The death of cheap tickets? Four factors to watch!

by Tom Johansmeyer on

Are the days of bargain pricing over? There’s a lot of pessimism around this issue. After getting smacked around in 2008 and 2009, this year has been a good one for air carriers, and USA Today reports: “Airfares are on the rise again and unlikely to fall again anytime soon.” Yet, a travel industry recovery comes with advantages, as more people want to fly, and they tend to be willing to stomach higher prices. So, what’s the deal? Are we going to pay more (happily), or will 2011 means continued a continued prowl for cheap tickets, particularly online?

There’s no doubt that the airlines are getting more of our wallets. The U.S. Department of Transportation says that the average domestic ticket surged 13 percent – from $301 to $341 – from the second quarter of 2009 to the second quarter of 2010. That’s the fourth quarter in a row domestic fares rose.

Now, airlines are price-takers, not price-setters. What does this mean? They respond to what consumers are willing to pay … they don’t set the tone for the market (e.g., the way a luxury goods manufacturer would). So, if fares are shooting up year over year, a consumer willingness to pay is certainly implied.

Individual airline fare increases are pretty interesting, with United Airlines up 25 percent on average for is period and discounter Southwest adding 15 percent, on average, to every ticket.

According to USA Today, airfares are climbing for three reasons:1. Tension between capacity and demand: during the recession, airlines cut capacity in an effort to lower operating expenses and keep their margins from getting throttled. Available seat miles plunged more than 12 percent from the fourth quarter of 2007 through the end of 2009, according to the Air Transport Association. But, travelers are coming back. Demand is up, and there isn’t as much supply on hand. That pushes prices higher, even as airlines scramble to add capacity. Yet, available seat miles are up only 1.5 percent over the past year.

Why?

Airlines have been burned by market forces before when adding capacity too quickly. USA Today explains:

Having learned a bitter lesson by adding back too much capacity, airlines are exercising greater caution and restraint this time around. Additionally, bankruptcies and consolidations during the past few years helped contain capacity. Brands like Aloha, EOS, MAXjet, Midwest, Northwest, Skybus and ATA Airlines have disappeared as a result of consolidation or financial calamity and AirTran and Continental Airlines will soon follow suit.

2. Oil won’t go down: oil has been on the rise for a decade, moving from below $20 a barrel to above $90 a barrel, some of which came from the 2008 market shock. Someone has to pay for this of course … and it isn’t necessarily you. That’s the problem with being a price-taker: you can’t pass along all your expected or unexpected price increases to consumers. Now that market pressures are being eased, airlines can start to recapture some of these expenses.

3. The business is changing: according to USA Today, “so called ‘low-cost’ airlines look more like network airlines every day” – as a result of carrier merger activity. And, the increase in maturity comes with higher expenses. For example, these airlines are “rapidly expanding into larger hub airports or building their own”: that cost cash. It has to come from somewhere. It can also come with long-term costs that aren’t always easy to forecast:

Hub airports are often plagued with congestion, resulting in increased flight delays which can wreak havoc on aircraft turnaround times and utilization schedules, further raising operating costs. In recent years, Southwest has expanded into some of the most congested airports in the country, like Boston Logan, New York LaGuardia and Washington Reagan National.

4. There’s more to spend: the fact that there are expense pressures on airlines doesn’t mean that you’re going to have to foot the bill. The oil price factor, for example, has been around for a while, and it wasn’t enough to protect carriers from price declines. The fact that you probably have more discretionary income – or at least less perceived employment risk – means that you aren’t going to wince when you see a higher price. You’ll book with less lead time. It’s easier for you to spend.

What will be interesting to see is the extent to which consumers will be more willing to open their wallets. Even though having more cash comes with a bit of comfort in using it, memories may not be as short following this recession as they were in previous economic downturns. The recession kicked off by the global financial crisis in 2008 hurt. A lot. Unemployment was severe – and continues to be. People may not be as willing to pay big fares as they were in the past. Does this leave more market opportunities for online discounts – such as those offered by online travel agencies? That remains to be seen.

What do you think? Leave a comment to let us know! There’s no crystal ball on this one, and I’d love to get your thoughts.

[photo by atomic taco via Flickr]

Bullets found on Southwest flight by CNN photographer going to cover Sarah Palin

by Tom Johansmeyer on

Let your kids kick the seats in front of them: it could save your life. If you’re the passenger being inconvenienced, it may behoove you to find a way to cope.

A kid who would otherwise be branded a royal pain found a loaded gun magazine … that should have been in the hands of a law enforcement official … on a Southwest Airlines flight. To make matters worse, the media was actually on the plane!

Here’s how it happened:

1. A kid was sitting on his mother’s lap during a flight from Burbank, California to Phoenix, Arizona
2. The plane landed, and the kid crawled across the seats in his row
3. His foot knocked an item to the floor – it was a loaded gun magazine
4. A flight attendant picked it up, but not before someone from a CNN crew, photographer Gregg Canes, saw it
5. The CNN passenger asked to take pictures of it, but the flight attendant would not let him
6. The gun magazine was turned over to the authorities

It’s that simple, folks … but it does get a lot more interesting.According to a statement by Southwest, “The item was immediately turned over to the crew working the flight who called in the local authorities to handle the investigation,” continuing, “The passengers who were remaining on that flight were rescreened and the plane was thoroughly inspected before returning to service.” They were ten allowed to get off the plane.

Southwest spokeswoman Brandy King told CNN that the officer who left the gun mag behind did follow the proper procedures to bring his gun on the plane. CNN adds:

“The full magazine was found in a back seat pocket,” a TSA official told CNN. “We believe it was left by a law enforcement officer on a flight that originated in San Jose and landed in Burbank. The officer was not an air marshal and we are trying to establish contact with the agent.”

Canes put it best: “It was actually almost funny, given the amount of scrutiny that we’ve been paying to the [Transportation Security Administration] and personal security. It seemed almost funny to see a magazine with bullets in it just sort of lying on the floor of a commercial jetliner.”

Need a bit of irony to round this out? Canes must have been in a gun state of mind; he was headed to Phoenix to cover a Sarah Palin book signing.

[photo by gcfairch via Flickr]

Airline profits may mean more elbow room for a little while

by Tom Johansmeyer on

The airline industry wants to thank you. Last year, it was mired in despair. The post-financial crisis recession left the carriers beleaguered and desperate for a turn of fortune. Corporate and leisure travel had fallen precipitously, and doubling down on extra fees, though prudent for profits, alienated both those considering a flight and the passengers with little choice but to hit the road. The brutality of 2009 was evident, and it seemed as though all there was for 2010 was the hope for something better.

Well, hope paid off.

Three quarters into this year, money is again beginning to flow, as a result of (finally) climbing fares, additional fees and an increase in passenger traffic. United Continental, Southwest and JetBlue have reported strong profits for the third quarter using a variety of tactics, but an increase in sales and higher prices appear to be the universal driver. And, this may translate to a bit more elbow room for you.
According to the Associated Press, airlines are beginning to bring back some of the routes they cut last year, as indicated by decisions at Delta and American Airlines to hire more flight attendants. The challenge, however, will be to increase capacity (and thus headcount) without imperiling this year’ hard-won profits.

The business of satisfying pent-up demand isn’t easy for the airline sector. After all, capacity can’t be added one seat at a time. Restoring a route to handle more passengers comes with it the obligation to fill the plane (to the extent possible) each time, in accordance with revenue per available seat mile (RASM) targets.

Nonetheless, the carriers seem ready to rise to the challenge. JetBlue is amping up fourth quarter capacity by up to 10 percent, with Delta looking at an increase of 5 percent to 10 percent. This follows even faster growth in September, according to the Associated Press:

Still, most of the airlines saw traffic rise even faster than capacity in September suggesting they have enough business to support the additional flights. The only exception was Delta, which added capacity slightly faster than traffic rose.

The moves come in anticipation of a strong 2011, according to Ray Neidl, an analyst for Maxim Group. He tells the associated press that the growth in capacity “is a little more long-term,” adding that “[d]espite the lackluster economy, it’s going to be a big year for airlines, especially as consolidation kicks in.”

So, what does this mean for the flying public?

Well, you may not have to occupy that middle seat for a little while, and the odds that someone else will be in it may be improving. The increase in capacity necessarily precedes an increase in sufficient demand to make it profitable, so enjoy it while you can! If the airlines can’t fill those new seats, a return to austerity could send you back to sharing an armrest.

[photo by Joe Shlabotnik via Flickr]

Fallen American Airlines could be next to merge … with JetBlue?

by Tom Johansmeyer on

American Airlines used to be the largest airline in the industry – now it’s third. Merger activity has narrowed the field, with Southwest–AirTran and United-Continental the latest deals that hit the sector. So, all eyes are on who will succumb to the urge to merge next, and American is being eyed as the next player.

According to a Forbes blog post, analysts from Morningstar believe that American Airlines “needs to make a big splash” to remain a player in an increasingly competitive market. The post continues:

“Once the industry’s largest carrier, [American Airlines] is now the third-largest…and any scale advantage it may have garnered is gone,” the Morningstar analysts write. “Ironically, AMR is at a substantial disadvantage, given that it steered clear of bankruptcy during the recession,” [Basili] Alukos and [Adam] Fleck say, pointing out that American’s labor rate is the industry’s highest on an equivalent basis.

So, who’s the right partner for American? The analysts at Morningstar are looking at JetBlue, especially given the latter’s “lighter cost structure.” Notes founder of Training the Street and former M&A investment banker Scott Rostan, “Three dominoes have fallen – Delta/Northwest, UAL/Continental and Southwest/AirTran.” He sees Alaska, Frontier and JetBlue as likely to make some noise.

[photo by Andrew Morrell Photography via Flickr]

Airlines getting scammed online, fighting back

by Tom Johansmeyer on

Airlines lose a boatload of cash – tens of millions of dollars a year – because of online fraud. Think about it: you pay for your pillow and to check a bag because some degenerate can’t bother to work for a living. The airlines are keeping their customers in mind (shockingly), though, and they’re fighting back. Better protection systems, increased staff and a higher priority for prevention are now on the agenda as carriers seek to protect their coffers.

The stakes are high, and airlines are exposed. A Deloitte UK survey conducted in 2009, with 50 U.S. and global airlines responding, report that 48 percent have seen increases in fraud year-over-year, with average losses of $2.4 million a year. Yet, it could be far, far worse. CyberSource and Airline Information conducted a poll and came to an estimated loss amount of $1.4 billion in 2008.

According to USA Today:

“The general feedback from everybody … is that they see it getting worse,” says Graham Pickett, partner in charge of aviation services for Deloitte UK, which conducted its survey for the International Association of Airline Internal Auditors. “The main driver has been … the Internet, and in particular credit card type bookings.”

Airlines have invested in protecting their profits over the past two years, especially the larger companies. Of course, they aren’t all that willing to talk about specific measures:

“Common sense on this issue limits a discussion of what we do to track, prevent and seek prosecution of such occurrences,” says Tim Smith, a spokesman for American Airlines. “We’re just not interested in providing a ‘how to’ lesson on the subject.”

The cyber-attack on airlines comes after online travel agencies, such as Orbitz, steeled their systems. For a while, they were the primary targets, with Orbitz, for example, getting spanked for millions of dollars a month by fraudsters.

The anti-fraud measures appear to be working. AirTran‘s team has reduced fraud losses to less than 1 percent of revenue, and Southwest says it has cut fraud by 73 percent.

How much does this matter? Think about all the small cuts you’ve had to deal with as a passenger. Every dollar matters to the airlines. Cutting fraud losses is just putting cash back in your pocket.

[photo by jepoirrier via Flickr]