American Airlines is the one to watch in 2010

by Tom Johansmeyer on

Could 2010 be the year for American Airlines?

Well, it’s hard not to see the light at the end of the tunnel after a decade of unusual airline severity. The market was shaken several times by terror attempts – including the attacks of 9/11 – economic pressures from the dotcom meltdown and the recent financial sector only made matters worse. Energy prices hit some peaks along the way, which, according to Joseph Lazzaro of our sister site, BloggingStocks, determines the fate of the U.S. airline sector.

But, AA in particular? The guys with the flight attendant who through a nutter over orange juice?

The stock is up 90% since June. To most travelers, this is not just irrelevant, but boring … until you think about how these matters can impact your experience on an airline. When a company is profitable, it has an easier time serving its customers. And, employees tend to relax a little bit, as profits and stock prices tend to be good signs that jobs won’t be disappearing (at least not in large amounts).Also, I use stock price as a proxy for intangibles, like brand strength, customer loyalty and other factors that are hard to quantify. At the end of the day, the price determined by investors takes all this stuff into account, giving customers and passengers a feel for how the airline is likely to treat it.

So, cast aside the recent high-profile debacles of this airline, including its recent runway faux pas in in Kingston, and think to the future. After all, everyone’s screwed up. United has its guitar-playing victim, and Northwest (and, as a result, Delta) watched a plane overshoot a destination. In a business where every player is scraping the bottom of the barrel, American may rise above, even if only slightly.

Airlines: why it always has to come down to price

by Tom Johansmeyer on

Imagine what would be pretty much a perfect world, at least for airline CEOs. You’re running a reasonable profit – let’s say 10 percent, enough to keep the shareholders off their backs. And, they’re growing annually at a low double-digit rate, as well. Again, the shareholders are seeing an upside, so there’s no pressure on the airline’s management. Since the numbers being posted are healthy, the need for cutthroat competition evaporates, and passengers make their choices by destination and service, the latter playing a minor role, because in this perfect world, service is pretty much consistent (and high) from one airline to the next.

Blissful, right? Well, it’s just about impossible.

What shatters this fantasy, in which Santa‘s the pilot and the tooth fairy is pushing the drink cart, is the concept of price. The travel market – like any market – doesn’t carve itself up neatly into the best possible outcomes for all involved. Some people make fantastic decisions, while others behave like morons. The leaders of each company think they can find an edge. Even in the perfect world described above, the mere possibility of an advantage can send the whole system into mayhem, but we’ll get to that in a moment.

The perfectly coordinated airline industry has a practical barrier. Such harmonizing is also known as “collusion.” And, it’s illegal. Just imagine every grocery store in your neighborhood setting the same prices. In doing so, they could guarantee themselves a tidy profit, as long as all agree not to break ranks. Now, if the airlines did this, they could basically set the prices they want, regardless of service. In fact, if all agreed to provide shitty service for a universally high price, you’d be screwed.

A lesser form of this is regulation. The prices are fixed, and there are no secrets about it. We tried this for a while in the United States, and I’ve heard great things about the experience of flying in those days. But, the thought of the government setting prices for anything makes me a tad uncomfortable. Business owners should be free to make a profit that reflects their hard work and skill.

So, we are where we are now … which is pretty ugly. Most airlines are struggling to keep planes in the air. Bankruptcy announcements are not met with surprise (unlike profitable quarters). Even the layman, who knows nothing about the air transportation industry, knows that the airlines are screwed up. The challenge is finding where the blame needs to go and fixing the problem. While it’s pretty easy to beat up the airlines on this one, the reality is that the system as a whole is pretty close to unsustainable.

Fares sell by price
We may complain about having to pay for soda or not getting those crappy little pillows and blankets (which we complained about getting before they were taken away), but we still beeline for the cheapest flights available. Need proof? I’ve heard countless people wonder aloud about an airline that charged just a little more for something resembling customer service. Yet, those wheels never go up. Meanwhile, Ryanair plans to get rid of some seats and creating a standing room only section on its flights and will probably sell tickets for those torture devices before filling the cheap regular seats on the plane. We’re addicted to cheap. If there were real demand for anything slightly better than what we have now, it would exist.

There’s a reason fares sell by price
Sure, there are travelers with a little extra disposable income, and they’d pay for a class that’s lightly better than coach. Maybe they’d shell out an extra $50 or $100 – maybe more. But, there’s always the squeal point. The squeal point, per ticket, gets lower when multipliers are involved. I’d pay an extra $100 for a little more legroom and coffee in a ceramic mug. Seriously. I don’t need a pillow or a blanket; I really don’t even give a damn about getting a smile. I just want to stretch out a little and sip my coffee from a civilized receptacle. Here’s the problem: if I fly with my wife, that $100 luxury becomes $200. If we were a family of four, it would jump to $400. Legroom isn’t worth that much.

For the business travelers, the situation is even more severe. It’s easy to figure that these guys would go for the extras because they don’t have to pay for it. Well, that’s true. But, someone does. These guys are accountable to the people who write the checks. Would a client notice a weekly expense bill that’s $100 higher? Probably not. When I lived that life, I’d run up $3,000 to $5,000 in travel expenses a week. Flight prices changed from time to time. The $100 wouldn’t be noticed. If someone did notice, he probably wouldn’t care.

But, we have to deal with the multiplier.

If you have 100 consultants or other professionals on a project where each has a weekly flight and hotel stay for an entire year (call it 50 weeks to leave room for vacation), the money adds up fast. The extra $100 becomes $5,000 per traveler. For the entire project team, this small taste of luxury would amount to half a million dollars … which would be noticed and to which the client would object. Business travelers are constantly pressured to keep expenses as low as possible, which takes us right back to buying on price. With business travel off substantially this year, we’re experiencing this dynamic today.

Airlines have to live with this
Since customers make their decisions based on the cost of a ticket, this is how airlines have to position themselves in the market. Being the best can mean going out of business. Instead, an airline has to be the cheapest for a particular route in order to win in the market – there’s no alternative to this. That’s why people complain about the service they get; if they weren’t flying these airlines, they wouldn’t be complaining.

So, to succeed, an airline has to make the calculated decision that anything can be sacrificed in the name of low prices. Whatever misery is inflicted on the passengers, they’ll accept it – they made that decision when they bought their tickets. I’m not trying to be mean, here, just honest. We’re not talking about Santa any more.

The market has evolved into one in which passengers have little likelihood of being happy … in part because they are making the conscious decision to fly that way. As long as price is king, the airlines have few levers they can pull.

Of course, this isn’t universal. There are some airlines with excellent financial track records (Southwest comes to mind immediately), and their flights can be decent, even enjoyable. While customer service is an obvious way to make even a no-frills flight much better, there are structural problems in the industry that have to be overcome. An obvious thought is that the big airlines should cut back to be more like their smaller, regional counterparts, which tend to do a better job of running profitably.

Let’s think through this.

First, cutting some routes can cause a chain reaction of change in the vast network that an airline traces around the world. There aren’t any easy answers here, but it can be done. Many airlines have cut back on flights and cities this year and have lived to tell about it. Take it to the extreme. The large airlines carve themselves up into little guys, run their routes and post strong earnings. Unfortunately, profits are intoxicating – and shareholders will want more. Eventually, this requires growth into new markets (e.g., adding routes) or acquiring other airlines. It may take a while, but the airline industry would eventually return to where it is today … and would assume the problems it has now.

Doing the right thing, essentially, would lead the industry back to doing the wrong thing.

The exceptions to the rule
Alternatives do exist for passengers who want more than the claustrophobic experience that is coach. Business class and first class come to mind. The problem is that the gap is far too wide – both in terms of amenities and cost. Most coach passengers could be fairly happy with much less than business and first offer. Unfortunately, it’s all or nothing, and the prices reflect the “all.”

There are passengers who pay the extra cost for these improved offerings, but there’s always a reason. They may have the financial means to make the decision easy. Or, in the corporate world, they reside far enough up the food chain that corporate travel policies favor them.

The super-luxury travel market has plenty of services available for passengers who don’t buy on price. You could use an exclusive service (though many of them have fallen on tough times), get a private jet share or simply buy your own wings. Again, this is far more than the legroom and ceramic mug I’m looking for.

Of course, even these upscale services aren’t making as much as the airlines had hoped, even at lower prices.

Why even collusion wouldn’t work
Let’s circle back to where we started, that imaginary airline industry in which everything is perfect. Even that is doomed to failure. Take regulation out of the picture (that’s a whole different animal), and think about airlines in which passengers can get something slightly better than what we have now. They pay a little more, but air travel is no longer a dehumanizing experience.

Now, think about a smoke-filled backroom in which a guy with a new idea is surrounded by cigar-chomping investors.

“I have something for you. I want to start an airline. Yes, I know that the guys in the market now have gotten together to fix their prices – it’s an open secret. But, I’m not going to play ball with them. I figure we can cut prices and run at a thinner margin. What we lose per flight we’ll make up in volume. Hell, people will buy on price, and they’ll flock to us. We’ll grow like mad.

“The other airlines will try to make a play on service, on how they give a little extra legroom and coffee in a ceramic mug. But, we’ll only need to say, ‘We’re cheaper.’

“It starts with short flights. If you’re only flying from Boston to New York, do you really need the extra legroom? How about Boston to Washington? The slope is awfully slippery. Next thing you know, people will go for the cheaper fares on flights from New England to Orlando … and then Orlando to Los Angeles. Finally, they’ll cut their comfort when they cross oceans.

“And, they’ll be flying our airline.”

The investors would be fools not to drive dump trucks up to this guy and unload their cash at his feet … at first. For a while, this airline would dominate the skies. But, the others would catch on. One by one, they’d break ranks from the agreement to keep their prices high, and they wouldn’t stop until the industry looks a lot like it does today.

What the airlines can do
It looks like the airlines are out of options. They are doomed to a low-margin (at best) existence in which cost-cutting, layoffs and disgruntled passengers are the norm. A Hobbesian state of nature will always play itself out at the gate. Knees will always poke chins in increasingly compact quarters.

This doesn’t mean the airlines are powerless to make the experience better, though. Even with small seats and no meals, there are plenty of ways to win on service. A smile can go a long way. Being polite can defuse a nasty situation.

Of course, none of this addresses the cost and price pressures and their impacts on the industry. But, does anyone think that’ll ever change?

Passengers to become drivers for Thanksgiving this year

by Tom Johansmeyer on

We aren’t staying at home, but we’re definitely not flying. That’s the word out of AAA this year. Thanksgiving, always a travel-heavy holiday, will see more cars in the road than people crammed at the gate, as travelers respond to the recession and recent increases in airfares.

AAA puts the number of people driving 50 miles or more from home for Thanksgiving at 38.4 million — up 1.4 percent from last year. The number of people traveling by car (regardless of distance) is set to edge 2.1 percent higher. Meanwhile, the number of people taking to the skies is expected to drop a hefty 6.7 percent. The Air Transportation Association sees the passenger count dropping 4 percent, but that’s for the “holiday period,” which stretches from November 20 to December 1. “Economic headwinds” are the primary reason, the ATA says.

The economic situation’s role in the decision to drive versus fly isn’t limited to the change in prices. Airlines have been pushing their fares up for the past few weeks, but for consumers, the decision is based on cost relative to their willingness to spend. Rick Seaney, CEO of FareCompare.com, tells MSNBC, “A leisure traveler might have bought a domestic ticket for $350 last year. Lately, $250 has been the breakpoint; above that, they just weren’t going to buy.”

If your flight looks crowded this year, it’s probably because there aren’t going to be as many planes in the sky. Only 679 billion domestic seat miles will be offered this year, down from last year’s 730 billion, which was already cut from the year before. From 2008 to 2009, the number of available seat miles is off 7 percent.

While the economic climate is certainly a factor, AAA sees other drivers in the trend from wings to wheels. The cut routes and flights, delays and the security gauntlet have all contributed to the decline in Thanksgiving passengers since 2000 of a profound 62 percent. If the airlines didn’t think they had competition for the Thanksgiving season rush, this is an answer that can’t be ignored.

Poll: Have you ever passed up the cheapest airfare to avoid a bad airline?

by Aaron Hotfelder on

People love to complain about the dismal state of air travel these days. Whether it’s the stomach-churning airline food (and there’s so little of it!), the complete lack of leg room, or the fact that your luggage was for some reason routed through Honolulu, we’ve come to expect some pretty poor service from quite a few airlines these days.

In any other industry, customers register their indignation by refusing to spend money at the offending establishment. Found a finger in your Caesar’s Salad? You’re probably never visiting that restaurant again. Tired of your cable cutting out in the middle of House? You just might cancel that company’s service and call up their competitor (who’ll probably even throw in a year of Starz at no extra charge!)

But with airlines, we’re like the pathetic girlfriend who’s been cheated on five times but still believes her boyfriend when he says, “Seriously, this time will be different! I’ve changed!” The worst airlines stay in business because by and large people are willing to put up with crummy service if it means they get a cheap flight.

I mean, imagine you’ve just done a search on Kayak for a flight from San Diego to Boston departing on November 4 and returning on the 15th. The lowest fare shows up as $228, but it’s with an airline that’s burned you in the past. (Let’s call them Cut-Rate Airlines.) This is an airline that’s arrived to its destination late almost half the time you’ve flown with them. They’ve lost your bags twice, and both times they shipped them to you two days later. Their food stinks and the flight attendants have never been especially pleasant either.

Fortunately, there’s an almost identical flight aboard Pleasant Air, a carrier you’ve flown with a dozen times without any problems. But that flight costs $288, sixty dollars more than the flight on Cut-Rate. So what do you do?

I’m interested in this question because as much as people love to complain about airlines, especially those incompetent bastards at [insert bad airline here], I usually find that people prefer the lowest airfare to paying more to fly with an airline with better service.

So, Gadling readers, am I wrong? Can airlines continue to treat their passengers like crap as long as they offer low fares? Make your voice heard in the poll below– or in the Comments.

Five ways to beat the competition to the overhead bin

by Tom Johansmeyer on

There’s nothing so gauche as to stick your carry-on into an overhead bin far ahead of your seat, grab a book or magazine from it and walk 17 rows back to your seat. Because, whether you know it (or give a damn), one of the passengers sitting under your bag may not have a place to put his. Then, when the plane settles in at the gate, he’ll try to shove his way to the back of the plane (where he was forced to stow his stuff) while everyone else is moving the other way. It’s a recipe for disaster.

And, it’s getting worse.

Airlines have had to cope with shrinking budgets, thanks to a dismal travel market, and that means making cuts. So, when there isn’t another pill water, peanut or blanket to chop, the airlines have to take away the planes themselves. Airline capacity is falling almost across the board this year, making planes more crowded. That translates to fuller overhead bins. The other airline money-making scheme – charging fees for extra baggage – has also cramped the cabin. Passengers are hoping to dodge the extra cost, even though it is modest.

When there’s an airline problem, of course, Congress rushes to devise some sort of solution – an obvious move given the track record legislators have had “fixing” the industry. The latest move appears to be an effort to limit and standardize carry-on sizes across airlines, with the TSA enforcing the rule at checkpoints. What will this accomplish? Well, your security wait just got longer. Not only will they have more work to do, but you’ll have the joy of waiting behind 27 people who all need to argue with the TSA employee about how the new rule is bullshit.

Until Congress comes in and accomplishes nothing, what matters most are strategies for making sure you can get as much of your stuff as possible into the overhead bins, especially if you want to keep some foot space under the seat in front of you. Here are five ways to make the whole process easier.

1. Board early
Chance favors the prepared. Get onto the plane as soon as you can. If you have elite status, use it. Linger by the gate to wait for your zone to be called. Then, strike when the announcement is made.

2. Be honest
You could become a scumbag and toss your carry-ons into the first overhead bins you see … or you could play it straight and put your bags in the appropriate bin. Become a part of the solution, not the problem.

3. Consolidate
Don’t carry too many carry-ons, and if you do max out the gear you can tow, bite the bullet and stick some of it under the seat in front of you.

4. Gate-check
You’ll have to wait a little longer for your bags, but it isn’t nearly as bad as having to linger by the carousel. This is as close to a win-win as you’ll find in the hell we call air travel.

5. Deal with checked luggage
Sometimes, you’re going to have to suck it up and check your damned bags. Don’t try to fight with the flight attendant or gate agent over size or amount. You’ll only delay the process … especially if the flight attendant has to announce that some of the bags in overhead bins will need to be checked. Don’t push the envelope, and learn to live with the rules.

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