Learning the Lesson of Competition in the Sky

If they don’t improve business efficiency and costs, airlines won’t survive the fierce competition of the world’s skies.

AMR, the parent company of the U.S.’ third-largest airline, American Airlines, has filed for Chapter 11 protection under American bankruptcy laws. It has reached up to $30 billion of debt and is the second-largest bankruptcy in the U.S. aviation world.

American Airlines was once boasted as the world’s largest airline company. It averages 3,300 flights to over 50 countries every day.

However, through mergers, its competitors expanded routes and fleets to improve their results, while American’s reform was slow, and it continued to operate in the red.

The traditional business model was not enough to protect against the loss of customers after the terrorist attacks in 2001, the rising fuel costs brought by the high price of crude oil, and rapid growth of and competition from discount carriers.

From here on, American can aim to rebuild while continuing to operate, or it can follow General Motors’ (GM) example of success after filing for bankruptcy. The question is whether they can be reborn to raise revenue through a full restructuring.

In the end, the primary cause of what drove American to file for bankruptcy was the stalemate in labor management negotiations concerning cuts in labor costs. It seems that necessary conditions would encroach on major cuts in pensions and other retirement funds.

In the U.S., five of the major airlines have gone bankrupt in the last 10 years. United Airlines, after its 2002 bankruptcy, merged with Continental Airlines that went bankrupt in 2010, to be reborn as the largest of them all.

After Delta Airlines’ 2005 bankruptcy, it merged with Northwest Airlines in 2008 to rise to second-largest.

While it keeps being put off, the most important issue is cost reduction using bankruptcy as leverage and widening the scope to increase efficiency even further through reorganization. That is the formula for rebirth of U.S. airlines.

American Airlines’ bankruptcy is also an important lesson for major airlines in Japan.

They must stay conscious of discount airlines, proceed with raising efficiency by adding aircraft and adding route plans, and figure out how to bring in profitable customers. The issues that American Airlines has to face are the same for Japanese carriers.

Japan Airlines, which is in the middle of restructuring its management, participates in the same alliance of aircraft carriers as American and has a code-sharing relationship for flights between Japan and the U.S. As American reduces unprofitable routes, it seems JAL will have to keep an eye on any influence during its own restructuring.

In order to beat the competition, All Nippon Airways must not neglect the effort of rethinking their cost structure either.