Downfall Of Top Airlines A Boon To Smaller Operators

While the economic crunch has been grounding "legacy" carriers, smaller airlines are taking off by offering lower fares and fun frills.

Image: iStockphoto

1 of 2 NEXT

The nation's airlines begin reporting third-quarter earnings tomorrow, and the results are a foregone conclusion: The big, so-called "full service" airlines will cumulatively lose about $1 billion, and the smaller, more nimble, supposedly "low frills" carriers will make a few bucks.

The earnings-call patter will also fall into an all-too-familiar pattern: Airline CEOs and CFOs will stress the rise of ancillary revenue like baggage fees and boast of their comparative success in raising fresh capital to burn during the traditionally brutal winter months. They'll moan about fuel prices, slash route networks again, and promise additional cost-containment measures to squeeze already-demoralized employees and irate passengers. The smaller carriers will underplay their successes and keep their corporate heads down.

This quarterly Kabuki isn't just boring and predictable. It masks an unprecedented development in the nation's commercial air-travel system. The once-almighty "legacy carriers" with the famous brand names and the historic lineage dating back to Charles Lindbergh have become, for want of a better phrase, too small to be too big to fail.

Even as recently as the September 11, 2001 attacks, the carriers that were flying at the dawn of airline deregulation in 1978 still controlled nearly 85 percent of the U.S. skies. This year, after the methodical assimilation of Northwest Airlines into Delta Air Lines, only five so-called legacy carriers will be left, and their combined market share has fallen below 72 percent.

The post-9/11 financials are even worse. Despite five Chapter 11 reorganizations, two mergers, the elimination of perhaps 250,000 jobs, and a string of debt and pension defaults, the legacy carriers lost a cumulative $38.5 billion between 2001 and 2008. And that, say number crunchers at AirlineFinancials.com, is before tens of billions of dollars worth of goodwill write-downs and hundreds of millions of dollars of reorganization costs. (United Airlines had the longest and most expensive stay in Chapter 11 in U.S. history.)

And the skies ahead are decidedly unfriendly. OAG, the airline industry's schedule keepers, says that there are 21 percent fewer seats for sale this month than in October 2000. And more cuts are coming this winter as the legacy lines grapple with the aftereffects of a massive international expansion that kicked in just as business travel plummeted after the financial meltdown of 2008.

Before we talk about which airlines will pick up the slack—hint: think JetBlue, Southwest and AirTran—it's worth spending a moment considering the collapse of the legacy carriers.

The six surviving airlines that merged and negotiated their way through the deregulated skies of the 1980s and 1990s—American, United, Northwest, Delta, Continental, and US Airways—were already hurting before 9/11. There had been some profits (about $17 billion between 1993 and 2000, says AirlineFinancials), but their fleets were old, they had pushed business fares too high, and top management was paying itself lavishly while ignoring the day-to-day deterioration of the in-flight product.

Even a no-strings-attached infusion of $4.5 billion in taxpayer funds immediately after the terror attacks that brought down two United and two American jets couldn't stem the rot. The carriers began to shed routes or shift them to commuter carriers. They switched to smaller, slower, more-cramped regional jets from full-sized aircraft. And they forced more passengers to fly through crowded, delay-prone hubs. Service continued to decline as the bankruptcies piled up.

1 of 2 NEXT