Why airlines have trouble turning profit

Q: Why does it cost so much to operate an airline?

A: Moving hundreds of airplanes, tens of thousands of employees and hundreds of thousands of passengers around a vast service network — safely — is one of the world’s most complicated processes.

Think of it as an assembly line in which thousands of pieces must come together at precisely the right time. And each product produced — a trip by an individual — is unique. Altogether, there are about 700 million of those products each year.

The assembly line tools — airplanes, airports and support facilities — are expensive. On top of all that, the assembly line is subject to bad weather, mechanical failures, passenger emergencies in flight, even hijackings, all beyond the operator’s control.

It’s a wonder that fares aren’t far more expensive and that more than 82% of flights operate on time.

Q: How much impact do labor costs have?

A: Labor is the biggest cost item at any airline, and workers’ desire for ever-higher compensation is at odds with customers’ desire for ever-lower fares.

Airline employees are expensive to hire and train, and difficult to replace. It takes years of flying to qualify to apply for a pilot’s job at a major airline. The health, vision, education, background check, and psychological requirements would disqualify more than 90% of adults. In the case of pilots, mechanics and flight attendants, federally mandated training is long and costly.

Airline managers know that if they’re struck, they would run out of cash in 30 days. That gives unions remarkable negotiating leverage.

The result? Pilots are the highest-paid union workers in the world. Mechanics don’t come cheap, either. Flight attendants and customer service employees are regarded as the cream of the crop among service workers and are paid accordingly.

Q: Will airline workers have to take big pay cuts?

A: Some pay cuts and benefit reductions are likely. But wage rates alone are not the problem. At most traditional airlines, complicated work rules and the airlines’ flight schedules create inefficiency. For example, pilots can get paid for 95 to 110 hours a month while actually flying 70 to 95 hours.

Low-fare airline Southwest, the industry’s profit leader, has few of those work rules or flight-scheduling problems.

Management and labor leaders agree that most airlines could wring up to 30% more productivity out of pilots and other workers. But workers would have to give up some lifestyle advantages.

Also, increased worker productivity would mean fewer workers. Translation: more layoffs beyond the 53,000 jobs cut since the Sept. 11 attacks.

Q: Why do fares vary so widely?

A: Every passenger values his or her seat differently. Grandma visiting the grandkids will adjust her schedule to get the best deal. To a businessman scrambling to get somewhere to keep a $100 million contract from being canceled, $2,400 for a one-way, first-class ticket seems cheap.

Airlines developed hub-and-spoke networks to cater to those high-fare-paying business travelers who want multiple departures each day to meet time-driven needs.

But even the smallest jets are too big for that demand alone. Airlines offer leisure travelers lower fares to help fill seats. Without those, business travelers’ fares would be higher.

That system made sense when full-price tickets cost no more than twice the cheapest discount fares. But carriers now have more seats than can be filled by natural demand, so they have to discount even more. The lowest priced seats now can be 80%, even 90% off the full-fare price.

To make up for that reduced revenue, airlines charge ever-higher top-end prices, leaving the few who pay top dollar feeling cheated and angry.

Q: Does that mean that leisure travelers eventually will end up paying more for their tickets?

A: Probably, but not a lot more. And only as the economy improves and demand rises.

Even Southwest executives agree that the deepest discount prices available in the marketplace currently are too low. They also agree that demand for full-price fares will grow as the economy improves.

Q: Can the big airlines salvage a business model that relies on business travelers for profit?

A: The risks of doing nothing are huge. But the risks of changing too quickly, too much or in the wrong way might be even higher.

The traditional carriers have sunk billions of dollars into fleets, facilities and people to service their networks. Switching to a low-cost, low-fare model such as Southwest’s would be complex and costly.

The pain likely would include pay cuts and more lost jobs. Lenders and creditors could see reduced payments from carriers and even some defaults. Stockholders wouldn’t reap any rewards in the short term and would risk losing it all through bankruptcy filings. Consumers could see their travel choices reduced. Some smaller communities could lose service.