A Little Blackbook on Creative Destruction

For some of you, the comment areas on a blog are often the first place visited. For others, they are largely ignored. For all of you, I have made an entire comment, made by blackbook, available below including my response back. Blackbook's thoughts are well worth reading.

On January 4, 2008, Blackbook responded to a post click here and raised the idea that: “what is missing in the airline industry is the type of creative destruction that has kept America’s companies at the forefront of research, development, innovation and change”.

I like the term “creative destruction”. How can it be applied to the US airline industry in order to make it a sustainable and profitable business?

blackbook said...
Yes, there is a lot about which to be pessimistic concerning the state of the U.S. airline industry. But, I feel these concerns mirror those that we see worldwide in the media concerning the status of our country as whole.

While there are many factors that would lead to such pessimism, both the U.S. and the airline industry have historically been sources of creativity and have a talent for reinventing themselves. Perhaps it's the natural optimist in me but I feel that, while we might get a bit bloodied en route, we will still emerge on the top of the heap.

What is utterly lacking in the airline industry is the type of creative destruction which has kept America's companies at the forefront of research, development, innovation, and change. Whether or not this comes as consolidation or another form of players exiting the market, it is clearly necessary.

Swelbar, I think you might have posted something at one time about the airline industry having higher barriers to exit than barriers to entry. With such diverse constituencies as employee groups, airports, lenders, aircraft lessors, etc... all working to prevent such an exit from the market, it is hard to imagine how ANY airline could have gone out of business. If all the major carriers survived the post 9/11 upheaval more or less intact, how can such an exit take place now?

Consolidation for consolidation's sake is not the answer, in my opinion. Look at the only example of the recent generation of it, US Airways. With each passing day it reminds me more and more of a late 1980s Continental, with a ragtag fleet of airplanes, various employee groups that hate each other, and a product which is shoddy at best. It is the present-day version of Gordon Bethune's comment about making the pizza so cheap, no one would want to buy it. Certainly such an entity cannot compete in the global marketplace. Neither shareholder nor stakeholder value is enhancing with the current situation.

Perhaps the market would be better served with exits rather than consolidation. The difficulty is of course in how these would actually take place. The current labor situation at some of the legacies are filled with enough animosity to make an Eastern Airlines-style Pyrrhic victory possible. If I had been subjected to what some of these employees went through in the bankruptcies only to see their executives line their pockets with millions, I probably wouldn't be opposed to seeing the whole ship go down. Still, I would have to say this is the only option I find less palatable than consolidation. It will, indeed, be an interesting year.

Swelbar responded...
Welcome back and Happy New Year. You ask many great questions and I will attempt to answer them in this comment back. But I think many of the ideas you espouse will require some separate writing and thinking.

As for your source of optimism on US aviation emerging again as global leaders, nothing would make me happier. Bloody road, yes; better off, yes.

As I asked my audience in a talk given recently: Why should we fear individual carrier failures or consolidation? We should not, although it will be painful for the subject carrier or carriers lost. Labor wants changes to the bankruptcy laws. Be careful for you ask for as the European approach may indeed be right.

I did respond to a commenter's suggestion affirmatively that the barriers to exit are higher than the barriers to entry. We talk alot about the need for consolidation here but I like your term of creative destruction.

And destruction may just be beginning as some stocks are acting like another round of bankruptcies may be ahead. And some of these bankruptcies may be in the regional and LCC space which is precisely where this industry needs to begin the process of shedding duplicative capacity and the associated fixed costs and tax on the infrastructure.

I definitely agree with you that consolidation for consolidation's sake is not the answer. What I have stated here many times is that any combination where one plus one is less than two is good - if not very good for the industry as a whole. So yes, that is destruction of capacity in some form.

Your reference to Eastern serves as a reminder that icons can be tombstones and three carriers that can emulate that disappearance today are American, US Airways and United. My sense is you read here so it does not take much to sense the anger emanating from the AA pilots that write to this blog.

Whereas the timing of the executive payouts probably could not have been worse, I am not sympathetic to that issue. It is hard to attract experienced people to this industry when they have many other choices in front of them. My experience as a board member has made this very clear and real.

Maybe the only way to create value in the immediate term would be to engage in a prepackaged Chapter 7 filing where proceeds from the sale of core and non core assets would flow directly to the shareholders? Value creation and creative destruction all at once?

But yes, consolidation that is good for shareholders, employees and the health of the core business would certainly seem to be more palatable than a liquidation -- one would think.

Dear Mr. President (and Congress): These Short-term Solutions to Congestion Gives Me Indigestion

As I am doing my afternoon browse of aviation news, I find myself struck by another press release issued by the White House Press Office entitled “Statement by the President on Aviation Congestion” click here. Certainly, some of the short-term actions being undertaken make sense and are being applauded by industry click here. But the final suggestion offered is as follows:

“Finally, the Department of Transportation and the FAA are working on innovative ways to reduce congestion in the long run. While short-term improvements in flight operation and passenger treatment can help, they do not cure the underlying problem: In certain parts of our country, the demand for air service exceeds the available supply. As a result, airlines are scheduling more arrivals and departures than airports can possibly handle. And passengers are paying the price in backups and delays.

The key to solving this problem is managing the demand for flights at overloaded airports -- and there are a variety of tools to do this in a fair and efficient way. For example, fees could be higher at peak hours and at crowded airports, or takeoff and landing rights could be auctioned to the highest-value flights. Market-based incentives like these would encourage airlines to spread out their flights more evenly during the day, to make better use of neighboring airports, and to move the maximum number of passengers as quickly and efficiently as possible.

This concept is called "congestion pricing." It has shown results in other areas of our economy -- in other words, other parts of our economy use congestion pricing. Some states offer discounts to drivers who use EZ-Pass, which reduces long waits at the toll plaza. Phone and electricity companies balance supply and demand by adjusting their rates during peak usage hours. Applying congestion pricing to the aviation industry has the potential to make today's system more predictable, more reliable, and more convenient for the travelers. Over the past seven weeks, federal officials have raised this idea with airlines and airport representatives in the New York area. I've asked Secretary Peters and Acting Administrator Sturgell to report back to me about those discussions next month”.

Whereas I will never suggest that I am an expert on the air traffic system, I do understand the economic drivers of cost to the airline industry. The “Fathers of Deregulation” envisioned the masses flying at significantly lower prices. This industry has evolved and adapted and delivered on the economic experiment undertaken in the late 1970’s. Consumers have benefited through significantly lower prices while shareholders, employees, and other vital stakeholders in the industry have suffered to varying degrees.

Now, nearly 30 years later – because you did not keep your promise to provide an infrastructure that could accommodate the goals and objectives of government policy that was so important in 1978 – you are going to turn the tables on the consumer and make it more expensive for them and somehow - I am sure - will find a way to blame it on the industry that delivered consumer choice and lower prices. And while the consumer is certainly impacted by delays in the system, have you ever thought about the direct cost to the airline industry stemming from delays that are not of their own making?

Market-based incentives are not necessarily going to change the clock that dictates the demand by consumers for air travel at certain times of the day and I do not read that possibility in your release. Further, your inaction on this issue is yet another catalyst to consolidate an industry that destroys capital rather than creates it. But I am sure that when the industry is forced to discuss the very real need to consolidate, the costs imposed on it by government actions/inactions – both direct and indirect – will be forgotten by you and your friends on Capitol Hill.

And all of this discussion at a time when the US signs an open skies deal with the EU that offers promise to an industry struggling to find new (read profitable) flying opportunities. The industry has made it known that at $100 oil it will surely consider cutting capacity. When we cut capacity, the least profitable markets will suffer (read small community air service Congress and President Bush). When we cut capacity, labor is disenfranchised. We could go on.........

There is just not much adhesive left on this band aid.

Swelblog.com: The First 31 Days

Whereas it has only been one month since I ventured into this unknown world of blogdom, suffice it to say that this labor of love has been among the most gratifying endeavors I have ever experienced. As I said in my very first post entitled Swelblog.com Taxiing Into Position: click here “I did not start this blog to win friends or influence anyone. I’m a data guy, and I’ve been studying the industry long enough to come up with some strong opinions . . . many of which aren’t popular in either boardrooms or union halls. My approach is analytical because, in my view, the numbers don’t lie.”

I have been moved by the comments made in other blogs and the press about this site and the use of some of the comments expressed here. To Holly Hegeman Planebuzz, Terry Maxon Airline Biz, Trebor Banstetter Sky Talk, and Loren Steffy Houston Chronicle I am grateful. To these, and all other, enlightened influential watchers of the industry and the many other readers who have commented to me via other mediums, I very much appreciate your welcome.

While I may not need to reiterate this point, I am going to as I want to make sure the readership fully understands that this blog and the MIT Airline Data Project are separate. I use the MIT site’s data to analyze issues because I know how the various metrics have been calculated, vetted and presented.

It was the second post, “All Eyes on Texas” that certainly seemed to launch this blog. Some agreed with my ordering of the difficulty of the pilot negotiations and others questioned my ordering. That is the sort of healthy debate that I hope happens here as the blog matures. As a result of my immediate previous post where I addressed a sensitive issue regarding the cost of the APA pilot opener, there were a number of comments made. I have always wanted this site to show both the “positive” and the “negative” comments regarding what I have written and, until Monday, I have made each of the comments available for public review.

But as the days following that piece unfolded, Monday morning I posted a comment that I should not have posted and ultimately deleted it. While it had some valid points, this blog was starting to become a venue supporting the views of one employee at AA challenging another. Then after I authorized the post to be published, a follow on comment was made which I deemed was exacerbating the situation versus having a meaningful exchange of views. I rejected this post. It is one thing to attack me -- and trust me you are in a long line of those that have had the opportunity long before I started this blog.

I welcome, no, I want comments on the issues discussed here -- but check the emotion at the door. From this point on, this site will not be used for personal attacks on another person commenting – period. There are many other venues for that. This is my blog and my rules. And they are changing as I learn.

There was a comment from flyby519 posted to Swelblog that I did not acknowledge and should have as it was precisely the type of thoughtful comment that I want to address in this blog click here. We will pick up here over the next couple of days.

Happy Halloween