• Strategy
  • CFO Magazine

The Long Haul

As airlines struggle to survive, the role of finance in decision-making takes off.

Long term, Parker expresses optimism that industry overcapacity will abate somewhat, in part as a function of industrywide combinations and liquidations. “When you get airlines consolidating back to their real core assets, there’s clearly room for three or four strong hub-and-spoke carriers,” he says. But not seven, as there are now.

For one thing, the Justice Department is very likely to soften its opposition to airline mergers. (It opposed the combination of struggling United and US Airways on antitrust grounds before the 9/11 attacks.) “The government is tired of hearing from airlines that they need help,” says Parker. “Therefore, they’ll find it hard to deter airlines that want to help themselves.” As for discounters, he believes their numbers will shrink, too, though he won’t speculate on which will end up being acquired or liquidating.

While some think JetBlue’s success could lead others to enter the low-cost market, Parker doubts that new entries will be extensive in the current market. Since JetBlue’s initial public offering in April 2002, he says, “I don’t see much money flowing to start-ups anymore.”

Further helping reduce industry capacity in the U.S., Parker expects a continuation of the recent trend of legacy carriers reassigning aircraft to more-profitable overseas routes, thus reducing the amount of domestic flying they do.

Parker and Kerr are reluctant to predict whether the industry really will become more efficient and profitable over time. They are not alone in their caution. “I wish I knew,” says JetBlue’s Owen, noting that the end of regulation, too, was supposed to spur rationality. “I joined the industry right when deregulation occurred. I naively thought we’d have five years when everything would shake out, and we’d have stability. So my predicting ability is not that good.”

Roy Harris is senior editor at CFO.

A Second Look at Service

Passengers may worry that it’s the job of finance executives to sacrifice service and passenger comfort for the sake of restoring bucks to the bottom line. Indeed, American Airlines has pulled pillows on some flights in a bid to save $300,000 a year, more carriers are charging for coach meals, and some are adding seats in planes on higher-profit routes.

But while “people with a short-term view of the world will cram in more seats,” says Aaron J. Gellman, a professor at the Northwestern University Transportation Center, “Southwest is taking seats out. The best of the finance guys are able to trade off. They understand the dynamic.”

That competitive dynamic has also led airlines to match rivals in moves that build the passenger base — as Delta recently illustrated by cutting fares in a way that simplified pricing and removed Saturday-night stays as a requirement for discounts.

“The finance profession has a bad reputation for being too focused on narrow things, and not on the big picture,” acknowledges JetBlue Airways Corp. CFO John Owen. Owen says he himself was thinking a bit small when CEO David Neeleman proposed investing in free live television in cabin seatbacks. “I was adamantly opposed; I saw it as a cost we could never make back,” says the CFO. But since the change was made in its fleet of 69 jets, Owen and JetBlue have come to view the service as “an essential part of the total JetBlue experience,” resulting in “loyalty and passenger buzz that will result in higher demand.” Says Owen, “We’ll make it up in the average fare, although we can never quantify it or prove it.” —R.H.


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