Go to the Globe and Mail homepage

Jump to main navigationJump to main content

An Air Canada Express aircraft passes the Toronto skyline on approach for landing at the Toronto Island airport on Sept. 24, 2013. (MOE DOIRON/THE GLOBE AND MAIL)
An Air Canada Express aircraft passes the Toronto skyline on approach for landing at the Toronto Island airport on Sept. 24, 2013. (MOE DOIRON/THE GLOBE AND MAIL)

The survival plan for media companies? Copy Air Canada Add to ...

The best-performing large company on the TSX last year was Air Canada. An investor who took a punt on 1,000 shares would have seen her $1,750 investment turn into $7,400 within 12 months. That can happen when a company that’s nearly dead shows a pulse; the promising turnaround earned Calin Rovinescu this magazine’s nod as CEO of the year.

More Related to this Story

But if you thought a speculative gamble on Mapleflot was the only way to earn a bundle in 2013, you’d be wrong. An investment in Delta Air Lines would have more than doubled your money. Southwest Airlines—ticker symbol: LUV—is arguably the least risky major airline in North America, but it still went up 84%. The airline business, once radioactive to investors, is printing money. The International Air Transport Association (IATA) forecasts that commercial airlines will make nearly $20 billion (U.S.) in operating profits this year.

The airlines didn’t accomplish this overnight. They didn’t do it by renegotiating their union contracts, or by skimping on frills such as in-flight meals, or by merging with each other to reduce competition. They did all of those things, and then some. The story of how the industry got its act together holds lessons for other distressed industries—notably the media business.

It took desperate times to force the airlines to change. The global airline business lost more than $40 billion in the years following 9/11. U.S. Airways went into Chapter 11 bankruptcy protection twice; Delta and Northwest Airlines spent nearly two years operating under bankruptcy court. In 2008, they agreed to merge.

Chapter 11 allowed the airlines to reopen their union agreements, and cut pensions and wages, but it didn’t eliminate their self-destructive behaviour. Overcapacity—too many planes chasing too few passengers at prices that are too low—has always been the industry’s weakness. Five years after the terrorist attacks, airlines were adding too many flights, despite operating at a load factor of just 76%. (Put another way, for every kilometre they flew, on average, one in four seats was empty.)

Then came a wave of mergers. After Delta-Northwest, United joined Continental in 2010, and last year, American Airlines swallowed U.S. Airways. The big six have become three, and they have taken a more rational approach to flights. In 2012, North American airlines increased their passenger capacity just 0.4%; last year, it was 1.6%.

The result is that the planes are stuffed with people. North American airlines now enjoy fatter profit margins than Asian or European airlines. The clever use of “ancillary fees”—charging passengers for snacks, for checking bags, for seat selection, for in-flight movies—is another source of profit. A recent story by the Detroit Free Press suggested the real cost of handling a piece of luggage is about $2, leaving a healthy margin on a $25 baggage fee. The analysis was flawed, but its conclusion was accurate: The fees are a moneymaker.

Behind the airlines’ new business plan was a simple premise: Make the user pay. A passenger who demands extra legroom or checks 35 kilograms worth of luggage should pay more than one who doesn’t. An Air Canada passenger booking a flight from Toronto to New York is faced with five fare classes, each with its own privileges and fees. In North America, the king of the nickel-and-dime approach is Spirit Airlines of Florida, which charges for items like water and boarding passes (it’s $10 to have them printed at the airport). That’s chutzpah. But Spirit gets 40% of its revenue from “non-ticket” sources; it’s also highly profitable, and its stock went up 156% last year.

So what does all of this have to do with Old Media?

Legacy media companies are facing difficult times. The causes and symptoms are not so different from the ones airlines had a decade ago: union agreements from a previous century, falling revenue, disappearing profit margins. The business also suffers from a glut of capacity. In a digital age, there are simply too many websites, publications and TV channels chasing advertisers.

Media companies continue to look for answers. But what the airlines proved is that there isn’t a single answer. There are many—and some involve doing uncomfortable things they would never have considered in better times.

For instance: The financial state of the business suggests that big media companies should look for merger partners. It also points to the need for bold experiments in making the user pay. Many news outlets have brought in paywalls to get their heaviest readers to pay more. Magazines and newspapers are taking up the price of printed copies or ceasing distribution of their product in places where it doesn’t make economic sense. (The Globe and Mail has done some of these things.)

But most old media companies, like the airlines of 2004, haven’t gone nearly far enough in trying out new business models and new ways of charging their customers. They will. Desperate times will force them to.

Follow us on Twitter: @GlobeBusiness

 

In the know

Most popular video »

Highlights

More from The Globe and Mail

Most Popular Stories