Things in the Sky

As promised, here are the highlights from the question-and-answer portion  the session I attended on Monday. Just to review, the airline representatives on the panel were David Hamm from Delta, Korbey Hunt from United, and Rhett Workman from US Airways, all from corporate real estate.

There were more questions asked than I’ve put here, but I think these are the most interesting.

The first question made things pretty heated, and quick, as it was about PFCs. The airport executive was wondering why there is such a disconnect between airlines and airports on this one, especially because it’s a government thing. (Note: Airports set their own PFC, up to $4.50, and these funds go to FAA-approved projects that “enhance safety, security, or capacity; reduce noise; or increase air carrier competition.”)

Right now, the big debate about PFCs is part of the FAA Reauthorization bill. Right now, it has a provision that would allow airports to increase their PFC to $7. Naturally, the ATA is against such a move. From a Google search, it looks AAAE has already released a document debating some of the claims from the ATA (granted, it’s not on their own website).

Anyway, I probably learned the most from the answers to this question. Korbey from United said that passengers don’t really look at the fee breakdown of their fare, just the bottom line. And David from Delta made a similar point by saying that the airlines have to consider PFCs in their revenue models to keep fares competitive. He used the BHM-FLL market as an example. His airline would probably do BHM-ATL-FLL. Passengers on that itinerary would pay additional PFCs because of the stop in Atlanta. So, if someone flew BHM-FLL nonstop, Delta would have to lower the fare to stay competitive. Multiple that out across a system and you could get millions.

Korbey from United said projects should stay close to airport infrastructure. He said PFCs shouldn’t be used to finance “marginal” things like trains, which seemed to get some of the airport executives pretty, er, for lack of a better word, angry. In response to that, the person who asked the question said that the airports need to make it easy for people to get to their airports so they can fly the airlines.

Later, Korbey mentioned that the airlines want to see some kind of return on projects. For example, if an airport wants to build a new taxiway that reduces taxi time, the airlines will probably go for that. But they are not too excited about aesthetic things.

Meanwhile, Rhett from US Airways just said that the airlines would like to communicate with the airports about the use of PFCs.

The next question I really found interesting was on the future of check-in counters. Rhett of US said that the airline took a field trip up to Seattle and Anchorage to see what Alaska had been doing to their ticket counters to increase output (I’ll have to ask the folks over at AS what they’ve been doing). David from DL mentioned the use of bag drops at Atlanta and said it has gone very well so far, and said that counters and going to get less and less “interactive.” Korbey seemed to agree, and said that while counters will never go away, they’re less important. (He also seemed to find it important to mention that people in Silicon Valley like avoiding human contact. Wow.)

Next, someone asked about common use terminals (especially at small airports) and what the panelists thought of them. All three seemed to like the idea as a cost-saving measure, but seemed a bit skeptical on it working (Korbey from UA said he’s seen a system like this advertised for years). From what they were saying, it seems that the IT angle is what’s slowing this down.

There was a quick question on regulation – would the industry like to see some hybrid of now and pre-1978? I found Rhett’s answer interesting, as he said sometimes it would be nice if a regulatory agency wasn’t examining every move carefully, as a long regulatory process can make an airline lose its advantage in an area.

David from Delta did have to field a couple of merger questions. He said they’ve consolidated many stations that have DL/NW service and they’re still trying to get some spaces together. He also mentioned that there will more movement, and there will be more change next year once the carrier is on one operating certificate. Finally, David mentioned that the fact that the airline now has so many fleet types it could pose a couple of issues on the airport side as well.

Anyway, one airport executive didn’t seem to appreciate the “partnership” and “communication” lines too much. He asked that if the airlines want a partnership, why do they pull service without consultation or discussion? Why do airport directors have to read about service cuts in the newspaper, and don’t hear it from the airline? And, the best line of the session came from this guy. This isn’t a direct quote, but he said something along the lines of “I can guarantee you charges if you guarantee me flights!”

David from Delta said that management doesn’t always tell his department about schedule changes, but it’s something that he’d liked to see fixed. Good. Rhett from US said that communication definitely goes both ways, but sometimes airlines have to act quickly due to resources beyond their control (i.e. oil). He mentioned how US Airways had to pull back the Las Vegas redeye operation quickly.

I agree with the airport director on this one. If the airlines want plans and forecasts from airports, the airports have to base their plans off current service. If they were away of an impending cut, they could make much accurate plans for the airlines.

Finally, one airport asked about changes in fees and charges, I think specifically in mid-year adjustments, and if the airlines liked that kind of idea. Korbey’s (from UA) answer pretty much floored me. He called this “self-serving” and said that a change in fees and charges would require an extra report to his boss, which, you know, requires work. Wow. Just wow.

Anyway, I know this is yet another long post, but I did find a lot of what was said to be more useful and informative, especially from David from Delta and Rhett from US Airways. I’ll have a couple of more AAAE-related posts next week.

Sorry to seem like a Debbie Downer, but take a look of this graph of EIA data that goes from March to a few days ago. Oil has had a nice little run, especially in the past couple of weeks.

Now, of course this could be a bad thing since it can equal higher costs for the airlines. But, if you’re in the camp that believes that the commodities market is a leading indicator of a recovery (myself included), then this could be a  positive news. It certainly doesn’t mean we’re out of this recession, but it could mean the worst is over.

Of course, there’s also the argument that the declining dollar could be a factor, which makes sense.  Generally speaking, a declining dollar will lead to higher oil, which is priced in terms of dollars. And I think there is some validity to this argument. While the dollar gained on some major currencies during the past few months , that trend has been reversing a bit. Take a look at this graph of the euro vs. dollar, for example.

Either way, while the focus sifted from oil prices to low demand in recent history, I think oil is slowly becoming an important issue again, and I’m sure hedging will probably be coming up more often during second quarter earnings calls.

I was reading Marshall Jackson’s blog this weekend and noticed he had mentioned that President Obama has revealed his initial plans for high speed rail in this country. I asked myself if an expansion could hurt he airlines.

Short answer: absolutely.

One notable example is the Madrid – Barcelona route, which has historically been the world’s busiest. In February last year, a high speed rail line was opened between the two cities. While I don’t have the exact decrease in frequencies, take a look at this part in the notes to Iberia’s February traffic results:

According to the new Strategic Plan, the company reduced capacity in the domestic sector by 21.6%, leading to a load factor of 68.7%, similar to the level reached in February 2008. Average stage length grew by 6.5% in this sector, due to the higher reduction of capacity in flights between Barcelona – Madrid (this route began to be operated by the high speed train on the 20th of February 2008).

Edit: According to this Wall Street Journal article, the high speed trains have ” snatched half the route’s air-passenger traffic.” (Hat tip to my dad for the link.)

Some airlines here in the States could definitely be hurt by a high speed rail expansion. Any further improvement in the Northeast Corridor could negatively affect the Delta and US Airways shuttle operations, and I agree with Marshall that Southwest would get hurt (I think the intra-Texas and intra-California routes especially).

If this is ends up being an expansion of Amtrak, I’m very worried when it comes to competition with the airline industry. The air carriers are motivated by profits and losses (as they should). If a route isn’t performing well, the airline will adjust accordingly by either eliminating the route or trimming capacity, and the opposite happens on successful routes. Meanwhile, a government-funded train system with guaranteed funding can continue operating despite being unprofitable, making true competition difficult.

What I’m interested in is how the industry will respond. If this proposal gains steam the ATA might get involved, or the individual airlines might fight as well, which has happened in the past. Southwest, for example, fought an attempt to bring high speed rail to Texas in the 90s:

Southwest Airlines filed motions, restraining orders, applications for injuctions [sic] and lawsuits against the Texas High Speed Rail Authority (THSRA) seeking to prevent a high speed rail project from being built in Texas or to at least slow the progress of such a project.

You can read more on that here.

This is definitely something worth watching in the future.

As promised yesterday, I’m going to share some opinions of the airlines’ responses to my questions.

First, I was surprised that so many airlines got back to me. In fact, the only airline not to reply was Midwest. It did take a few tries to get in touch with some airlines, but it was good to see that many airlines are willing to talk to bloggers, though some are better than others.

When Continental spokeswoman Kelly Cripe got back to me, she said that the airline “initially tried to avoid baggage fees, the fact is that the consumer gave no preference to airlines not charging them.” That statement made me think of contacting Southwest, since that airline has been advertising it’s lack of fees compared to other airlines.

Paula Berg, Southwest’s Manager of Emerging Media wrote that the airline’s lack of a change fee was one of the “primary reasons for choosing Southwest” for many of Southwest’s customers, especially business travelers. She noted that while other airlines might be earning extra revenues from those fees, they could also lose customers this way. Finally, Berg also wrote that “it will be up to our Customers to decide how they feel about fees. But so far, our strategy is working for our Customers.”

(Side note – I’ve seen Southwest capitalize customers in the past, and I think it’s great that they do so.)

I’m not sure if I entirely believe Continental’s assertion that consumers showed “no preference” for no baggage fees. Continental only instituted the first bag fee a few months after adding the fee for the second. Is that really enough time to determine consumer preferences? I’m not sure.

Another interesting thing I noticed about Continental’s response was that it was said that “the baggage fee became a necessary competitive response,” but it was also emphasized that Continental still gives free meals. Wouldn’t cutting meal service make Continental more competitive with other carriers, too? Apparently the airline thinks free food is better at enticing customers than a lack of bag fees. (A similar argument could be made with any of the other airlines that said the fees keep them competitive, yet differentiate themselves from the rest of the industry in the same e-mail.)

But I think the most important question of all is if the airlines were dishonest with customers in this situation, and I think they were to some degree. Yes, airlines do have to cover costs other than fuel, and revenue from additional fees does help cover them. But, a look back at some press releases from 2008 shows that the airlines often used rising oil prices as a way to “sell” these fees to consumers.

The industry could (and should) have followed the example of Canadian carriers Air Canada and WestJet. Here’s part of a press release from Air Canada announcing the removal of the airline’s second bag fee:

Air Canada announced today that in response to decreasing fuel prices the airline is eliminating all second checked-bag charges implemented this spring and incorporating fuel surcharges into its advertised base fares on North American flights. “Although the cost of fuel remains highly volatile and far above historic norms, the recent retreat in oil prices is enabling us to reinstate our previous baggage policy. We are eliminating the second checked bag charge on North American Tango and Tango Plus fares, reflecting our customers’ expressed preferences. Further, Air Canada is making its pricing more transparent by removing add-on fuel surcharges for flights within North America and instead adjusting its base fares to cover the total cost of fuel,” said Ben Smith, Executive Vice President and Chief Commercial Officer

Meanwhile, here is part of a news release announcing WestJet’s decision to eliminate its fuel surcharge:

WestJet today honoured its commitment to monitor the fuel environment and remove the fuel surcharge if and when the price of fuel subsided. The airline announced the removal of the fuel
surcharge, effective 1 p.m. MT today, in acknowledgement of the recent decline in fuel prices. “The decision to eliminate the fuel surcharge is in line with who we are,” commented WestJet Executive Vice-President of Guest Experience and Marketing Bob Cummings. “The WestJet brand is all about caring, straight talk, trust and best value – our advertising is effective because we walk the talk.”

I think it is fair to say that the decisions by these two airlines helped build up trust with their customers. I’m not sure if the same can be said of the airlines here in the States. There are two noticeable exceptions, though. The first carrier is Southwest, simply because the airline chose to take a different path than many others. The other exception is Frontier. While the airline has maintained its luggage fees for its economy fares, the airline’s new AirFairs program seems to make it very easy for customers to see what they’re getting for their money.