And another one bites the dust…
This morning, Denver-based Frontier Airlines announced it was filing for bankruptcy protection – less than 24 hours after Oasis Hong Kong Airlines canceled all flights amid an unexpected liquidation process that became public on Wednesday.
Oasis and Frontier are just the latest casualties in what has become a freefall within the rapidly collapsing airline industry. Three other airlines, Aloha, ATA, and Skybus, all stopped carrying passengers last week. Champion Air took a more orderly approach – they announced that effective May 31st, they would cease operations.
The US airline industry is one of the most critical nodes of the Nation’s entire infrastructure systems – the commerce and business lifeblood of the Nation is dependent on the unimpaired flow of air transportation. For these reasons, airlines have been targeted by terrorists, criminals, and publicity seekers for most of the last 50 years.
When banks and the lending institutions recently began to unravel from their own un-sound business practices, the highest levels of the government quickly became involved. Congress held hearings, new oversight and regulatiosn were proposed, and government financial backing was deployed to save the industry.
Six airlines going out of business in a span of less than two weeks should be a very large wake up call for the nation. We will likely see the consolidation of major established legacy air carriers, resulting in mainstay airlines going away as they become absorbed into other corporations. The economy of scale is leveraged when redundant managements and services are removed. This consolidation is leading to a smaller number of total flights and eventually much more costly price structures.
These symptoms are a result of other deep seeded problems the largest of which is fuel prices. Several major US airlines entered bankruptcy or teetered on the edge over the last few years. They managed to avoid extinction by cutting costs, salaries, and occasionally bonuses, while constructing a new business plan for the creditors. Most of the plans were based on an oil price of about $65 per barrel, which in some cases was unrealistic when they were proposed.
The other underlying cause is un-sound business practices by both government and the airlines. The government imposes taxes on airlines that exceed those levied as ‘sin tax’ to discourage things like drinking and smoking. The airline business, which developed under the CAB with regulated operations and pricing, was so profitable that under deregulation, they failed to learn how to drive market pricing and expectations.
Many more US citizens will lose their jobs, communities will lose air service, and the supply chain will become constricted as this symptom becomes pandemic. One solution will certainly be our seeing the airlines subsidized by foreign governments reach out to provide our critical air service.
It is time our Nation’s leadership intervenes in this crisis.
