Issue of the week: The Darwinian struggle in the skies

Panic has gripped the global airline business, with the world’s largest carrier warning this week that the “explosion” in fuel costs would radically reshape the competitive landscape, said Caroline Brothers in The International Herald Tribune. Air France–KLM, the world’s largest airline as measured by revenue, said it would add fees, cancel hundreds of U.S. flights, and eliminate thousands of jobs. The announcement follows American Airlines’ decision last week to cancel unprofitable routes, mothball up to 85 of the oldest planes in its fleet, and levy a fee on every piece of baggage checked by discount-fare passengers. “The new fee is just the latest example of airlines adding charges on top of rising airfares,” said Micheline Maynard in The New York Times, “even at the risk of angering travelers further, to make up for the billions of dollars they are losing.” The baggage surcharge follows 14 fare increases by American since mid-April. “I’m constantly surprised at the creativity in the wrong direction of airline management,” said University of Michigan business professor Claes Fornell.

In today’s “Darwinian” environment, airline executives may have little choice, said Kerry Ezard in the trade magazine Airline Business. “Already we have seen the weakest airlines dying off,” and the survivors are “desperately” scrambling to shave costs and increase revenue as the price of oil heads north of $135 a barrel. “The airline industry as it is constituted today,” said American CEO Gerard Arpey, “was not built to withstand oil prices” at such a high level. He ought to know. American is “forking out $665 million more for fuel” this year than it would have paid at last year’s prices.

That’s why half-measures won’t suffice, said James Moore in the London Independent. Deutsche Bank analyst Chris Reid recently “castigated the industry for indulging in a ‘last plane standing strategy’—hoping that rivals will eventually go bust and they will be left sitting pretty when energy prices start to fall.” Reid believes it’s unrealistic for airlines to think they can simply wait for a price break that may never arrive. Instead, in an era of permanently high oil prices, they’ll need to scrap expansion plans and sharply raise fares. But many airlines would rather nickel-and-dime their customers with fees, in no small measure because those fees don’t show up in online searches for the lowest airfares.

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If times are so tough, why are Southwest Airlines shareholders so happy? asked Joe Nocera in The New York Times. The short answer is that they own a piece of the only airline “that has been consistently profitable through these tumultuous times.” Southwest co-founder Herb Kelleher, who retired as chairman last week, credits the company’s governing philosophy for its steady earnings. “You have to treat your employees like customers,” he likes to say. “When you treat them right, then they will treat your outside customers right.” Then again, the secret to Southwest’s profitability might be more prosaic: Through adroit use of futures contracts, it has locked in a price of $51 a barrel for 70 percent of its fuel supply.