In recent weeks, every major U.S. airline has been in discussions with another carrier for a possible merger. Since Delta Airlines and Northwest Airlines announced merger intentions on April 14, the industry has been buzzing with speculation that additional combinations are coming. How the changes will impact the business traveler remains unclear. Keeping watch on all of these developments is Bluegrass Airport Executive Director Michael Gobb. Following are excerpts from the conversation. You can hear the entire conversation by clicking on the Podcast below.
TM: What is happening in your world, Michael?
MG: Our world continues to be upended. Certainly the merger talks, the price of oil going above, what is it now, $115 a barrel? All of these issues and costs are coming together at the same time that the airlines are struggling to provide increased levels of service to customers while trying to increase the price of the ticket so they can afford to make money. ...One of the few areas that the airlines can control is their fixed costs, their management costs. ... The administrative, the sales teams, the analysts, the pricing folks, the reservations folks - if you can eliminate that duplication, that appears to be where the new Delta airlines will see the bulk of its savings. Now it's also interesting that the industry is taking capacity out of the domestic market. Delta just this year, just in 2008, has removed 10 percent of the domestic seats available for sale. Northwest, I believe, is running in the area of 4 to 5 percent. Industrywide, the airlines have talked about a 6 percent reduction in U.S. domestic capacity. It's probably going to be double that. They didn't anticipate oil prices going as high as they have, as quickly as they have.
TM: Will eliminating those redundancies result in fewer people doing more things?
MG: I imagine it will result in fewer people doing more. One of the other beauties of the Northwest/Delta merger is that their systems have very little overlap, meaning that they're flying to different places, specifically putting together a tremendous international route structure. Where Northwest is so strong in the Asian market with great ties to Europe, Delta is extremely strong in the European market, the South American market, India, the Middle East. When you put those synergies together, and you look at the airlines wanting to control costs by taking some of the less fuel- efficient airplanes out of their route systems, really focusing on the 50-seat regional jet, reducing capacity, eliminating some of the overlap they have, they're ideally suited to maximize their cost savings.
TM: How does it look on the domestic front?
MG: You know, I think for Bluegrass Airport, we're faring very well. I tell people all the time that when we compete for air service, we're just not competing against those two airports about an hour away from us. We're competing against 429 other airports for the same precious commodity and that's the airline seat. What we've seen over the past half a dozen years has raised concern. We did an analysis - I think it was about six years ago - where we analyzed cost structure: what it cost to move a person through Missoula to Salt Lake onto Florida. And when you look at ... the operating cost at $40 a barrel for a $250 ticket to take you from Missoula, Montana, through Salt Lake to Florida, the airline eats up all but, I think, $10 or $12 of the revenue they get from you. So they have no revenue or yield left to get you to Florida from Salt Lake and then back. So the airline CEOs are saying there has to be some increase in fares. There does have to be. Their costs certainly are increasing - and just in the fuel cost, three- or four-fold.
TM: The airlines already have difficulty maintaining profit margins. When does it become a crisis, if there isn't one already?
MG: I believe we are at the tipping point. And that's why you see Delta and Northwest sitting down at the table. Ö With the costs the way they are the airlines have not been able to hedge the way they have in the past. Simply speaking, hedging fuel is just buying fuel at a price today, and you're not going to take delivery of it for maybe a year. Southwest used to do a fabulous job of hedging their fuel, and that's where they were able to keep their costs under control. Now most of their fuel hedges have expired... I think we are at the tipping point now where something has to happen, and with our country, with our global marketplace, we're simply too dependent on our aviation infrastructure to allow carriers to go away, to allow service to go away.
TM: Given your perspective as an industry professional who is obviously watching this moment by moment, if you could wave a magic wand, what would that "something" be?
MG: It's going to be smart mergers putting logical players together.
TM: What should the Lexington business traveler who is watching all of this be thinking right now?
MG: ...We have six branded carriers. I would imagine you will see Bluegrass having three or four carriers, but (with) that activity being spread out amongst those three or four so that you still have a good level of competitionÖ We move over a million people in and out of Bluegrass Airport every year. We have a very lucrative customer base for the airlines. One of the reasons we have nonstop service to 13 destinations, pretty much all jet service now, is because of the quality of our customer. Our core customer is that business customer. Certainly the leisure customer enjoys all of the amenities - the lounge, the upscale food now with Desha's coming into the airport and Quizno's. We have a market to the airlines that a lot of communities don't. I just read that Delta Airlines is terminating their nonstop flight from Louisville to Boston. Southwest is pulling Louisville/Florida flights out of the market. We've not seen reductions in service with the exception of that one to Minneapolis that was announced and then pulled back.
TM: Are there any new ideas out there that might change the airline experience in the future?
MG: I'm not sure the passenger is going to notice a lot of changes. What is interesting is the airlines are talking about quality of service again, primarily, I believe, because they're competing now on the international marketplace. Domestically, there is not a lot of yield to be made. There is in the international market. Ö What I'm seeing and hearing is an increase in quality where Delta is going to, for business class. all lie-flat seats instead of the seats that get you part way but you really can't get comfortable. Well, they are doing that because of the other international carriers. They are putting a very high level of service in all of their aircraft regardless of the section of the airplane. So where the airlines were tending to pull everything back, you are starting to see meals come back. The passenger had gotten tired of being nickeled and dimed. So either the carriers are looking at a la carte pricing for products or they are going in the opposite direction where they are bringing some of the old-fashioned service together.
TM: Anything you would like to add?
MG: Well we've touched on it, but we get a little complacent with the level of air service, with the facilities, that we're very proud of at Bluegrass Airport... Central Kentucky should expect the best from their airport, and I'm hearing (from) more and more people all the time that they're really happy with "their" airport and with that buy in, with continuing to be in touch with what our customers want and then... providing a warm and comfortable experience.