View from the Wing

Kudos to news media that are trying to explain changes in airline elite qualification. But very few stories are able to cut through the rhetoric and explain the important changes clearly. A story in this morning’s USA Today is a perfect example.

The article leads with Continental’s changes in elite qualification, counting only 50% of mileage flown at lower fare classes towards elite qualification (although leaving out Continental’s escape hatch for next year only - fares booked on the Continental website will still accrue 100% of mileage towards elite qualification). Then it notes changes at Delta and Alaska, and historical changes at Northwest and American. So far so good.

But the article only alludes to problems of using fare class (as opposed to revenue) as a proxy for customer value:

Continental’s new elite qualification rules mean that for someone paying $182 for a Newark, N.J.-Cleveland round trip, only half the miles would count toward OnePass elite membership, but someone paying $1,240 round trip to sit in first class on the same flight would receive 1.5 credits per mile. On some routes, the difference between a full-credit fare and a partial-credit fare is less than $100.

(Emphasis mine.)

Moreover, there is no good way for most flyers to even pick the fare class they’re purchasing! And fare classes are incredibly arcane. The airlines moving towards fare class qualification are destroying any simplicity in their programs. Folks buying expensive business fares are also among the least likely to take the time to study up on complex rules.

Imperfect proxy aside, the USA Today piece and nearly all other articles about elite changes, do a poor job of understanding and explaining the devaluation of benefits for frequent flyers. This article even makes it appear as though Delta is sweetening the pot:

Last week, because of customer feedback, Delta beefed up the incentives it offers elite Medallion members by sweetening its upgrade policy. For instance, members who reach Platinum status will receive unlimited upgrades at the time of booking based on availability when purchasing three economy-class fare types.



“They felt that we weren’t providing enough of an upgrade benefit, particularly when they were traveling on the higher-value economy fares,” says Robert Borden, head of Delta’s SkyMiles program.

Of course, this change was just a partial giveback of benefit reductions announced last year. The upgrade benefit is not as reach as it was in 2002.

And USA Today fails to mention at all that Continental will now require flyers to pay more miles for domestic upgrades, and to pay cash in addition to miles for upgrade awards to Hawaii on mid-level fares.

The folly in the last change — asking flyers to pay cash to use benefits they’ve earn on business travel for (what is most likely) leisure travel to Hawaii — is that lucrative business travelers often make decisions about who to fly not just on how they’re treated when flying on business but also how they’re treated when flying on leisure. In other words, the airline that treats them well across the board will get their business.

In fact, business flyers will often make their purchasing decisions exclusively based on how they’re treated when flying on leisure. In other words, the airline that will place them in first class with their spouse on vacation gives them every reason to be loyal. Treating an elite customer’s spouse well to earn business is hardly a novel concept.

Airlines will find that as they tinker with qualification changes and scale back benefits, they’ll lose flyers. Their risky gamble is that they can replace those flyers with higher yield customers. My own hunch is that it won’t work, but it’s a business decision.

Unfortunately, it’s a poorly executed business decision. If airlines want to tie benefits to revenue, that may make sense. But in order to attract higher paying customers, they need to offer more not less to those customers. And they need to treat those customers consistently well — whether they’re traveling on expensive or cheap fares. In other words, airlines need to look at a ciustomer’s total value and not just the value on a particular ticket.

Continental could have done better by making a change to a more revenue-based model of elite status and then either adding benefits to its top 75,000 mile tier or to a new 100,000 mile tier.

Gordon Bethune makes the stupid statement of the day.

Bethune allowed that traditional carriers’ costs are higher, but said this was because staff are more senior than at low-cost carriers that have started up in the past few years.



Continental recently calculated its 2002 financial statements assuming it had the same revenue and network, but the labor cost structure, of JetBlue. Instead of a $350 million loss, Bethune explained, Continental would have had a $450 million profit. The difference is “directly attributable to wage rates and seniority levels,” he said.

Yup, it’s just the unfair advantage of a lower cost structure that makes JetBlue better off. Don’t blame us!

This from the head of an airline that has had the cost-shaving advantages of two bankruptcies.

Wonder who Gordo thinks negotiated those higher costs?

Travel columnist Christopher Elliott has a new blog.

This guy was intimidated flying first class. I guess I didn’t know what to expect the first time I flew up front, either. But you get used to it very quickly.

Once upon a time I used to walk back through the first class cabin to get to coach and I couldn’t imagine that I’d fly up front. I also didn’t understand how anyone could pay the prices the First Class commanded. I didn’t know that it was possible to use frequent flyer miles to get up there. I didn’t know about upgrade coupons. I didn’t even know that there were frequent flyer awards for first class. Mileage earning meant saving up 25,000 points for a domestic ticket, right?

Now I’ve learned the error of my ways and I pretty much always fly up front. And I share some of the things I’ve learned with others on this website. But I still remember that first shrimp dish placed in front of me. And the free drinks. And not wanting to get off that jumbo jet and give up my incredible lumbar support. And I’m afraid to fly coach.

Most of the media’s attention to airlines divulging passenger data to the government has focused on JetBlue’s offering up information in violation of its own privacy policy and then covering it up.

Something that’s gotten far less publicity is that NASA requested a significant amount of passenger data from Northwest Airlines. NASA initially denied having made the request but then confirmed it.

Stonewalling by NASA and Northwest Airlines has left it unclear what information, if any, was actually shared and what was done with any information that was transferred.

It does seem odd, though, for NASA to be entering the airline security game.

Bidding for Air Canada has been narrowed down to two potential suitors.

U.S. buyout specialist Cerberus Capital Management LP and a company controlled by Canadian businessman Victor T.K. Li.



Both were among more than a dozen suitors that expressed interest in the insolvent airline, the company said, adding it hoped to make a final choice before the end of October.



Air Canada, the country’s dominant airline and world No. 11, said it selected the two finalists because of the “higher enterprise and equity values” of their proposals as well as their lower completion risk.

Potential deals preserve Air Canada’s ability to sell part of its Aeroplan frequent flyer program later to raise additional cash.

But why would anyone want to make a C$700 million equity investment in a failing airline? The National Post offers an assessment of the potential and pitfalls for a reconstituted Air Canada.

It’s important to manage your miles and prevent them from expiring. Odds on if you’re reading this website, you don’t need a newspaper article to tell you that!

But this article seemed like a good prompt to remind you about a free software program called Miletracker. It’s what I use to manage my frequent flyer miles. It checks all your accounts with a single click and can log you into any of them with a click as well.

For a more full service option — including letting you know when your miles will be expiring (so you can do something about it before that happens!), letting you know about current bonuses, and even guaranteeing your mileage against unauthorized use — consider Mileage Manager. It comes with a (very) small cost but is likely worth it for many.

The Newark Star-Ledger reports that online booking of hotels doesn’t seem to be saving consumers money.

No doubt the median consumer isn’t as web savvy as some, and while there are savings to be had the article suggests that the savings are by no means automatic. It’s certainly possible to get four star hotels on the cheap online.

The lower end properties show virtually no savings from online bookings. Of course, there’s alot less room to save on a Best Western than on a Ritz Carlton property.

And it’s possible that the existence of online pricing prevents gouging at the direct reservation level as well.

Nevertheless, it’s an interesting conclusion that deserves greater study.

Airport security screeners became federal employees, ostensibly because we couldn’t trust the quality of private contractors. But it turns out that under the old private system, the FAA ensured greater quality control than the TSA now does with federal screeners.

The federal government isn’t testing the skills of airport security screeners as thoroughly as it did before the Sept. 11, 2001, terrorist attacks and needs to develop a recurrent training program, according to an investigative report issued Wednesday.



The General Accounting Office report found that the Transportation Security Administration, which hired more than 55,000 airport screeners nearly a year ago, “collects little information regarding screener performance in detecting threat objects.” The agency’s covert team, which tries to determine whether weapons can get through a checkpoint, performs fewer tests than the Federal Aviation Administration conducted before the terrorist attacks. The agency also does not use a software program that tests screeners’ ability to identify weapons on the X-ray machines, according to the report.

Fortunately,

In November 2004, airports will be allowed to apply to return to a screener workforce that is employed by private firms rather than the TSA. Several airports, according to Airports Council International, have already expressed an interest because of frustration with the way the government has handled staffing.

But why do they have to wait until the Presidential election?

Flying US Airways? Credit the flight to your Lufthansa Miles & More account and earn double miles. Offer is valid for your first roundtrip between October 26 and December 31.

Malaysian Airlines is in a scuffle with its employees union because

Malaysian Airlines has grounded air hostesses over the age of 40, and a senior airline executive defended the move by saying that passengers … “prefer to be served by young, demure and pretty stewardesses, especially Asian ladies.”

The USA Today Save Skymiles Ad that I mentioned yesterday was mentioned in the Atlanta Journal-Constitution.

I’m told, but have not received a copy firsthand, that Delta made the following statement in response to the ad:

A very small group of SkyMiles members placed an ad in the Georgia edition of today’s USA today, stating that they were leaving Delta because of recent management decisions. (Those decisions include service and employee cutbacks and, most importantly in this group’s opinion, changes to the SkyMiles program.) This very small fraction of members - less than a quarter of one percent of the company’s 32 million SkyMiles members - are those who were accustomed to qualifying for Medallion status traveling on low-fare segments or earning limitless first class upgrades. The reshaped SkyMiles Medallion program ensures that DL’s highest revenue customers receive premium treatment with rewards that are based on fares paid as well as miles flown. As a result, customers who generate the most revenue for DL will reach elite status faster and are now truly recognized as the company’s most important customers. Although DL continues to evaluate and refine the program, there are currently no plans to return to the program offered in the past as the company believes its revised Skymiles program and related benefits strike the right balance between the needs of our Medallion memebers and those of DL.

Many airlines, especially in the U.S., are moving to a two-class configuration for their international flights. Whether dubbed BusinessFirst, World Business Class, or BusinessElite, the idea is to meld the business and first class cabins into one premium product. International first isn’t being purchased as much as it once was, so the airlines are trying to concentrate on a competitive business class product.

This post by Alex Tabarrok on consumer behavior got me thinking about whether it may be individually rational for an airline to pursue this strategy, but collectively damaging if all airlines pursued this strategy because the existence of first class might make it easier to sell business class.

When there are only two product qualities consumers are torn between two “extremes,” either of which makes them uneasy. Add a third quality and you create a happy medium. Simonson and Tversky (the cite is in the link below) report that when offered a low-end and a midrange microwave oven consumers chose the midrange 45% of the time. But when offered the same two ovens plus a high-end oven they significantly increased their purchases of the midrange. Even when few consumers buy the premium product the mere fact that it is offered can increase sales of the midrange product. Hal Varian calls this Goldilocks pricing

Does paying for business class seem more reasonable — whether ot individual consumers or more likely to corporate travel managers — when there’s a more expensive product that you’re choosing not to buy? And so does the existence of that more expensive product increase your sales of business class?

Continental Airlines may be better off only offering a business class cabin, but they may sell more of their business class seats because United and American offer a first class that consumers can choose not to buy.

As more airlines opt for a two-class product, will they not just be competing in the same space but diminishing the total pie as consumers and travel managers start to view that high end product as the extravagance?

This is all theoretical and can be countered either by data or a competing theory. But it’s an interesting proposition about consumer behavior.

Update: Alex Tabarrok responds:

If I understand you correctly you are pointing out that a firm need not itself offer all 3 quality types - instead it can position its own product so as to be the mid-range product. I agree.

Consider, for example, a market that already has a high and low quality product then an entrant would certainly want to take advantage of extremeness aversion to position its product in the “middle”. This sets up a game very similar to the Hotelling model in which there is no equilibrium as each product tries to get to the middle!

George Soros, the major backing behind the launch of JetBlue, may throw his hat into the ring for bankrupt Air Canada.

It is believed Soros’s main rivals are Texas Pacific Group LP, a firm that specializes in investing in distressed airlines, and Cerberus Capital Management Inc., a player in the world of high-yield distressed debt. In recent days, both have advanced to Air Canada’s shortlist of prospective investors.



It’s been speculated Cerberus and Texas Pacific, both U.S.-based, might try to circumvent Canadian laws capping foreign ownership of airlines at 25 per cent by partnering with the likes of Onex Corp. of Toronto, or perhaps Quebec’s public-pension-management agency, la Caisse de d

The September 11 airline security tax was temporarily lifted on June 1, but it’s coming back October 1.

Much of the analysis of the tax focuses on the ‘failure’ of airlines to pass the savings on to consumers, missing the point that consumers are willing to pay a certain price (and as anyone who studies airline pricing knows, that price varies under lots of conditions) for their travel. Adding a tax doesn’t make them willing to pay more, and removing a tax doesn’t mean travel is worth less to them.

So no one should be surprised that prices don’t move in lock step with taxation. But one should always be skeptical of articles that talk about average ticket prices, or even worse ones that make a claim (as the previously linked article does) that when the tax was lifted,

rather than passing the savings onto customers, the major airlines increased fares by $5 each way so the industry could reap the benefits of the tax break.

Delta flyers, unhappy with changes to the Skymiles frequent flyer program, formed a coalition called Save Skymiles.

Their logo is a business traveler with a parachute, and the dubbed Delta (D)riving (E)very (L)oyal (T)raveler (A)way.

This group rented a mobile billboard which they sent out to various airports and parked in front of the Delta shareholders meeting. Photos are available here.

Today they ran an ad (Adobe Acrobat) in the Atlanta edition of USA Today. While Delta representatives met with the Save Skymiles group, and Delta made some cosmetic improvements to the program, in the end only lip service was paid. So this group has decided to stop trying to save Delta from itself, and send its lucrative business to other airlines.

A condensed version of the text of the ad:

We are Delta Medallion Flyers. Just a few months ago, most of us would never have considered flying any airline except Delta…

Sadly, Delta’s management has lost sight of the needs of its customers, the wishes of its employees and the company’s responsibility to its stockholders. …

Cuts in services, laying
off loyal employees and refusing to deal with the reality of what
Delta’s most loyal customers truly want are signs of serious problems
within Delta’s management. The SkyMiles program, once the best in
the industry, is now more an insult than a benefit, and despite our
attempts to help right the airline’s course, we continue to get false
assurances that management is doing what “we” want. …


Leaving an airline that you’ve trusted for years and employees
with whom you have developed relationships is difficult. However,
after realizing that Delta’s management has no interest in our perspective and cares little about you or about us, we have decided
to take our business elsewhere…


We wish you well and continued safe travels.


Signed,


5,700 Delta SkyMiles members living all over the world and
representing over three billion SkyMiles.

(I’ve shown where I cut from the text above, but do click on the .pdf file for the full document. My editing may or may not be a fair rendition. I wanted to provide the gist without making it too long.)

I invite all new visitors from Marginal Revolution and the Volokh Conspiracy to read a quick description of just what this site is all about and what it can do for you. Thanks for visiting!

Tyler Cowen’s recent post on price gouging referenced a common misconception about airline pricing:

It is sometimes argued that airlines keep coach quality low deliberately, to raise the demand for business and first class tickets. I don’t know if this is true..

In fact, it isn’t true. Or at least it doesn’t seem to fit the current evidence for domestic flights at all.

• Airlines only sell about 10% of their first class seats domestically. 90% of first class seats are occupied by frequent flyer awards, upgrades given to frequent travelers, and airline employees.
  

• Coach quality has, in general, been rising. American made a fleetwide decision to add 2″ of legroom at every seat by removing a row of seats (They’ve retrenched a bit on some very low yield routes, but this enhancement is still true for the majority of their fleet). United added 3-4″ of legroom to the front of their coach cabins. JetBlue offers all leather seating and satellite TV in their all coach product and next month will be taking out a row of seats to add legroom. Discounter ATA is in the process of doing the same.
  

• Domestic first class quality has, in general, been falling. A sweeping generalization, but there are few exceptions: meals have been cut back (either by removing appetizer courses or going to an all cold offering), hot towels and warm cookies have become rarities, and Godiva chocolates are pretty much nonexistant.

International travel is a bit different. The trend among US airlines has been to improve coach service (the domestic improvements apply internationally, though most of the discounters don’t fly internationally) while reducing service in business and first classes. At the same time, the quality of the SEAT in business and first has improved markedly (close to flat recline in business, for instance). Airlines sell a higher percentage of these seats.

Perhaps the theory of keeping coach awful to encourage first class ticket sales just doesn’t work domestically (shorter flights) and does work internationally (longer flights), but that wouldn’t explain improvements in coach product and deterioriation of first class service.

However, I think the more compelling argument is that increasingly marginal seats are sold close to marginal cost (now more than ever with internet distribution, priceline, hotwire, etc) and higher load factors are necessary to break even. That means stuffing more seats onto the plane - and the biggest difference between coach and business is the seat.

Additionally, the theory would have been even less true before deregulation. When airfares were regulated, airlines still competed in areas other than price. One of the most frequent areas of competition was onboard food. The competition to provide a good meal in coach at one point got so fierce that the CAB felt the need to regulate the thickness of sandwiches!

It’s worth noting that many airlines outside of the US — especially airlines in Asia — are far more successful at selling premium class tickets than are their US counterparts. That may be a function of the quality service they offer. I would argue that ANA, Cathay Pacific, and Singapore Airlines have the three best products in the sky. Their success at selling their premium product may be a function of how difficult they make it for customers to upgrade. And it also may be a function of corporate cultures that permit purchases in Asia that would, in most cases, be frowned upon in the US. But none of that reconciles the original theory with the fact that the Asian airlines providing the best business and first class service also provide the best coach products as well.

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British Airways is offering $25 off online bookings. The offer is valid for flights booked through December 7, 2003. Travel must be completed by March 31, 2003.