The Other Important Relationship Between Airlines and Bankers
In his September 23rd column for Conde Nast Portfolio, Joe Brancatelli writes about how airlines depend upon bankers' butts in First and Business class seats to make money, especially NEW YORK bankers. And we all know that group of animals is fast headed for the Endangered Species list even under the strict definitions of the extinction-loving "W" administration.
The rest of us on any given flight are, in the words of at least one airline exec, mere "ballast," a necessary evil to be tolerated in the back of the plane so the big money boys up front will have lots of flights to choose from between city pairs.
(You can read Joe's entire column at: http://www.portfolio.com/business-travel/seat-2B/2008/09/23/Airlines-Depend-on-Bankers.)
I'm sure that's true, too. Thirty years of up-close-and-personal experience flying "sharp end" millions of miles all over the globe gave me plenty of opportunities to chat up my premium cabin neighbors. Sure enough, many of them toiled in the financial services sector in one capacity or another.
Everything Joe wrote rings true (not that I ever doubted him), but there's another reason that airlines desperately need bankers: cash. Airlines burn through cash faster than corn passes through a goose.
Everyday airline operations are extremely expensive (labor, maintenance, airport leases, fuel, landing fees, insurance--the list is endless). Then there are the heavy capital costs related to buying airplanes and other equipment, keeping parts on hand, building big hangars, running gigantic computer networks--another long list.
Oh, and all those costs are steadily rising, too, many at a rate faster than fare increases can keep up with (think: aviation fuel).
Add to this the fact that airline margins even in the best of times (whatever that means for the commerical aviation business) are razor thin, as airline so-called managers constantly remind us.
The summation of these unhappy realities is that airlines have been described by at least one esteemed economist as merely:
"... cash accumulators for other constituencies."
What this means, of course, is that airlines have so many chronic cash needs that they act like a sieve for money. Dumptruck loads of dollars constantly flow in the top of the airline sieve and get quickly sifted out the bottom to pay creditors and vendors. There's little or nothing left over most days, and especially not when demand dips faster than the airline can react to reduce its costs.
Let us not forget to consider seasonal air travel demand, too. It may be a predictable fluctuation, but there's only so many variable expenses to run up or down. The relentless fixed costs must be paid even during expected demand troughs when the revenue faucet turns to a trickle.
This is where the bankers come in, but this time in their professional role as money-lenders, not in their spending role as high-paying customers. Cash-hungry airlines depend utterly on bank lines of credit to fund their operations through demand valleys. Otherwise they'd go broke.
And we all know at least one certainty to expect from the Wall Street debacle still unfolding: No matter how things are resolved, credit is going to dry up, and what's left will be a lot harder to qualify for and much more expensive.
Where will that leave the airlines? Nobody knows. Even McDonald's recently reported difficulty securing adequate credit lines to fund its food-buying operation, and their business is less risky, more predictable, and has better margins than the airline industry's.
If you were a banker with only a handful of shekels to lend, and you had to choose between two credit risks, McDonald's and an airline, which business would you give the money to?
We've all been chattering about how airports and air flights will be less crowded and less stressful in the aftermath of the current meltdown, but what if some airlines disappear when their credit lines are shut off?
I was in Sydney, Australia that terrible Monday, 9/11/01. I was still there four days later, on Friday, September 15, 2001, when Ansett Airlines, the second largest air carrier Down Under, failed and shut down all operations right after midnight.
In one instant, all Ansett tickets were rendered worthless; Ansett frequent flyers lost all their foolishly banked miles; Ansett passengers were stranded all over the country where their last plane landed; shareholders were wiped out; thousands of direct and support jobs were lost; banks lost the loans and credit lines due them; government tax authorities lost important revenue streams.
It was sheer bedlam all over Australia that day and that weekend, and for weeks afterwards it was near impossible to get a flight to anywhere from anywhere on the only remaining options, Qantas and Virgin.
We're a whole lot bigger than Australia, and we have tons more air capacity, but still, it gives me pause to consider the impact of one or more major carriers going under all at once because the high-roller bankers who aren't flying any more won't lend their dollars any more, either.
In his September 23rd column for Conde Nast Portfolio, Joe Brancatelli writes about how airlines depend upon bankers' butts in First and Business class seats to make money, especially NEW YORK bankers. And we all know that group of animals is fast headed for the Endangered Species list even under the strict definitions of the extinction-loving "W" administration.
The rest of us on any given flight are, in the words of at least one airline exec, mere "ballast," a necessary evil to be tolerated in the back of the plane so the big money boys up front will have lots of flights to choose from between city pairs.
(You can read Joe's entire column at: http://www.portfolio.com/business-travel/seat-2B/2008/09/23/Airlines-Depend-on-Bankers.)
I'm sure that's true, too. Thirty years of up-close-and-personal experience flying "sharp end" millions of miles all over the globe gave me plenty of opportunities to chat up my premium cabin neighbors. Sure enough, many of them toiled in the financial services sector in one capacity or another.
Everything Joe wrote rings true (not that I ever doubted him), but there's another reason that airlines desperately need bankers: cash. Airlines burn through cash faster than corn passes through a goose.
Everyday airline operations are extremely expensive (labor, maintenance, airport leases, fuel, landing fees, insurance--the list is endless). Then there are the heavy capital costs related to buying airplanes and other equipment, keeping parts on hand, building big hangars, running gigantic computer networks--another long list.
Oh, and all those costs are steadily rising, too, many at a rate faster than fare increases can keep up with (think: aviation fuel).
Add to this the fact that airline margins even in the best of times (whatever that means for the commerical aviation business) are razor thin, as airline so-called managers constantly remind us.
The summation of these unhappy realities is that airlines have been described by at least one esteemed economist as merely:
"... cash accumulators for other constituencies."
What this means, of course, is that airlines have so many chronic cash needs that they act like a sieve for money. Dumptruck loads of dollars constantly flow in the top of the airline sieve and get quickly sifted out the bottom to pay creditors and vendors. There's little or nothing left over most days, and especially not when demand dips faster than the airline can react to reduce its costs.
Let us not forget to consider seasonal air travel demand, too. It may be a predictable fluctuation, but there's only so many variable expenses to run up or down. The relentless fixed costs must be paid even during expected demand troughs when the revenue faucet turns to a trickle.
This is where the bankers come in, but this time in their professional role as money-lenders, not in their spending role as high-paying customers. Cash-hungry airlines depend utterly on bank lines of credit to fund their operations through demand valleys. Otherwise they'd go broke.
And we all know at least one certainty to expect from the Wall Street debacle still unfolding: No matter how things are resolved, credit is going to dry up, and what's left will be a lot harder to qualify for and much more expensive.
Where will that leave the airlines? Nobody knows. Even McDonald's recently reported difficulty securing adequate credit lines to fund its food-buying operation, and their business is less risky, more predictable, and has better margins than the airline industry's.
If you were a banker with only a handful of shekels to lend, and you had to choose between two credit risks, McDonald's and an airline, which business would you give the money to?
We've all been chattering about how airports and air flights will be less crowded and less stressful in the aftermath of the current meltdown, but what if some airlines disappear when their credit lines are shut off?
I was in Sydney, Australia that terrible Monday, 9/11/01. I was still there four days later, on Friday, September 15, 2001, when Ansett Airlines, the second largest air carrier Down Under, failed and shut down all operations right after midnight.
In one instant, all Ansett tickets were rendered worthless; Ansett frequent flyers lost all their foolishly banked miles; Ansett passengers were stranded all over the country where their last plane landed; shareholders were wiped out; thousands of direct and support jobs were lost; banks lost the loans and credit lines due them; government tax authorities lost important revenue streams.
It was sheer bedlam all over Australia that day and that weekend, and for weeks afterwards it was near impossible to get a flight to anywhere from anywhere on the only remaining options, Qantas and Virgin.
We're a whole lot bigger than Australia, and we have tons more air capacity, but still, it gives me pause to consider the impact of one or more major carriers going under all at once because the high-roller bankers who aren't flying any more won't lend their dollars any more, either.
posted by William A. Allen III | 11:49 PM
1 Comments:
Let's hear it for biscuits/sausage/gravy and an end to the endless debate and vote on the bailout....then we'll see where the chips fall (no pun intended.)
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