Rob Britton
Making Money in the World's Most Competitive Industry - Why is it so hard?
|
Managing Director of Brand Development and Advertising for American Airlines, Rob Britton provided MGSM |
Rob is responsible for brand stewardship, worldwide media advertising, direct marketing, promotion and customer research. He has spent thirty-five years in and near the travel and tourism industry in marketing, international affairs, corporate communication and operations roles.
Before providing a post-mortem on American Airlines' financial issues, Rob provided context for the quandary, explaining the regulatory history of the airline industry in the United States. "For more than half a century, the industry was heavily regulated, severely restricting competition, pricing and routes" he said. However, in 1978 the US Government relaxed restrictions, opening the marketplace to a degree. Rob explained that it was at this point that low-cost carriers were allowed to enter the market, creating a second tier in the industry.
In addressing the question "why is it so hard for established airlines to make money?", Rob was quick to point out that the industry has been in downturn since the year 2000, but that the September 11 attacks played a minor role in the financial crisis. Other factors included the dotcom crash, the collapse of North American telcos, and steep declines in U.S. equity markets and business confidence, all of which prompted a steep decline in business-travel demand. He also put his comments in context by providing statistics, "American Airlines has lost $6.7 billion USD since 2000 and we have long term debt in excess of $20 billion USD" he explained.
Rob then identified five issues as contributing factors to these figures. The first issue was incumbency where Rob noted that the large, established airlines have huge structural disadvantages in contrast with the new carriers. This extends to labour costs, productivity and the complexity of the organisation due to years of regulation and management decisions. Prior to deregulation, the incumbent airlines had revenue levels that justified the added expense of complexity. Lastly, incumbents must manage customer expectation, as customers expect premium service levels at budget prices.
The second issue was the high fixed costs of the airline industry. Rob estimated that these costs were 80% of total costs. Consequently, the airline is restricted in their negotiations with employees over labour costs and productivity. The organisation cannot withstand a strike. If they don't fly, 80% of the bills still come in. They are also unable to downsize to survive, due to training and other related issues. Intertwined is also the issue of the huge capital requirements of the incumbents due to the expense of basic assets. In an industry that is simultaneously capital intensive, labour intensive and energy intensive traditional trade-offs are costly and can take years to implement.
Another limiting factor has been government influence. According to Rob, no other industry is, or has been, subject to as much government influence over key aspects of their business. "We still have the legacy of domestic regulation" Rob said. This is far-reaching as governments control much of the airport infrastructure. For example, although the number of carriers has tripled, the number of runways remains almost unchanged. Governments also inflict enormous tax burdens and continue to regulate international aviation, prohibiting, for example, American Airlines from flying to China, one of the fastest growing international markets.
Finally, Rob believes the industry is subject to huge double standards as what is accepted practice in other industries is unacceptable or illegal for incumbent airlines. Many of the double standards exist between the incumbents and low cost carriers. For example, Southwest Airlines has long advertised using price ranges, but according to Rob, when American Airlines developed similar advertising concepts, the government intervened. "Low cost carriers are the darlings of Washington, whilst the incumbents are goats - but the government created this situation" he said.
Rob concluded with American Airlines' four point turnaround plan based on lowering costs to combat the above situation.
