At the end of December and the beginning of the New Year, both American Airlines and Delta Air Lines made a play for gaining some ownership of the financially beleaguered Japan Airlines. Japan was not too keen on the idea of a US airline having any control of their airline and they iced the deal. They do however see the value in a marketing alliance or sharing of routes; so, they may not want to get married but dating seems like a good idea.
So why would US based airlines who are in the middle of bleeding billions of dollars think they could put money into Japan’s flag carrier? Where does the cash even come from and what are they after? What is the value proposition of one airline that is losing money investing in another airline that is almost bankrupt?
I am not sure I can answer any of these questions; but, the questions do raise further thoughts and questions about the possibilities and about what these guys are thinking.
Could it be that the legacy airlines in this country have come to the realization (sadly) that they are no longer effective and efficient at providing value to the American traveler for domestic travel?
With the increasingly anti-social behavior of the airlines in this country, which includes a deteriorating ability to get us there on time, unbundling services so that we have to pay for checked bags that may or may not make it to the destination with us, and long security lines that further waste time, travel by air mas- transit in the United States is a poor value proposition. When I travel by air, I like to get an average speed that is better than what I can do on the interstate in my truck (70 mph). If it takes me six to seven hours of travel time to take a 450 mile trip on the airlines and cost me $500 round trip, then why bother with the misery? It is easier at that point to leave the house and drive straight to the destination. It takes a 1000 mile trip or more (like Nashville to Denver) before I get a feeling that I am really saving enough time to compensate for the anti-social experience.
The analysts who study the financials of the airlines say the airlines make their money on international routes. The major carriers are taking a direction that seems to indicate that the leaders of these carriers think the same way. If that is the case, then from a free market perspective, it would seem that the market is determining that the airlines deserve a profit when they take you and me to somewhere outside of the United States but do not deserve a profit when they take us somewhere inside the United States. The market decides what it will pay for a service based on the value it places on that service. If the supplier to the market cannot figure out how to make a profit providing that service then it has to either increase the value through some innovation or eventually get out of the business. With the exception of the government, I don’t know of any other industries or institutions that survive long-term when they create negative cash flow. Substitute the words “negative value” for “negative cash flow” because cash or currency is merely a means to measure what we as the market determines to have value!
Most of the significant happenings in the airline world revolve around alliances and strategic mergers or ventures between airlines in different countries that want to connect to each other and gain an advantage of sharing those profitable international passengers. Getting us to other parts of the world by air has value as compared to the alternative form of getting there – by boat.
So, maybe what we are seeing is the shift in what the value proposition for airlines in the United States will be in the coming decade? What do you think about this?