US Flag Carrier Airlines: Culture, Margins, and Business vs Leisure Travel | In Practise

US Flag Carrier Airlines: Culture, Margins, and Business vs Leisure Travel

Former COO at Delta Air Lines and Former Global Head of Transportation at Airbnb

Learning outcomes

  • Impact of US airline consolidation on pricing
  • How legacy carriers are positioned versus low and ultra-low cost carriers
  • The DNA of Delta vs United and Southwest vs Ryanair
  • Potential responses from airlines if 10% to 20% of business travel is lost permanently
  • Core levers airlines can pull to manage margins
  • The average operating margin for first, business, and economy class for US airlines
  • Outlook on the industry structure
  • How Airbnb was approaching integrating airlines into the core product and the future distribution of air travel

Executive profile

Fred Reid

Former COO at Delta Air Lines and Former Global Head of Transportation at Airbnb

Fred has over 45 years of experience in the travel industry. Fred ran European Sales for American Airlines in the 1980’s before spending 7 years as President at Lufthansa Airlines, the German flag carrier. Fred was also President and Chief Operating Officer at Delta Air Lines for 5 years before becoming the CEO of upstart Virgin American in 2004. Fred also spent 4 years as President of Flexjet, fractional private jet ownership company owned by Bombardier, and also enjoyed 4 years working on the Cora Aircraft Program, a division of Kitty Hawk building next-generation aircraft. Fred is currently a Senior Advisor to Brian Chesky and the Former Global Head of Transportation at Airbnb. Read more

Fred, can you provide a short introduction to your background and role in the airline industry?

I would call it an accidentally happy career. I graduated from college at UC Berkeley, across the bay in San Francisco. I knew two things. I wanted to move around – I didn't want to be stuck to a desk – and I knew I wanted to be in an exotic location. So I joined a hotel company in India. A couple of years later, I started in the lowest possible job I could get at Pan American World Airways in Saudi Arabia. Over the decades, I moved from place to place, lived in eight different cities and eight different countries, and worked for a number of carriers. The highlights of this time were being the president of Lufthansa, based in Germany, years ago, and being the president of Delta a few years later. Then I was the founding chief executive of Virgin America, launched in San Francisco in 2007.

Looking back at the structure of the airline industry in the U.S., we have seen significant consolidation in the last 10 to 15 years. What is your view of the drivers of that consolidation?

It’s a matter of evolution. Compared to other service industries, whether it’s rental cars, hotels, computer reservation systems, or airports, the airline industry was a lot less consolidated than other industries of a like nature. In addition to that, in the crisis years following the September 11th attacks of 2001, at one point, 60% or 65% of all the seats in the USA were in bankruptcy proceedings. To clean up the balance sheet and consolidate was a big driver. This consolidation ended up with the three super mega carriers today, Delta, American, and United, and some other very respectable players like Jet Blue, Southwest, Alaska and so forth.

Do you think this consolidation can prevent a race to the bottom in prices?

You could argue the way that pricing is displayed on computer reservation systems, that the race to the bottom, if you want to call it that, pre-existed consolidation and might be a factor today. I think that how many seats you put in at what price points is what drives your pricing strategy. It's not so much your price; it's how many seats do you have available at that price. In the years coming up to 2020, the U.S. carrier industry has been on a five or six-year streak of record profitability that we never achieved before. Of course, that's changed now, due to the pandemic, but I don't think that pricing alone is an indicator of success or failure.

Your view is that it's more about the price of the incremental seat in the industry, rather than the aggregated price of tickets in the industry?

You’ve had low-cost carriers for decades, you’ve had ultra-low-cost carriers for a decade or slightly more, and you’ve had global carriers, and they all bring something else to the party. I don’t think it’s safe to say that the global carriers will kill low-cost carriers, nor will it happen the other way around. The global carriers offer different things to different people, and so do the low-cost carriers. They’ve found a way to co-exist. The common threat right now is the pandemic and the disruption to society and the economy.

Can we look at how the legacy airlines and the legacy carriers have evolved versus the likes of Southwest or even the ultra-low-cost carriers? How have you seen their position and value proposition evolve over the last decade?

It became evident, at some point, that low-cost carriers are not an existential threat to legacy carriers. I can't think of an instance when a legacy carrier or a low-cost carrier failed due to the direct actions of one or more competitors. I subscribe to the notion that most companies do not fail because of homicide; they fail because of suicide. This is a grim way of saying that if a company has got its values right, they’re careful with the cost, please their customers, and their price point is relevant, they’re probably going to find a place in the sunshine.

So the core proposition of premium offering, business travel, longer haul flights is here to stay, and it’s at less of a threat from the low-cost carriers?

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US Flag Carrier Airlines: Culture, Margins, and Business vs LeIsure Travel

September 14, 2020

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