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Dan Ackman of forbes.com Discusses Airline Industry Woes

Aired April 22, 2003 - 14:37   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.


MILES O'BRIEN, CNN ANCHOR: Well could the nation's airlines be facing a perfect storm, if you will? Well, a senior editor from forbes.com who specializes in covering the airline industry, travel industry in general joins us now. Dan Ackman joins us from New York.
Dan, perfect storm is what you've called it. That's probably a good way of putting it, isn't it?

DAN ACKMAN, FORBES.COM: Well, it's not what I've called it, it's what the industry has called it itself. But I think it is accurate.

Basically, since September 11 and accelerated with the war in Iraq, airline traffic miles are dramatically down, perhaps 25 percent. Revenues are down perhaps 20 percent and they are cutting expenses but they can't cut them as fast as revenues are declining because expenses are down maybe 10 percent in that time.

O'BRIEN: Let's talk about expenses. We have a graphic put together here. Let's do a little airlines economics 101. We're talking about the cost of seat miles here. It's a concept -- basically the cost of moving a seat per mile per passenger per available seat. At the top of the list U.S. Airways about 11 cents per seat mile. At the bottom of this list 8.2 cents.

Let's page to the next one and I want to -- because that's where the point is made. Look at Jet Blue down there, 5.3 cents, Southwest, 6.3 cents. Worth pointing out those are profitable airlines.

How are those airlines doing it? Is it because they don't have unions?

ACKMAN: Well, let me say two things, first about the chart. I'm not really sure where those numbers are come. I know it's cited to J.P. Morgan. But I don't think the discrepancy in expenses is quite as dramatic as that chart indicates. I think that chart indicates the difference between Southwest and American is like 70 percent. I think it's probably more like 40 percent and that's before...

O'BRIEN: Well, 40 or 70, it's still a big difference.

ACKMAN: It's still a lot. It's still a lot. No question.

O'BRIEN: Why? Why are those big heavy operators doing so poorly? Are they bad business people?

ACKMAN: No, I don't think so. I mean, you -- it's hard to compare. Certainly Jet Blue -- to compare Jet Blue to American Airlines is a very much an apples and oranges comparison. Jet Blue has about 5 percent of the airline traffic as American Airlines. And even Southwest, which is much bigger than Jet Blue...

O'BRIEN: Well, wait a minute. Wait a minute, Dan. What ever happened to that whole theory that, you know, with volume you can do it cheaper? If -- if Jet Blue is smaller, shouldn't it be more expensive by that theory?

ACKMAN: Sure. All I'm saying, there certainly are things that the big airlines don't do that Jet Blue does do. But all of the big airlines seem to have cost structures that are much, much higher than Jet Blue's or than Southwest. And I think the size and the fact that they have to service a lot more markets comes into play as well as the union contracts. I don't think their union contracts -- they're paying their people 70 percent more than -- than -- than Southwest is.

O'BRIEN: All right. Well, here's -- this is where I'm trying to get to this point. I'm sorry to lead you down this road, but let me get to my point.

The point is the airlines are going to the federal government saying, Bail us out.

ACKMAN: Right.

O'BRIEN: Isn't the federal government just rewarding some bad business practices? There are airlines proving you can make money in this environment.

ACKMAN: Well, first of all, the federal government is not bailing the airlines out. That's pretty clear. That's not going to happen.

But to say that the airlines are the cause of their own problems is partly accurate but it's also partly inaccurate because the fact is every year since the dawn of time or the dawn of aviation, airline traffic has gone up except for one year in the early '90s around the first Gulf War. Now for two years running it's going to go down. That's unprecedented in the history of aviation and it's not really wrong to say the airlines were blindsided by this.

So they certainly can deal with their cost structures, and they are. But to say that they're just bad management I don't think really captures what's happening here.

O'BRIEN: All right. But if you're a passenger, sometimes you feel like the airlines are not doing a very good job catering to their clients.

ACKMAN: Sure.

O'BRIEN: Having said all of that, is this an opportunity for travelers to take advantage of this? You don't want to take advantage of an ailing industry. But nevertheless, prices must be lower in some cases. ACKMAN: There are certainly a lot of bargain fares out there. That's really nothing new.

I don't know if the overall fare structure has come down that much. i mean, the airlines are trying to keep it up. I mean, that's the only way they can really stay in business, in addition to cutting costs. But certainly there are a lot of bargain fares out there and people will take advantage of them and they will also continue to complain whenever they have a bad flight.

The thing about the airlines is you could have 20 good flights and one bad one, you only remember the bad one.

O'BRIEN: That's the one you tell the story about, right? That waiting for that bag for days, in some cases.

All right. Dan Ackman. I guess we're -- we're tough customers, aren't we?

ACKMAN: We certainly are.

O'BRIEN: Appreciate you joining us, as always. Dan Ackman...

ACKMAN: Thank you very much.

O'BRIEN ...from forbes.com joining us out of New York.

TO ORDER A VIDEO OF THIS TRANSCRIPT, PLEASE CALL 800-CNN-NEWS OR USE OUR SECURE ONLINE ORDER FORM LOCATED AT www.fdch.com







Aired April 22, 2003 - 14:37   ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
MILES O'BRIEN, CNN ANCHOR: Well could the nation's airlines be facing a perfect storm, if you will? Well, a senior editor from forbes.com who specializes in covering the airline industry, travel industry in general joins us now. Dan Ackman joins us from New York.
Dan, perfect storm is what you've called it. That's probably a good way of putting it, isn't it?

DAN ACKMAN, FORBES.COM: Well, it's not what I've called it, it's what the industry has called it itself. But I think it is accurate.

Basically, since September 11 and accelerated with the war in Iraq, airline traffic miles are dramatically down, perhaps 25 percent. Revenues are down perhaps 20 percent and they are cutting expenses but they can't cut them as fast as revenues are declining because expenses are down maybe 10 percent in that time.

O'BRIEN: Let's talk about expenses. We have a graphic put together here. Let's do a little airlines economics 101. We're talking about the cost of seat miles here. It's a concept -- basically the cost of moving a seat per mile per passenger per available seat. At the top of the list U.S. Airways about 11 cents per seat mile. At the bottom of this list 8.2 cents.

Let's page to the next one and I want to -- because that's where the point is made. Look at Jet Blue down there, 5.3 cents, Southwest, 6.3 cents. Worth pointing out those are profitable airlines.

How are those airlines doing it? Is it because they don't have unions?

ACKMAN: Well, let me say two things, first about the chart. I'm not really sure where those numbers are come. I know it's cited to J.P. Morgan. But I don't think the discrepancy in expenses is quite as dramatic as that chart indicates. I think that chart indicates the difference between Southwest and American is like 70 percent. I think it's probably more like 40 percent and that's before...

O'BRIEN: Well, 40 or 70, it's still a big difference.

ACKMAN: It's still a lot. It's still a lot. No question.

O'BRIEN: Why? Why are those big heavy operators doing so poorly? Are they bad business people?

ACKMAN: No, I don't think so. I mean, you -- it's hard to compare. Certainly Jet Blue -- to compare Jet Blue to American Airlines is a very much an apples and oranges comparison. Jet Blue has about 5 percent of the airline traffic as American Airlines. And even Southwest, which is much bigger than Jet Blue...

O'BRIEN: Well, wait a minute. Wait a minute, Dan. What ever happened to that whole theory that, you know, with volume you can do it cheaper? If -- if Jet Blue is smaller, shouldn't it be more expensive by that theory?

ACKMAN: Sure. All I'm saying, there certainly are things that the big airlines don't do that Jet Blue does do. But all of the big airlines seem to have cost structures that are much, much higher than Jet Blue's or than Southwest. And I think the size and the fact that they have to service a lot more markets comes into play as well as the union contracts. I don't think their union contracts -- they're paying their people 70 percent more than -- than -- than Southwest is.

O'BRIEN: All right. Well, here's -- this is where I'm trying to get to this point. I'm sorry to lead you down this road, but let me get to my point.

The point is the airlines are going to the federal government saying, Bail us out.

ACKMAN: Right.

O'BRIEN: Isn't the federal government just rewarding some bad business practices? There are airlines proving you can make money in this environment.

ACKMAN: Well, first of all, the federal government is not bailing the airlines out. That's pretty clear. That's not going to happen.

But to say that the airlines are the cause of their own problems is partly accurate but it's also partly inaccurate because the fact is every year since the dawn of time or the dawn of aviation, airline traffic has gone up except for one year in the early '90s around the first Gulf War. Now for two years running it's going to go down. That's unprecedented in the history of aviation and it's not really wrong to say the airlines were blindsided by this.

So they certainly can deal with their cost structures, and they are. But to say that they're just bad management I don't think really captures what's happening here.

O'BRIEN: All right. But if you're a passenger, sometimes you feel like the airlines are not doing a very good job catering to their clients.

ACKMAN: Sure.

O'BRIEN: Having said all of that, is this an opportunity for travelers to take advantage of this? You don't want to take advantage of an ailing industry. But nevertheless, prices must be lower in some cases. ACKMAN: There are certainly a lot of bargain fares out there. That's really nothing new.

I don't know if the overall fare structure has come down that much. i mean, the airlines are trying to keep it up. I mean, that's the only way they can really stay in business, in addition to cutting costs. But certainly there are a lot of bargain fares out there and people will take advantage of them and they will also continue to complain whenever they have a bad flight.

The thing about the airlines is you could have 20 good flights and one bad one, you only remember the bad one.

O'BRIEN: That's the one you tell the story about, right? That waiting for that bag for days, in some cases.

All right. Dan Ackman. I guess we're -- we're tough customers, aren't we?

ACKMAN: We certainly are.

O'BRIEN: Appreciate you joining us, as always. Dan Ackman...

ACKMAN: Thank you very much.

O'BRIEN ...from forbes.com joining us out of New York.

TO ORDER A VIDEO OF THIS TRANSCRIPT, PLEASE CALL 800-CNN-NEWS OR USE OUR SECURE ONLINE ORDER FORM LOCATED AT www.fdch.com