There is no industry as difficult to understand or as confusing to cover as the airlines. It should be straightforward. Millions of Americans want to travel. Airlines want to take them there. Demand. Supply. Everyone wins.
Sadly, that’s not the case. In the airline business, both the companies and the consumers are losing. Airlines are losing billions of dollars a year and at war with their pilots and crews. Passengers are losing patience, inching toward total revolution, frustrated by long delays, canceled flights and surly crews. Air travel is an industry rife with bankruptcies, unhappy customers, unhappy employees and the near total destruction of investor capital. How can it be that both sides of the business (the demand and the supply) are having such problems?
Blaming the Airlines
For all the mystery we add, at the end of the day business is really quite simple. Analyze costs, find price point, offer product, have customer pay for product above your costs, enjoy the profit. Rinse, lather, repeat. Airlines do not seem to understand this. Or don’t need to. Nearly every airline but Southwest (LUV: 16.46, -0.01, -0.06%) flies most of their customers around the country at a loss. Finding out if an airline is losing money on you is an easy game. Fnid an airlines “RPM” (revenue per passenger mile - most are around 11-cents/mile), track the flight miles in the air, consider what you paid for the ticket and divide that by the revpam x miles flown. Its easy to figure out exactly what point in the flight you begin flying for free.
For years most airlines have been unable or unwilling to run profitably. They have allowed costs to spiral higher by keeping too many planes in the air while at the same time reinforcing bad consumer behavior with unsustainably low prices. How many industries consistently sell their primary product below cost? How many do so an survive, anyway. Why is Southwest the only airline that seems to understand the balance sheet?
The one smart thing airlines have done is creating regional semi-monopolies. Their “hub & spoke” system is really code for “we own this city.” Northwest has it in Detroit and Minneapolis. Continental in Newark and Houston. American in Dallas, and so forth. This gives them much political leverage, which in turn can be cashed in for generous tax breaks and government sponsored benefits. And its really because of this that they are allowed to continue to operate is a poor manner. Airlines need to realize that their passengers don’t care about hubs or spokes, and just want a reasonably enjoyable - or at least humane - experience.
Solution: Improving the flying experience will help the balance sheet. Then they will be able pass through their higher costs help get their balance sheets back in order. We are willing to pay more if we get more. American consumers do so in nearly every other aspect of their lives. A $15,000 Kia will get you where you need to go the same as a $45,000 BMW. A $100 Casio tells the same time as a $1,500 Tag Heuer. Why drink Sierra Nevada when you can have a Schlitz? But yet BMWs, Tags and Sierras sell well. Americans pay up for products and services they view as superior. The ‘democratization of luxury’ has become pervasive in every aspect of our lives except for air travel. Airlines have only themselves to blame for this by acting like poorly managed commoditized transport mechanisms rather than the first part of a engaging experience.
Blaming the Customers
The biggest questions I have for the airline customer are these: why do we think we should be able to fly for nearly nothing? Why do we expect anything other than an “air travel-in-a-box” type service when we refuse to allow airlines to actually (gasp) make any money on their product?
At one point air travel was a luxury, and trip to be enjoyed by a select few. Then came the democratization of travel. Deregulation initially served its purpose by creating more airlines and low fares. But that birthed the problem too. Somewhere along the way the american air traveler moved from considering flying a privilege to believing it a Constitutionally guaranteed right. And a low-cost right at that.
A friend who used to work in airline finance explained to me that the ‘click-thru’ rate on airfare sites such as Expedia and Orbitz drops off exponentially with each $5 increase in ticket price. Travelers may greedily grab the $290 dollar round trip from New York to Los Angeles and ignore the $300 ticket. The price sensitivity he detailed was remarkable.
All of this at a time when the reason airlines are looking for other revenue sources for exactly the reason we all understand: gas prices are high. Jet fuel is expensive. It’s estimated higher fuel costs will add $91 billion to airlines’ bills this year.
Airlines have only started to force through fare increases. Incredibly, on the whole airlines are making nearly the same money on each traveler that they did back in 1985! The constant push to be cheaper by a few dollars than the next airline on popular routes has been great for travelers, but bad for arlines. They have nearly no pricing power. If we want to keep flying, our thinking as consumers has to change. This isn’t a deflationary flat panel television, whose cost gets lower each year due to productivity enhancements. Flying is essentially the same as it was 30 years ago.
As we gripe about these (finally) higher ticket prices, it is the uproar over charges for drinks, peanuts and pillows is the most bizarre. When we go out to eat we pay for food, drink and tip. We pay more for snacks and drinks at the movies than we do on a flight, but for some reason we accept it at the theatre. We know that the $20 entree at our local restaurant would cost just $10 to make at home, but Americans are eating out more than ever. We can cook for ourselves, but not fly. And yet we still grumbleat the slightest extra airfare, not matter how fair.
Air travel should not be a commodity. We are dealing with a major event. The Bernoulli effect and thousands of pounds of thrust are not small potatoes. Airplanes themselves cost tens of millions of dollars and involve amazing technology. They are flown by highly trained pilots. Do you really want continued cost cuts at 35,000 feet?
Solution: Acceptance that air travel is not a social service. Airlines are corporations whose reason for being in business (more and more theoretically it seems) is to make money. As their costs go up, ticket prices must go up. And since travelers are resistant to price hikes, airlines have to start charging for drinks and pillows. Just like milk, movies and education. We need to realize that the years of nearly free rides are over. Traveling is a luxury. You will have to pay more for it. Live - and fly - with it.
http://briansullivan.blogs.foxbusiness.com/2008/08/06/the-baffling-airline-business-a-play-in-two-acts/
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