Op-Ed: Danny Hood's New Year's Res Solution

Let's focus on my biggest concern and the only problem that wakes me up at 3 a.m.—the health of the airlines. My father taught me to never bring up a problem unless I had recommendations for a solution. So, let's talk about solutions to the financial health of the "Big Six" network airlines: American, Continental, Delta, Northwest, United, US Airways, the U.S. travel industry's biggest problem. Our domestic economy and most global economies are highly dependent on an efficient and safe public air transportation system. Travel agencies, hotels, car rental and limousine companies and many other businesses are dependent on a healthy public air transportation system.

To find a few possible solutions, first let's talk about areas where the airlines can help themselves:

1. Negotiate the ability to right-size labor costs quickly

Most other travel industry suppliers (including us) had a horrific fourth quarter of 2001 both economically and emotionally. American, United and others lost great employees and customers—not just money. We were forced to lay off hundreds of employees, pay $0 bonuses, and tighten our belts significantly. Our senior management took temporary pay cuts even when we had contracts. We acquired a very good regional agency (McCord Travel) in the first quarter that "right-sized revenue" due to 20 percent reductions in trips by our client base. This was aggressive action and tough to do. However, there is no way an industry can survive that waits two to three years to right-size and has to threaten bankruptcy at the courthouse steps to get salary concessions. Most companies, other than airlines, have lower base salaries and pay flexible compensation (bonuses, stock options, etc.) during good financial years. If you think about it, airline employees get stock in exchange for salary reductions during the near bankrupt years. This works just the opposite of Corporate America.

2. Finalize three global airline joint ventures with anti-trust immunity

We need a little help from the Justice Department in this area. However, the airlines need to build strategic plans that are true joint ventures and not soft marketing alliances that just focus on such traveler perks as frequent flyer benefits and airport club access. If the airlines presented a comprehensive plan to DOJ, it would help DOJ to act.

3. Choose three distribution channels and/or models and shut down the alternatives

I believe the three "keepers" are the airline Web site, the airline reservation center (insource or outsource; fee or no fee), and fewer large distributors with contracts. All independent travel agencies could become affiliates of the large global networks. We have fewer travel agency home offices in 2004—about 1,100. This is roughly a 50 percent reduction of the home office locations before commission cuts and caps started in 1994. The third-party distribution system model would have significant changes. There would be no more terminology that speaks of fragmentation/segmentation, such as GDS, TMC, ITMC, etc. The true distributors would have one acronym, GAD, for Global Airline Distributors. GADs would charge the airline one simple fixed fee per transaction. I think the fee should be $5 cheaper to the network airlines than it is today, which is essentially what American and Northwest have tried to finesse. This fee would consolidate GDS fees, overrides, soft dollars and promotional fees as one simple fee. I believe that offset savings in the distribution system can be achieved by synergies of convergence of the GDS/TMC/ITMCs, volume/scale, and reasonable fees from independent agencies to be a part of the global airline distributors. Much of this consolidation is happening right now.

4. Simplify fare structures

Converge and minimize the fare bands and options to approximately 10 fares or less as Delta, American and others have just announced. Finally, we have airline pricing that makes business sense from network airlines.

Keep creative corporate discounts that are win-win deals.

Charge the right long-term premium for business travel (30-50 percent and not the long-gone days of 400 percent, when we had $800 business fares and $200 leisure fares).

5. Simplify fleet to no more than five types of aircraft

Southwest has one type of aircraft (737) and has the least complexity and lowest cost. They are the prototype to benchmark if you added advance seat assignments like JetBlue. However, in order to fly globally as a true network airline, five aircraft types is a reasonable goal. It can be done, as Continental has demonstrated by their reduction from 10 to four fleet types over the past three years.

6. Lobby, lobby, lobby for some government help

Now that we have the airline's list, let's talk about external solutions that I call government action:

A. Either fully deregulate the airlines or fully re-regulate (no more in-between!)

Let's face it, this is a quasi-utility that is governed by The National Railroad Act written in the 1930s. I would work on some updated legislation for the U.S. airline industry for this century. I would let airlines truly succeed and fail and let market forces determine who survives and who doesn't.

B. Fast track anti-trust immunity for the three global alliances

C. Reduce airline taxation by 50 percent

The average tax on an airline ticket is 26 percent or $53. This is higher than 11 to 21 percent "sin tax" on alcohol and tobacco products and we are trying to reduce consumption of those products. I would make up the lost revenue by increasing occupancy/hotel taxes and implement car rental taxes. These segments of our industry are dependent on a healthy airline industry and they are healthy. The corporation and passengers are still paying all of these taxes. It should be roughly the same amount paid by the consumer. All of these types of relief need alternative funding, as we have to think about the deficit.

4. Hedge or cap uncontrollable fuel costs with government subsidies

I would not pay out any more taxpayer dollars in general bailout funds. However, I would implement a subsidized cap on crude oil of $33 a barrel. This is the airlines' break-even point. Remember, they have to pay approximately $7 additional per barrel for refining before it goes to the tarmac fuel trucks. This is the only government subsidy that I would keep implemented on a long-term basis. I would ask for payments on this subsidy when fuel costs go below the break-even point.

5. Fast-track labor disputes

The tough Delta pilot negotiation incurred $3 billion in cost to the airline over three years of negotiations for $1 billion of annual savings. My ROI on this broken model shows six years to break even versus getting those concessions within two quarters. The airlines need a model that includes bonuses and equity during the good years in exchange for the salary concessions, which is where they ended up.

The bottom line is that I would love to see a plan of hope for stressed out airline employees who are doing more for less money right now. My plan for hope may be way off base. But, my father would be proud that I mentioned a solution to the problem that wakes me up a 3 a.m.

Danny Hood is president of WorldTravel BTI, the Atlanta-headquartered mega travel management company.