Monday, June 14, 2010

Airline consolidation: bigger but not better

This year I’ve had the joy of spending lots of time experiencing mediocre airline service. In particular, United Airlines has truly refined the definition of steerage with their 4th class (ala the Titanic) below the traditional 3rd class service called coach.

Once upon a time, the full-service carriers provided service, but since 9/11 they have been cutting any semblance of quality or service in the name of cost reduction. (Delta and United seem to have fallen particularly far, American and Continental not so much.) Today we have the irony that Southwest provides more service for its tickets (e.g. checked bags) than its former full-service rivals.

Lacking innovation in a mature industry — and uninterested in improving quality — the response instead seems to be consolidation via merger. After Delta-Northwest, we now have the prospect of United-Continental. Bigger is not better, but it is bigger and perhaps there are minor scale efficiencies to be wrung out.

The lame duck president of the industry’s trade association, Giovanni Bisignani, was quoted as saying that the industry will consolidate into “a dozen global brands supported by regional and niche players”.

Certainly the existence of regional players makes sense – Southwest doesn’t need international linkages to survive, and for that matter neither does EasyJet (or RyanAir). But I’m not sure what’s magical about “a dozen.”

The same FT article had a snippy response by an Indian bureaucrat:

Praful Patel, India’s minister of state for civil aviation, said: “All I can say is if Giovanni is right and we have 12 global brands, three will be from India and three will be from China.”
Much as I’m a firm believer in the rise of China and India, both are years away from running even one world-class global airline, let alone three each. Perhaps they can acquire such competencies — for example if China folds in Cathay Pacific — and the one thing that these airlines (particularly the Chinese) have going for them is a wealthy state sponsor able to fund large acquisitions.

What will happen if Cathay combines with a Chinese airline, or Continental with United. I’d like to think the higher quality partner will be the surviving culture, but if the goal of consolidation is scale (or other forms of cost reduction) then there’s little reason for optimism.

1 comment:

Mazi said...

United doesn't even give out pretzels anymore let alone peanuts. On a flight from SFO to DIA, they gave nothing but beverages. Now, if you want to buy a food box for 9 dollars, you can get a small bag of pretzels.

And everyone knows that after the United-Continental merger, United won't get better, Continental will get worse.