miami, Dallas and Houston to Latin America; from Chicago, New York to Europe and Asia; from Los Angeles and San Francisco to Asia Pacific, etc. Even history plays a role in this difference. The USA was historically a decentralized nation while the great majority of countries on earth, including European ones have always been highly centralized nations.  

The Network Configuration Difference Between U.S And Eurasian Carriers - U.S. legacy carriers have a have high labor cost oriented network: USA, Canada, and Europe. Domestic operations account for 70 % of activities in some airlines.  In times of moderate fuel price, labor represents the biggest share of airlines operating expenses. U.S airlines are highly active in world’s region with high labor costs and strong union tradition: USA, Canada and Europe. 

European and Asian carriers have a less geographically concentrate operating model. They are more equally present on the 6 continents. Air France, British Airways, Lufthansa and Emirates have stronger presence in Africa, the Middle East and Asia-Pacific than the U.S majors. Moreover, those world’s regions have significantly lower salaries than in North America and Europe. This gave these airlines important edge on U.S carriers on reaching good financial performances.

GDP Real Growth During The 2008–2009 Financial Crisis

World map showing real GDP growth rates for 2009. (Countries in brown are in recession.) 

● European legacy airlines have an international and intercontinental-oriented operating structure while the U.S carriers have a domestic and short/medium haul-oriented operating system. The consequences of that is that European and Asian carriers have a larger proportion of wide-body aircraft in their fleet. We all know the economic advantage of using wide-body aircraft. They enable to lower seat costs at almost all levels.  

● The geographic location also play a major role. We know that the world can be divided into Western Hemisphere (Americas) and Eastern Hemisphere (Europe, Asia, Africa, and Oceania). European and Asian carriers can at a greater extent use their hub as world transit point for international and intercontinental passengers. American carriers cannot easily do the same as they are disadvantaged geographically.

London, Paris and Frankfurt are well known for being important traffic transit hubs between North America/Europe to Asia/Africa. Emirates Airline is now trying aggressively to get a piece of that huge and lucrative market. This is the reason why the airline is amazingly big despite the tiny size of the country’s population, land area and GDP.  

● European and Asian airlines are also more resilient to industry shocks than U.S. carriers. Being on the Eastern Hemisphere and having their network more evenly spread across the globe make these airlines more resistant to shocks. We all know in the industry that any variation of the demand has a great impact on the profit of airlines. The U.S market is huge but U.S carriers don’t have a credible counterbalance to the variation of the demand for that market.

Its size is too big comparing to the U.S international and U.S intercontinental markets. On the contrary European and Asian carriers have a more balanced advanced economies/emerging countries presence. It’s not surprising to see many airlines posting annual passengers and profit growths during industry meltdowns (Singapore Airlines during the SRAS crisis in 2003 and in the financial crisis in 2008, Emirates in 2008 and 2009). 

The air transport cycle is follows to the economy’s cycle. When you have 70% of your activity affected to a world’s region (USA), it’s difficult to find a counterbalance when this region is hit economically. Moreover, Europe is the foreign continent where U.S airlines have the largest presence. However, the European economy is strongly correlated to the U.S one. This doesn’t make things easier for U.S airlines at all. As example, out of their 260 destinations, American Airlines only flies 13 destinations in Europe, 0 in Africa, 0 in the Middle East, 0 in Oceania and 5 in Asia-Pacific (excl. Oceania).