Big Airlines Precursor of Big Cities

“Are the big airlines a precursor of what lies in store for big cities in this country?” was my thought as I sat in O’Hare this morning, waiting for a flight to Knoxville to talk to the Tennessee Municipal League Conference. In the next several paragraphs I’m going to talk about the airlines, but just substitute the word ‘big cities’ as I go thru my analysis.

The big airlines (United, American, Delta, etc.) were all created in a regulated world. Costs of operation increases were relatively easy to pass along to the consumer and as a result more attention was spent on expansion rather than on cost containment or profitable expansion. Their cozy world was upended in 1980 when the Staggers Act deregulated the entire transportation industry. New companies like Southwest, JetBlue, AirTran (read small towns) have stepped into the lurch with a low cost, more efficient operating model that allows them to make profits at ticket prices that the big boys lose money at.

In 2000 the average airfare cost 13.5 cents/seat-mile. Last year it was 11.7 cents, a 13% decrease. During that time, the major airlines have lost a collective $32 billion. For the past several years the economy has been growing, inflation has been low, interest rates historically low and as I can readily attest to, airplanes have been flying relatively full. In a “normal” capital-intensive business like the airlines, all of these factors should be recipes for minting money. However, the airlines extremely high fixed cost structure, built up in that regulated environment, is today forcing most of the old “legacy” carriers into contemplating bankruptcy. Even if they survive, they will continue to have difficulty in competing against the more nimble, low-fare carriers.

The same differences exist today in a comparison of large cities with the agurbs®. Keep your eye on how it plays out for each over the next several years.