VideoThe nation's air-service net-work is still reeling from 9/11, economic doldrums, its own bloated capacity, waves of defensive fare-slashing, and expensive fuel. But along with the daunting challenges has come an opportunity for CFOs: to reshape their airlines to fly profitably in the industry that emerges from the wreckage.
Indeed, airline finance executives are taking charge as never before. Three of the four lowest-cost major carriers have put their former CFOs at the helm: Gary Kelly at Dallas-based Southwest Airlines Co., Larry Kellner at Houston-based Continental Airlines Inc., and Doug Parker at Phoenix-based America West Airlines Inc.
"I think CFOs are emerging in the airline industry," says Aaron J. Gellman, a professor at the Northwestern University Transportation Center. "Before deregulation [was begun in 1978], the CFO sort of rolled with the punches. It wasn't a critical issue that he be top-flight (no pun intended). The financing was done formulaically." One lesson that legacy carriers are learning from Southwest and other successes, he says: "Always put finance people in a key role counseling senior management."
Unfortunately, the legacy airlines — led by American Airlines, Delta Air Lines, Northwest Airlines, United Airlines, and US Airways — have learned too slowly the make-or-break nature of cost structures. Right now, with soaring fuel prices pushing even such lower-cost carriers as America West into the red, Southwest and start-up JetBlue Airways Corp. top the short list of "haves" in the industry. Meanwhile, the real legacies of the legacy airlines are uncompetitive labor costs, poorly planned fleet investments, and routes vulnerable to fare wars. When high-cost carriers lead in price-cutting — as Delta did recently — it may well increase their own pain.
It's 25 Years; Get Over It
At JetBlue, CEO David Neeleman hired John Owen as CFO. Owen was the long-time treasurer of Southwest, which JetBlue unabashedly proclaimed as its model. "Without a doubt, the airline industry collectively has not been well managed," says Owen, who says it has rolled up a "cumulative net loss for its entire history." But he gives high marks to Southwest, America West, and Continental for managing to outperform most of the competition.
Southwest CEO Kelly sees the industry's deregulation as a poor excuse for the extent of its current problems. "We've been deregulated for 25 or 26 years," he observes, and it's long been clear that "the number-one criteria customers use to select their airline seat is price, so you'd better have your costs under control." In his view, "as recently as 2000, carriers were making decisions that assumed the heyday would continue. And those have been very bad mistakes."
The industry was the victim of a "tipping-point phenomenon," says Yale University law professor Michael E. Levine, a former top airline executive. As discounters with lower cost structures expanded their services geographically against a backdrop of severe overcapacity, a situation was created where "it's estimated that 75 percent of people buying tickets have some sort of reasonable low-cost alternative," he says. "So yields have been dropping dramatically," and the failure to reduce contractual commitments sufficiently pushed airlines deeper into the loss column.
Another obstacle he sees: "The natural instinct of CFOs is to maintain liquidity, because that maintains their flexibility. I'm not suggesting that the obsession with liquidity is wrong, but building up cash reserves has been a problem" in cases where airlines have other needs, such as keeping the labor force happy.
American "Wins"
In terms of actual flexibility — the basic ability to change with the times and make money — America West, the nation's eighth-largest airline, has shown some signs of developing into a survivor that could one day rival number-six Southwest.
From their conference room looking north across Arizona's Salt River to the red mesas beyond, Doug Parker and his CFO, Derek Kerr, talk about their experiences since their high-school days together in Farmington, Michigan. Kerr became an aerospace engineer, working for a time on the B-2 bomber program before moving to American, and later Northwest, to work with Parker in finance. Parker joined America West as CFO in 1995, and Kerr followed the next year, becoming senior director of planning. The two men clearly believe that legacy carriers have handicapped themselves in recent years by failing to recognize their real low-cost competition.
"I think they looked too much at each other; they viewed the industry as American, United, Northwest, and Delta," says the 43-year-old Parker, three years Kerr's senior. "American was clearly interested in making sure it was better than United. And at the end of the day, it won that game: it was bigger and more profitable, so United went into bankruptcy first." Meanwhile, though, "Southwest was doing much better than all of them put together. And that opened the door to others that could do a good job of keeping their costs low."
When it started up in 1983, America West, too, used the legacy-carrier model, worrying less about fare competition than about offering full service through its hubs in Phoenix, Las Vegas, and Columbus, Ohio. While designed with a lower cost structure than its rivals, America West lost some of that advantage in the small-margin Las Vegas market. Like most competitors, it had severe ups and downs. Overexpansion led it into bankruptcy in the early 1990s, but it then established a solid profit-making record until economic woes hit the airline hard early in 2001. The terrorist attacks caught it cash-short, making it among the first carriers to seek a federal loan guarantee.
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