A Changing of the Guard in the Airline Sector

It only took 10 years, but American Eagle parent AMR (NYSE: AMR  ) finally came to terms yesterday with the reality that its cost structure and debt levels would be uncompetitive next to its peers.

AMR has struggled with a plethora of issues. Its labor costs are arguably the highest in the industry and negotiations with the workers' union has been going nowhere fast. AMR's fleet is relatively old compared to that of other national carriers United Continental Holdings (NYSE: UAL  ) and Delta Air Lines (NYSE: DAL  ) . An old fleet isn't necessarily a problem, but older planes tend to get considerably worse fuel mileage, which is also hurting AMR in the pocketbook. Finally, the company is sitting on a monstrous pile of debt totaling $11.6 billion that it never would have been able to crawl its way out from underneath. In reality, the AMR bankruptcy seemed like a foregone conclusion to many.

What the AMR bankruptcy does signify, however, is a clear and definitive changing of the guard from a national-carrier-dominated industry to regional carrier supremacy.

Think about it: every major national carrier has declared bankruptcy in the past decade -- some even twice! US Airways (NYSE: LCC  ) in 2002 and 2004, United Continental in 2002, and Delta Air Lines in 2005. This isn't to say that regional airlines haven't had their own issues (Mesa Airlines, Hawaiian Airlines, Aloha Air), but regionals have been considerably quicker to adapt to changing consumer travel habits and are far less affected by rapid economic shock.

Take Allegiant Travel (Nasdaq: ALGT  ) as an example of why being small puts you at the top of the mountain these days. Allegiant's fleet is similar to AMR's in that it's older than many of its peers' -- but this actually puts it at an advantage to the national carriers. Allegiant purposely buys used planes in order to keep its cost structure down. That's not an option for Delta, United Continental, US Airways, or even AMR, which recently placed an order for 200 new 737s with Boeing (NYSE: BA  ) , which it says it still plans to go through with.

Another differentiating factor has to do with just how each company operates its routes. Allegiant, because it's so small, has the ability to shut down routes altogether if fuel prices rise too rapidly or passenger load counts dip too low. National carriers simply can't shut down popular routes without the fear of alienating their customer base.

The final reason Allegiant does well is because many airline consumers could give a damn about loyalty. The almighty dollar is what rules their decision-making process a lot of the time, and what most potential passengers are looking for is the lowest-priced flight possible. With alternate fees built in elsewhere (baggage, meals), Allegiant is able to pass along these savings at a markedly lower price than the national carriers can offer.

Another airline capable of undercutting the national carriers yet somehow able to keep customers loyal is Alaska Air (NYSE: ALK  ) . Many airlines offer mileage credit cards, but few have had the success in luring customers and keeping them loyal like the Alaska Air credit cards have.

With AMR's bankruptcy, I can only assume that the talk of airline consolidation is right around the corner. As for me, I think the solution lies in breaking some of these national airlines into smaller components before we wind up in the same situation all over again in another five to 10 years.

What's your take on the airline sector? Are regionals the way to go or will national carriers reassert their dominance? Share your thoughts in the comments section below and consider adding these stocks to your free and personalized watchlist to keep up on the latest news in the airline sector.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. He always takes the window seat on an airplane. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong. The Motley Fool owns shares of Allegiant Travel. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that's never crash-landed.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 30, 2011, at 12:58 PM, DK737 wrote:

    "What the AMR bankruptcy does signify, however, is a clear and definitive changing of the guard from a national-carrier-dominated industry to regional carrier supremacy"

    Your still unproven premise is that an airline bankruptcy signals a changing of anything in the airline industry. Did Allegiant not also file for bankruptcy earlier in the decade? Were they not using old airplanes and cheap labor then? Did Allegiant's bankruptcy signal anything like your premise? Secondly, your premise concludes that a more fragmented industry is a more viable business model. Uhmmm, lets see how many airlines have come and gone in a fragemented airline industry since deregulation in 1978? Isn't it more than 175? Oh by the way, if want scheduled and reliable service to your city then don't count on Allegiant since they don't provide that.

    Next time you write something for public consumption remember that it is better to be thought a motely fool than open your mouth and prove you are one.

  • Report this Comment On November 30, 2011, at 1:08 PM, asixpilot wrote:

    You neglected to mention (as do most pundits) that the employee groups voluntarily gave up many concessions in 2003 @ AMR to stave of bankruptcy. The pilot group alone gave up 23% in pay and closer to 30% of their overall their overall compensation. The cost difference between the other legacy carriers is had their cost structure reduced in bankruptcy proceedings and the affected employee groups had more taken from them. It is not all labor's fault.

  • Report this Comment On November 30, 2011, at 3:02 PM, TrackUltraLong wrote:

    asixpilot,

    I'm not claiming that pilots are in the wrong here and that's why American Eagle went belly up. AMR had a mile-long list of problems and labor issues were merely one of them.

    Thanks for the comment.

    TMFUltraLong

  • Report this Comment On November 30, 2011, at 7:47 PM, ExAMR wrote:

    asixpilot, your final comment ("it is not all labor's fault") is a non-sequitor: nothing you said prior to that point leads to that conclusion.

    I would argue that it IS labor's fault - pilots most of all.

    The seniority system is a very, VERY significant problem. All new pilots struggle through horrendously LOW wages, but that gradually improves to where in 10 years most main-line pilots are looking at $100-150K+, which seems reasonable.

    BUT that's not where it STAYS: after another 20 years, $300K job in another 20 years (777 pilot flying 8 days a month to Japan). WHAT exactly has changed so these pilots are WORTH that? Sure, experience is worth something, but how can you justify THREE TIMES AS MUCH? Do you REALLY think a pilot improves THAT much AFTER they've already spent 10 years at a mainline airline? (rememeber, they had a couple thousand flight hours, 5-10 years of additional experience, BEFORE they got on with the airline)

    Let's face it: pilots at AMR have had a GREAT deal - whether they took cuts earlier or not, they STILL are making WAY more than the competition. At the end of the day, that's what it comes down to: air travel is a commodity, and price makes the decisions. AMR's pilots MUST reduce their demands / expectations, or AMR will never survive. And just ask your TWA friends what it's like to be at the bottom of another carrier's seniority list then...

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