“At times it feels as though the airline industry has been pushed over a cliff”

herbstRobert Herbst runs the Web site AirlineFinancials.com, which has provided some of the more memorable and controversial airline analysis for this site and many other media outlets. Herbst is a pilot for a major American airline — I agreed not to mention it in this interview, but his employer has been disclosed elsewhere — and has been crunching airline numbers for many years. He flies Boeing 767 and 757 aircraft in the United States, where you’re likely to find him on southern routes during the winter months.

I really admire the charts you publish. They’re informative, contrarian and often, very enlightening. How did you become interested in statistics and analysis?

Thank you. Coming from you, I take that as a great compliment.

Flying commercially requires a high consideration of numbers and data. I’ve always been interested in financial markets and general economics. Back in the early 1980’s I became an active trader in equity and derivative markets. To achieve a better understanding of the corporations I was trading stock in, I got more involved in their financial reports.

In the later 90’s I wrote an investment newsletter for a couple of years. Around that time, some pilots from the union asked for my help to analyze the airlines.

How does being an airline pilot inform your work as an airline analyst?

To be honest, I don’t see how you can effectively understand the airline industry unless you have worked in it. Operating large jet aircraft, carrying hundreds of passengers around the world is considerably more complex than anyone outside of the industry can understand.

Nearly all of an airline’s operation happens between the airport terminal door you enter at your departure point and the airport terminal door you walk through after you have reached your destination. As a pilot, I have the opportunity to be directly involved in nearly every aspect of an airline’s operation.

You seem to try to make a point with the charts you publish. What are you trying to help people see?

You are an excellent writer with an ability to put words together that will tell a story. Your feedback shows that you make a connection with your audience. I try to use charts with the same objective as you do with your words.

After using numbers and spreadsheets for most of my life, I can look at a screen of data and almost immediately see a picture in my mind of how those numbers could be useful and interesting if they were in a more user friendly format.

It’s easy to lose interest when someone is talking about numbers. I try to take numerical data and reformat boring numbers into a graph or chart that hopefully, creates an interesting picture. When I am successful, the charts and graphs will provide enough information for the readers to form credible conclusions without being told what to believe.

There seems to be a bias in the mainstream media, and certainly among bloggers, against legacy carriers. Do your hope our research can counteract, or even correct, that bias?

At least one of my parents worked for Northwest Airlines until I was 15. So you could say I’ve been more or less involved in the airline industry for almost 60 years. I well remember the old days of airline flying when it was an exciting event traveling by air. While some aspects of air travel have improved, it is sad to see this once great industry become such a negative experience for so many.

It would take longer than we have here to truly discuss how and why once great airlines have become so distressed. At times it feels as though the airline industry has been pushed over a cliff and other times it feels like it is dying by thousands of paper cuts.

If I had only one message I could get heard, it would be that these once great legacy airlines have hundreds of thousands of incredibly dedicated employees who are more disappointed and discouraged by what is occurring to the industry than any passenger will ever be able to understand.

Let me ask you about the dust-up over luggage fees: One prominent travel expert suggested Southwest’s refusal to charge for the first checked bag was bringing in new customers. You published statistics that suggested it wasn’t true. Was that truth-squadding or were you towing your employer’s company line, as some observers suggested?

The analytical work I do is absolutely unbiased toward ot against any airline, management or labor group. My diligence for accuracy in the cockpit is equally important in the analytical and consulting work I do.

Ancillary fees — like baggage charges — are now adding needed billions to airline operating revenue. There should be no argument some passenger bookings are being driven to Southwest because they don’t charge the baggage fees. So far, I have not seen credible data to suggest Southwest is achieving more net revenue than they are losing by not following the industry in charging competitive ancillary fees.

What do you wish airline passengers could know about the operation of a legacy carrier, that they currently don’t?

I wouldn’t narrow it to just the legacy carriers. Getting an aircraft from point A to B for any airline safely and on-time is a very complicated process. A lot of the traveling public does not seem to understand the impact weather and un-planned maintenance issues creates for on-time performance. In order to keep costs as low as possible, every aircraft for every airline has to fly many hours a day. If weather and/or maintenance issues affect an aircraft in the morning, that aircraft is going to be late all day.

The history of the airline industry shows a continuous recycling of new airlines replacing old airlines. Unless/until realistic changes are incorporated into the industry, the cycle will only continue as the non-legacy carriers of today, will have similar future problems as they get older.

What do you think legacy carriers should know about their passengers, that they don’t?

The main difference I see between older legacy carriers and the relatively newer airlines revolves around customer service and personalization of the customer. I think legacy management teams focus far too much on the spreadsheet aspects of the operation and not nearly enough time on what really happens or doesn’t happen between walking through the first door of a terminal building and the last door past baggage claim.

If I were king for the day, every upper management level employee would be required to spend some number of days every month mixing in with each of the various labor groups.

Is there one particular chart that you are proudest of?

That’s an easy answer for me. I have a chart that’s never been seen before. It’s the center point for a great deal of research I’ve been doing. If I had my way, this chart would be a large picture over the top of every airline ticket counter and every politician driving for lower airfares, would have to explain what this graph is telling us.

Pass yield & ratios
If you spend a little time interpreting this chart, the story will tell you why the airlines have so many problems and when they started.

Unfortunately, most of the media stories and especially politicians are focused on the cost side of the airline industry. There is continuous pressure to make the airlines into a low cost, mass transit system albeit with several airlines competing for little more than cash flow. Of course, while everyone wants very low airfares, they also expect unprecedented safety, new and clean aircraft, on-time arrivals, no cancellations and much better customer service than we currently have.

In my opinion, on-going problems for the airlines are not caused by the cost side. Problems for the airline industry are absolutely caused by a lack of revenue.

Historical data shows passenger fare yields and costs moved in tangent with CPI inflation through the 70’s and into the very early 1980’s (note: the airline deregulation bill passed in 1978).

From approximately 1982 through today, passenger fare yields have been virtually flat. As my graph shows, if fare yields were adjusted for CPI, the current passenger fare yield would be well over twice the current rates (yield is the amount for one paid passenger flying one mile).

All of us understand how every day costs have increased over the last 30 years. For the airline industry, while costs of everything continuously increased, passenger fare yields for the last 30 years have stayed in a range of 11.0 cents to a high of 13.75 cents per mile. If passenger fare yields had continued up with inflation since the early 1980’s, they would currently be approximately 32 cents per mile.

For the last 30 years, opposed to raising fares to cover increasing costs, airlines offset their rise in costs by increasing the number of average passengers on each flight.Avg LF 1970 2009

On a cash flow basis, this business plan worked more or less OK until 9/11 came along and passenger demand rapidly decreased at the same time costs were being driven up.

In 2003 when oil spiked up, there was no way for airlines to increase passenger fares high enough and fast enough to keep up with the unpredictable cost of jet fuel.

Through 1999, the cost of jet fuel for the entire US airline industry was approximately $11 billion or less each year. In 2008 the airlines paid $58 billion for jet fuel.

Since airlines were already at nearly maximum capacity in seats sold and passengers weren’t willing to pay higher fares, something had to pay for this huge increase in fuel costs.

What paid for the staggering fuel cost increase since 2003 was primarily a combination of labor concessions, reduced customer service and a deterioration of each airlines financial balance sheet to include the bankruptcy or restructuring of every major airline.

There aren’t a lot of other airline analysts out there. What do you peers say to you about your research? And what do you think of theirs?

I’m an independent analyst. Most analysts work for large financial institutions.

In the end, most of what an analyst does is make an opinionated interpretation of data that does not have just yes or no answers. Longer-term projections for airlines are little more than educated guesses. Credibility for an analyst is a requirement to succeed long-term. Like all professions, some analysts are better than others.

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