Letters to the Editor

"Hubs Started Airlines' Nosedive"

   - published in The Wall Street Journal, April 27, 1994

Frank Dooley, in his March 30 editorial page article "Why Airlines Crash", perpetuates one
of the industry's great myths when he blames arcane work rules and restrictive contracts
for making certain airlines uncompetitive. He misidentifies the productivity (and profitability)
problem's causality.

The problem is structural, and worsening due to management denial. The decade-old evolution
toward the pure hub operating structure is the most significant driver of cost inefficiency and
low productivity.  It is disingenuous to blame an industry's woes on its workers, when the
appropriate demand is that management "fix the factory".  Similar to steel, auto and other
capital and labor intensive businesses faced by lower cost competition, the airline industry
must re-engineer its structure and processes to maximize productivity, delivering lower prices
and the value-for-money a changed marketplace demands.

The results of such an original initiative are illustrated using Mr. Dooley's, choice of Southwest
Airlines. Southwest's input costs are parity with the Big Three airlines, yet it is on average more
than 30% more productive in terms of output offered for sale. This is a function of asset allocation
strategy - primarily its aircraft scheduling, secondarily, by asset allocations that are byproducts
of its scheduling strategy, and not at all by wage rates and work rules, which are in many ways
similar to Big Three operators'.

The core of Southwest's competitive advantage is its strategy of maximizing asset use structurally,
from which it derives high productivity and the ability to offer low fares and greater value.

In 1991, then U.S. Secretary of Transportation Samuel Skinner commissioned a study, by
Penn State University's Dr. Peter Capelli, of airline labor issues and their impact on industry fortunes.
That study found labor issues had not negatively affected industry fortunes. The study did, however,
raise the issue of deteriorating industry productivity at Big Three airlines, which was obvious as long
ago as 1988 and which is inherent to and a direct result of over-use of the hub scheduling strategy.

Mr. Dooley's labor contract causality argument evaporates if one looks beneath the surface,
reviewing in detail Southwest's aircraft and crew scheduling, how these affect day-to-day working
conditions and productivity.  The point-to-point scheduling favored by Southwest results in higher
employee productivity than hub airlines produce, despite shorter duty days, fewer days away from
home per month, and no self-imposed hub-related delays. (Southwest is the industry's on time leader.)
These working conditions compare favorably with the greater number of longer duty days, punctuated
by endless sitting around, induced delays and remote layovers experienced by crews flying hub schedules.

Southwest's comparatively favorable working conditions yield more actual flying time, less time away
from home and on the job, and industry-parity pay. Southwest's schedules may be flown using wage
rates and work rules in Big Three carrier contracts yielding attractive financial results. Yet hub carriers'
schedules may not be flown with Southwest's "ideal" contract, without substantial unfavorable effects.

This is purely a function of hub scheduling. Looking beyond the work rule rhetoric to the root cause,
it is hub-bound aircraft, crews and facilities that are the binding constraints on productivity.

R.W. Mann & Company, Inc.
Airline Industry Analysis and Consulting,
Brooklyn Heights, N.Y.


Postscript:  August 18, 2005

Not until 2003 and 2004 did some network carriers, notably American and Delta, begin to "de-peak"
their hub schedules and thereby reclaim latent productivity bound up in prior scheduling practices.

Both carriers were able to free up and source scores of "free" aircraft, numerous terminal facilities and
gates, and thousands of flight, cabin and ground staff, due to these measures.  American was marginally
profitable in the 2Q/2005, a real achievement and despite the burden of persistently high fuel costs.

Thus, a decade later, they began to achieve the improved asset productivity, subject of our 1993
Wings Club presentation and 1994 WSJ letter.

Sadly, there are still those who "don't get it", and thus, we proclaim them "left behind by intelligent design".