Two billion reasons why you pay to check bags

by Tom Johansmeyer on

Or, you could call it “2 billion reasons why flight attendants shouldn’t get raises.” It works both ways.

The labor debacle at British Airways reminds us of the perpetual stupidity turmoil that has come to characterize the airline industry. Not to pick on BA, but the strike shows how disconnected the flight attendants are from the nuts and bolts of the business, and it translates across the pond. Yet, passengers are in a similar state of denial, feeling wronged by the airlines as they are nickled and dimed for “amenities” such as checking luggage. With the latest data from the Bureau of Transportation Statistics, it’s pretty obvious that airlines need to bring in some more money, and it has to come from somewhere.

In the United States last year, 769.9 million travelers set foot on planes (departing from, arriving to or completely domestic), a decline of 5.3 percent from recession-stained 2008 and off 8.2 percent from 2007, when 832.2 million passengers flew the friendly skies. This was the first time the number of fliers fell below the 800 million mark since 2004, in which 763.7 million passengers boarded planes. Think about it: 2009 is basically 2004. The airline industry has lost five years of growth.Meanwhile, fewer people were paying less for tickets, with the average fare falling $30 from 2007 to 2009 – settling at around $315. The increase in demand led to the shedding of around 700,000 flights from 2008 to 2009.

In all, this dynamic cost the U.S. airline industry approximately $2 billion … and that doesn’t include financial losses elsewhere. Fewer customers spending less led to a profound decline in revenue, and the airlines need to find a way to get it back. They’ve been able to close the gap, in part, through the ancillary fees we’ve all grown to hate. Every time you pay to check a bag, eat an unsatisfying sandwich or grab a little more leg room, you’re helping to keep these guys in business.

Of course, this would be a lot easier if the airlines would do their part. Price increases are frustrating when you see striking employees looking for more in a market where their salaries are effectively unsustainable. And with some flight attendants willing to subject themselves to interviews with 18 airlines in order to land a job, it’s pretty clear that demand is sufficiently high to make pay raises not only unnecessary but irresponsible.

So, it’s time for both sides of this equation to accept reality.

Passengers: you’ll be paying for extras. The airlines need it right now, and the beauty of momentum is that they’ll keep charging us for everything imaginable even when the economy recovers, because they aren’t going to slash a revenue stream that’s paying off.

Flight attendants: raises? Look at the economics of the situation. If passengers are paying more for the same service and demand is high for a shrinking number of positions, there’s no reason to pay them. With revenue in the tank and an aggregate net loss of $4.6 billion for 11 U.S. airlines last year, there’s no money for raises … unless there’s a new way to extract blood from a stone, of course.

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Corporate travel comeback expected

by Tom Johansmeyer on

When you look at the woes experienced by the airlines through this recession, it’s hard to escape the fact that there’s only one solution: the business traveler. Recreational travelers may be important, but that’s not where the real money comes from. Airlines salivate over the M&A banker who books a last-minute flight every week. As businesses were laying off and cutting costs, corporate travel suffered, dragging the airlines down with it. With a turn for the better expected this year, airlines are now looking for ways to attract these valuable passengers and the budgets the command. Bed-like seats are starting to pop up, and first class service is finding its way onto regional carriers.

According to airline consultant Bob Harrell, “The business traveler is the most profitable part of the traveler segment.” As much as these folks can be a pain in the ass (and I sure was back in my day), they are probably the most important passengers the airline has. Harrell adds, in USA Today, that even in coach, the smallest domestic refundable fare paid by the business traveler tends to be five times higher than the rock-bottom price paid for a comparable ticket by a leisure traveler.

So, to bring the valuable customers in the door, airlines are rolling out the perks. Luxury lounges, in-flight gourmet meals and other amenities, the airlines hope, will put the corporate traveler back in their seats. The airlines are even paying handsomely for the business traveler: Delta, for example, is pumping $1 billion into enhanced up-market services through 2013.Business travelers represent a unique opportunity for airlines, in that they command travel budgets that are quite large relative to their incomes. They travel frequently and often have some degree of choice in the airlines they use. Further, business need may render price effectively moot. This is the sort of passenger that any business would love, and the airlines are no different.

Cash, it seems, is the universal language.

Click here to gain more business traveler insights in my weekly “White Collar Travel.”

Fees passengers hate actually make sense

by Tom Johansmeyer on

I honestly don’t have much of a problem with all the extra fees being tacked on by airlines. They have an obligation to their shareholders to deliver results: it’s a fact of life. And, realistically, they don’t do us any good if they can’t afford to put planes in the air. But, I suspect I’m in the minority on this one. A recent online poll by Airfarewatchdog.com sought to learn which fee passengers hate most and found that 52 percent abhor having to pay to pick a seat. Only 14 percent had a problem paying for snacks. A mere 3 percent (my kindred spirits, I guess) said they were happy to pay for extra services.

George Hobica, Airfarewatchdog.com‘s president, observes that passengers are more tolerant of fees that come with an added expense to the airline. If you want a meal, someone has to pay for it. Sure, you’re going to pay more than the airline does – as you should – but there’s an understanding that the airline is picking up part of the burden. With seat assignments, he believes, the fact that there is no incremental cost is what irks passengers.

I see Hobica’s point, but there’s an opportunity cost for the airlines that isn’t readily seen by the average passenger. If there is a place for a fee that the airline doesn’t use, it’s potential income that can never be recaptured. Sure, there’s no additional cost to be covered, but there is the reality that the airlines aren’t monetizing something that could ease the pressure on their financial statements.

There’s a good reason for every additional fee you’re seeing: airlines don’t have a choice. Rather than push up the prices, this a la carte approach allows passengers to decide what’s important to them. Why pay for a meal you won’t eat … or for a “better” seat that won’t make a difference to you?

Airline demand suffered worst decline in 2009

by Tom Johansmeyer on

Demand for airline seats fell 3.5% last year, making it the greatest decline the industry has seen, according to the International Air Transport Association. Airlines had a tough time filling 75% of available seats on average flights, IATA reports, and an early recovery, given the difficult conditions of 2009, is unlikely. For the freight sector, the situation was even worse: a 10.1% year-over-year decline, with less than half of all available capacity consumed.

Giovanni Bisignani, IATA’s chief executive, says, “In terms of demand, 2009 goes into the history books as the worst year the industry has ever seen.” He continues, to USA Today, “We have permanently lost two years of growth in passenger markets and three years of growth in the freight business.”

IATA forecasts a $5.6 billion loss for the air transportation industry in 2010. Bisignani observes, “Revenue improvements will be at a much slower pace than the demand growth that we are starting to see.”

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.