LET THE MADNESS BEGIN (April 2023)

...Oh, that's right, it has begun. Lots running through my head this morning. Yesterday, I wrote in detail to clients about the concept of cost convergence in layman's terms. It is complicated and it is not. The network carriers will emulate the ULCCs in one critical area - they will fly bigger airplanes. More seats will bring down the cost of producing a seat. More seats equate to more revenue potential without having to add frequency. You get it.

While CASM (Cost per Available Seat Mile) is one measure of assessing the unit cost of producing a seat mile by one carrier/sector versus another carrier/sector, is that the best, or only, measure to consider? When we created the #MITAirlineDataProject, one of the tables generated looked at the number of ASMs produced per labor dollar spent https://lnkd.in/gSmM6nAp.

The MIT Airline Data Project was constructed during the court-assisted restructuring years of 2005 - 2013. Productivity was actually important then - when airlines were/could be vigilant on cost control. For the network carriers the 2005 - 2008 period was the high-water mark in terms of ASMs produced per labor dollar. By 2019, the network carriers were producing only 19 ASMs per labor dollar while the ULCCs produced 44.3.

That is a story, but the real story is Southwest, and it underscores one of many conundrums they face. The Airline Data Project begins its output in 1995. With some negligible exceptions, Southwest's output per labor dollar decreased year-over-year throughout. As growth slows and employees climb the seniority ladder, this is what happens and where the Southwest model will struggle to find the right deal that works for all.

Comparing 2022 to 2019, the Big 3 produced 13.4% fewer ASMs per labor dollar or said another way -- they paid $436 million more in 2022 than 2019 to produce 12.3% fewer ASMs. Southwest's labor bill went up by $1.1 billion and it produced 5.3% fewer ASMs. The ULCCs in 2022 produced nearly twice the number of ASMs as the other carrier sectors, however it cost them 33% more to produce 12.3% more ASMs. Those ASMs are getting expensive.

And this is before AA, UA, and Southwest complete their negotiations. Spirit is not happy with Pratt and Whitney and as that propagates, their cost of production will only increase. As I have written many times, there has never been an industry set up like this for management to raise fares and employees to demand significant compensation adjustments.

Adjustments that have moved the market in terms of direct compensation all the while lifestyle issues need to be addressed too. The outcome of all of this would have been easy to predict 15 years ago. Not so much today.

One more thing, read #BenBaldanza's article in Forbes today on the Airline Monopoly version.