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Airline Analyst Tracks Decline in ServiceSeptember 1, 2009 By: George Dooley
The anniversary of 9/11 is coming and the effects of the 2001 terrorist attacks will be marked by the media and commentators. But Robert Herbst, a respected airline expert and host of AirlineFinancials.com offers a fresh perspective on 9/11 and the changes in the airline industry since the attacks.
His analysis, “How the Legacy Airlines Lost So Much Altitude Since 9/11” sees major losses in the quality of passenger service as well as financial problems that are not going away anytime soon. Herbst’s perspective offers a framework for travel agents and the industry to understand the realities of the airline industry post 9/11.
“The airline industry is vital to our economy and national defense," Herbst says. "It is not going to go away. When discussions and questions revolve around why is customer service and morale so bad in the airline industry? It seems like a rather easy question to answer after you understand what has actually occurred in the last few years."
Herbst’s views and analysis are republished below:
After losing over $5 billion last year, the airline industry is now on course to lose a similar amount for 2009. This projected loss comes after the airlines will spend over $13 billion less for fuel compared to 2008
Losing money for the old legacy carriers is nothing new. But this year, even low cost Southwest, after 35 consecutive years of profits, is expected to lose money. Of significance for how serious the revenue problems are for the industry, Southwest's load factor will be the highest in the airline's history.
If you've taken a flight or read a newspaper lately, you're probably aware the airline industry has serious problems from customer service to record financial losses. Before jumping to conclusions and attributing blame, let's do a review of what has -really- occurred to the industry.
While we focus on the largest legacy carriers, over the past two decades over a hundred smaller airlines went out of business or have struggled to stay alive. The following considers the six largest legacy carriers and their mergers/acquisitions before and after the September 11, 2001 tragedy. These airlines—American (AMR), Delta (DAL), Northwest, United (UA), Continental (CAL) and USAir (LCC)— currently carry 58 percent of the U.S. market share or approximately 65 percent after accounting for regional carrier affiliates.
Since 9/11, United, Delta, USAir (twice) and Northwest all filed bankruptcy. American and Continental reorganized outside of bankruptcy. For the eight years leading up to 2001 (1993-2000) the airlines noted above had cumulative net profits of $17.1 billion.
The same airlines had a cumulative net loss of $38.5 billion in the following eight years (2001-2008). While many billions of debt and employee pension obligations were abrogated through the bankruptcies and reorganizations, cumulative long term debt and capital leases are still 15 percent higher than they were just prior to 9/11.
One of the most recognized losses to the airline industry and investors has been the large drop in market cap (share price x shares outstanding). This loss of shareholder value affects each airlines borrowing power and increases the cost for financing.
Over the past eight years, and not accounting for tremendous losses through the bankruptcy process, cumulative market cap for the airlines dropped by over 52 percent going from $21.8 billion in the second quarter of 2001 to $11.4 billion in the most recent second quarter of which Delta alone claims half of the current market cap. The change in market cap does not reconcile significant stock value losses from bankruptcy.
As we approach the eighth anniversary of the 9/11 tragedy, here are some startling statistics showing what has -really- occurred since then to the legacy carriers that were once recognized as the best airlines in the world.
Comparing 2008 to 2000 for the Six Remaining Legacy Airlines
* Total Operating Revenue decreased by $2.3 billion falling from $89.2 billion to $86.9 billion.
* Fuel cost skyrocketed from $11.3 billion to $36 billion (+218 percent).
* The fuel cost for the average one way passenger fare increased by 402 percent going from $23 to $93.
* Capacity as measured by available seat miles (ASM's) decreased by 14.3 percent.
* Employee wage/salary expense decreased by 33.5 percent.
* The average one-way passenger fare increased by 22 percent going from $162 to $198. This increase was below the 25% CPI inflation over the same time period. This is revenue to the airlines and does not include taxes, airport fees, security charges etc. that airlines are required to collect but do not keep.
* While the average air fare increased by $36, the labor wage cost for the average air fare decreased by 36 percent to $41.
* Since 9/11, over 155,000 jobs for just the airlines noted above have been lost falling from 428,000 to 272,000 (-36 percent) total employees.
* The average passenger ratio to airline employee increased from 1,139 passengers per employee to 1,413. In other words, the reservation or ticket agent, flight attendant etc., on average, now resolve issues and provide customer service to over 24 percent more customers than eight years ago.
* As employees worked more for less, the average revenue generated per employee increased by an astounding 53 perent as it went from $209,000 per employee to over $319,000.
* While 155,000 jobs were lost and the average revenue per employee increased by over $110,000; general management wages/salaries as reported on DOT41 (Department of Transportation) forms, increased by 44 percent as it climbed from $243 million to $350 million.”