Now, there’s no news in the GAO’s finding that legacy carriers have higher costs than the budget airlines, and the GAO says it’s in cutting costs where the so-called big airlines will find their salvation. In broad terms, the unit cost per available seat mile of the budget carriers is 7.3 cents and the legacy carriers are paying 10 cents. With a 27-percent cost advantage, the budget lines can easily undercut their competition. Matching fares with the likes of Southwest and JetBlue is a recipe for losing money and the big airlines are expected to lose up to $9 billion this year. That’s not to say the budget lines are awash in profit cash. In fact, as a testament to their rigorous cost control, their modest combined profit of about $1 billion a year has remained constant except for a dip to the break-even point just after 9/11. It’s also in decline now, likely because of high fuel costs. In contrast, the legacy lines have gone from a combined profit of $7 billion in 1998 to combined losses of almost $10 billion in 2001 and 2002. They’ve since “recovered” to losses of about $4 billion but fuel costs are hitting them hard, too.
…Losses In The Equation…
Key Takeaways:
- Legacy airlines operate with 27% higher unit costs than budget carriers, making it difficult for them to compete on price and leading to substantial financial losses.
- While budget airlines maintain a cost advantage and historical modest profits, both airline types are currently seeing profits decline (or losses increase for legacies) due to high fuel costs.
- The GAO recommends that legacy airlines prioritize rigorous cost-cutting as the primary path to improve their profitability and ensure their survival.
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