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Wednesday, July 27, 2011

A fine way to run an airline. Right into the ground.

Aberdeen is facing the risk of losing its air service.   Delta airlines has notified its affiliated feeder services that it is losing money in supporting air service to smaller communities and will no longer continue to do so.   Delta cites the costs, especially fuel, and paltry number of passengers. Aberdeen is served by its Mesaba subsidiary.

The year I came to Aberdeen, the town was served by the newly formed Republic Airlines, which was created in 1979 through the merger of North Central Airlines and Southern Airlines. I do not have the statistics on passenger boardings over the years, but the business then seemed brisk.  (The last decade shows the dwindling passenger trend:  Aberdeen had 24,608 passenger boardings during 2000 and 20,089 during 2010.)  Republic served as a regional carrier, and from Aberdeen, one could fly directly to Minneapolis, Sioux Falls, Brookings, Pierre, Rapid City, Bismarck,  and Fargo.  You could make connections with other airlines at the larger of those airports.  The aircraft used were turbo props that weren't as sexy as jets, but they were roomy, could hold all the passenger luggage, and, I understand, were cost efficient and stable for pilots to fly.   

Then came deregulation and the direct routes to towns in the Dakotas were abandoned.  Mesaba became a carrier charged with feeding passengers into the central hub in the Twin-Cities.  If you wanted to fly to Sioux Falls or Rapid City, you had to go through the Minneapolis-St. Paul airport.  The tickets got very expensive, and for business travel the college where I worked found that it could afford airline tickets only to very distant destinations.  The rest of the time, we were instructed to drive. Also, Mesaba abandoned the Republic turboprops and began using much smaller aircraft, which were not particularly comfortable and could not hold much luggage.  The cost accountants figured that the central-hub arrangement was more cost effective, but they did not account for the loss of passengers.

When shuttling passengers into central hubs and redispatching them to their destinations became the airline rule,  air travel became very inconvenient.  One of my last trips by air was to Rapid City.  I took one of those dinky planes to the Twin-Cities,  waited around the terminal for a couple of hours, and then caught another fairly dinky plane for Rapid City.  The planes were too small to hold all the passenger luggage.  So, after I got to Rapid City, I had to leave my hotel and room number with the ticket agent there so the airline could deliver my luggage, which came in on another plane later.  Much later.  There were items in the luggage I needed for the meeting I was sent to attend, and they were not there.  

At one point, Republic had one daily jet flight on a DC-9 between Aberdeen and the Twin-Cities.  The jet came from the Cities in the evening, parked overnight, and returned to the Twin-Cities early the next morning.  That did not last long.

There was another merger when Northwest Orient Airlines bought Republic.  Northwest dealt with low passenger numbers, but did upgrade the aircraft so that one could be fairly certain of having one's luggage when one arrived at the destination.  And then there was another merger between Northwest and Delta.  Delta upgraded the planes again, and now serves Aberdeen with jets.  The problem is that the jets are expensive to run, so Delta cut back on flights.  Now it has given notice that it wants to terminate service altogether.

Airline deregulation made it possible for airlines to make more money on flights out of their hub cities, but it also left passengers in smaller communities without service.  As happened in Aberdeen, both business and casual travelers simply found it necessary to find other modes of travel, meaning by car.  

What is happening to the airlines cannot be attributed solely to changing economics.  While airline officials talk about the costs of fuel and security matters raised by terrorists, a big factor has been the invasion of the bean-counters,  the MBA-trained business theorists who can bolster bottom lines only by cutting expenses.   What they cannot do is build businesses,  find ways to provide services and products that are needed, and build a customer base that supports a profit margin.  

The airlines are part of a business activity that centers on acquisitions and mergers to reduce competition, not on engaging in the business of extending their services to more customers.  In the mid-1980s, I was part of a group that was asked to do a market survey for a man who represented a group of investors.  The man had been involved in the formation of Ozark Airlines, which once served Sioux Falls.  Ozark was then bought out and merged with TWA, another carrier now on the defunct list.  The man had the idea of using the money he got from the merger to start another regional airline that would cover routes that were abandoned when airlines stopped serving small communities and flew only from hub to hub.  The man said there was a huge market to be tapped for a carrier that re-instituted direct air service between smaller communities, as well as feeding passengers to central hubs.  He and his fellow investors decided to put their money into another enterprise, but not because a smaller, regional air carrier could not get passengers and make money. When the deregulation of airlines took full effect, airlines shifted their emphasis from serving its regional routes to limiting their  flights to their hub-to-hub routes.  That aspect of air service got very competitive, but there was no competition at all for the kind of inter-regional service with which airlines, such as Republic and Ozark, had their beginnings.  One of the problems that the potential investors a smaller regional airline found was no satisfactory aircraft were being designed and built to adequately service shorter, regional routes.  Just as the airlines focused on hub-to-hub routes, the aircraft manufacturers focused on huge, fast jets for that service. The rule was that any air routes that could not support huge jets with masses of passengers would simply not be served.  They were outside the interests and abilities of the companies to find feasible ways to provide economical, reliable service.  

The corporate world likes to talk about market-driven business in a competitive world.  But as the history of corporate mergers and acquisitions shows, the main concern of big corporations is to eliminate competition by consolidating industry and creating monopolies which can control and manipulate the markets. There is money to be made by smaller airlines that operate smaller, more economical, and thereby less sexy aircraft, but the profit margin is not something the major airlines want to bother with by finding ways to make them profitable.  And the profit is not big enough to bother with.  The profits are too paltry for an executive corps that expects million-dollar salaries and bonuses. The idea of businesses built on service to communities and their people is as obsolete as the family farm. 

Those who have some kind nostalgic yearning for the glamor of feudalism defend and apologize for what modern corporations actually do.  The original idea that drove business was to fulfill the need for a product or a service and find ways to meet the need in a way that made a profit.  Today's business theory regards communities and consumers as something to exploit, not to serve.  

Aberdeen does not at the present time receive an essential air service subsidy, but it qualifies for one.  The airport manager and board suggest that air service could continue in some fashion on that basis, but then cite the Congressional furor to cut spending, which makes such a subsidy very iffy for Aberdeen.  The Aberdeen Chamber of Commerce and Development Corporation have protested the service cut to Delta, but they support the business policies that make justify a cut in service as a good business decision.  

The problem is how the American business community has come to regard itself as a new royalty and the cowed consumers who do not question why businesses exist and how they are run.  They have accepted being exploited and then discarded when businesses decide they don't need them anymore. 


larry kurtz said...

Do you know if NorthWestern Energy has its own plane parked at the Aberdeen airport, David?

David Newquist said...


There are no aircraft based in Aberdeen under Northwestern Energy's name'

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Aberdeen, South Dakota, United States