Why U.S. Airlines Can’t Compete

At first glance, things look pretty good in the U.S. airline business. Last year was the first time since September 11 when none of the legacy carriers was in bankruptcy. After five years of colossal losses, the industry is projected to show a profit for the third straight year. Two of the majors—Delta and Northwest—seem set to merge, expanding operations both at home and abroad.

But take a second look. The fact is that American airlines are more numerous but typically less profitable and more heavily indebted than rivals in Europe, making them ripe targets in coming merger battles. Delta and Northwest, for example, are merging less to tackle new opportunities than merely to survive, and may not make it without a huge infusion of cash from Air France, which wants in on the deal. With more competition coming—an open-skies agreement is set to liberalize transatlantic travel next month—European carriers are far better positioned to exploit new openings at U.S. airports than the other way around. The fact is that the world's most competitive big economy lags way behind the airline field for a host of reasons, led by old technology and stifling regulations.

Flying in America feels more and more like riding an aging bus at 35,000 feet. The fleet is old, and carriers can't afford to buy new, more-fuel-efficient planes—a chicken-and-egg problem compounded by rising oil prices (fuel expenditure is up 237 percent since 2002). That shows on the balance sheets: the United States has six major airlines and droves of smaller carriers, far more than any other nation, but only three are among the world's dozen most profitable. The major U.S. carriers hold nearly half the global industry's $190 billion debt burden; many survive only because of protection by U.S. bankruptcy law in the international slump that followed 9/11. "Most of the rest of the world doesn't have this concept of, 'I can't pay my bills, so I'll reorganize.' The live-or-die decision is more quick and brutal in the rest of the world," says John Leahy, an American who is COO for Airbus. "After 9/11, Swissair filed for bankruptcy on a Saturday and was liquidated over the weekend."

Europe bounced back quickly and aggressively. Air France and KLM, for example, merged. But in the United States, regulators were reluctant to allow mergers, so the glut of competitors led to price wars on domestic flights and big losses. One result: the struggling U.S. airlines do not have even one representative among the top 10 buyers of the much-lauded new Boeing Dreamliners or the Airbus A350s and A380s. Over the next decade, carriers in Europe, Latin America and the Middle East intend to replace about 6 percent of their fleets with new models each year; the comparable figure for U.S. carriers is 3.5 percent, about the same as Africa. Since the new planes are up to 40 percent more fuel-efficient, the competitive position of U.S. carriers will only decay. New environmental rules that raise the cost of transporting jet fuel inside the United States will compound the problem.

So will the open-skies deal; as of this April, it will allow any airline to fly between any city in Europe and any city in the U.S. But thanks to skewed trade rules, U.S. companies have been flying straight to Europe for years, so the real beneficiaries of the new deal will be the European carriers. British Airways, for example, will launch routes from France to Newark. European companies like Air France will soon be showing up at more ticketing counters across the country, robbing American carriers of long-haul market share, which is far more profitable than the domestic travel that currently makes up 73 percent of their revenue.