Who Takes the Hit?
Four small airlines stopped flying last week. And about the only thing more dramatic than the rapid-fire demise of Aloha, ATA, Skybus, and Skyway was the shoot-from-the-corporate-hip response of the big network carriers.
They quickly added a blizzard of new fees, fare increases, fuel-surcharge hikes, and travel restrictions aimed at business travelers, their most loyal, most frequent, and most profitable customers.
"Desperate people do desperate things," notes the oft-quoted airline watcher Terry Trippler, a travel agent and former airline employee who isn't particularly antagonistic toward his old bosses.
Whenever the airline business turns sour-as it has with metronomic regularity since deregulation, in 1978-the big airlines turn on business travelers. When they drive up our fares and complicate the travel process, we get angry. Then we stop flying or defect en masse to carriers like Southwest, JetBlue, and AirTran, airlines that offer more rational service and pricing policies. That only exacerbates the economic troubles of the big airlines, and they respond by slashing leisure-travel fares below operational costs until several more of them go the way of Pan Am or Eastern or TWA. It happened in the mid-1980s, in the early 1990s, right after 9/11, and it's happening now.
This latest round of sturm und drang in the skies is being blamed on $100-a-barrel oil. Jet-fuel prices have definitely tripled in the last five years and the nation's six network carriers-American, United, Northwest, Delta, Continental, and U.S. Airways-say they cumulatively face about $10 billion in additional oil costs for 2008.
But what is also true is that the big airlines bet fuel costs would decline this year and foolishly reduced their fuel-hedging positions. (By contrast, Southwest Airlines has remained consistently profitable for more than 30 years, partially by aggressively hedging its fuel costs.) More to the point, however, is that none of the carriers that folded last week were specifically doomed by the high cost of crude.
Hawaii's Aloha Airlines was taken down by a combination of poor management strategy (it eliminated inter-island first-class cabins, driving local business fliers to Hawaiian Airlines) and the arrival of a well-financed startup carrier called go! A federal judge has already ruled that go! illegally used proprietary information from Hawaiian Airlines and ordered it to pay $80 million in damages.
ATA Airlines was seriously wounded several years ago when it accepted a short-term financial bailout from Southwest, in exchange for its crucial Chicago hub and other prime assets. When it lost a key charter-travel contract last week, it didn't have enough scheduled service to survive. Midwest Airlines, a niche player with limited financial and managerial wherewithal, shuttered its ill-equipped, high-cost commuter operation Skyway Airlines and turned its routes over to a larger commuter airline.
Then there was Saturday's demise of Skybus Airlines. Launched last May, it burned through tens of millions of dollars offering erratic schedules on tertiary routes (Gary, Indiana, to Greensboro, North Carolina, for example); gave no customer service (Skybus had no published phone number and refused to take calls from its travelers); and used an "unbundled" fare structure (travelers paid separately for everything from checked baggage to notification of flight delays). Its bizarre marketing angle-a heavily promoted promise of a few $10 seats on all flights-guaranteed that anyone who paid $11 felt overcharged.
It was simply a matter of unfortunate timing that those four carriers tanked in the same week. But in response to the unrelated failures, the six network carriers pulled out an assortment of old and failed pricing tactics. They increased the "minimum-stay" restriction on some prices, to force business travelers to buy higher fares to secure the travel flexibility they need. Five of the six airlines are now charging $25 for a second checked bag. (The lone holdout, American, is likely to match the new one-free-bag standard.) Several carriers raised so-called nuisance fees on items such as frequent-flier award redemption and itinerary changes.
The big airlines also raised their fuel surcharges again, a tactic cynically aimed at business travelers. Surcharges are piled atop a business traveler's fare and do not qualify for any negotiated corporate discounts. On some international routes, the surcharge now exceeds $300 roundtrip.
Airlines insist that these new pricing gambits are necessary to cope with higher oil prices, but consider the state of fares since the New Year. Prices have already risen at least six times in the last 90 days, says Rick Seaney, whose FareCompare.com obsessively tracks airline-fare patterns. Seaney adds that prices charged by at least one carrier, Northwest, have jumped by as much as $120 roundtrip since the beginning of the year.
What will business travelers get for all these increases? Less service than ever before, according to the big airlines. Each of them plans to reduce their domestic route networks by as much as 5 percent by the end of the year. That means fewer opportunities for business travelers to fly with them, which will further reduce revenue, thus extending the fear-and-loathing cycle into next year.
The Fine Print.
The big airlines' fare structure continues to be inexplicable. If you want to fly from New York to Los Angeles today, one-way fares on the 2,475-mile route are as low as $379. That's less than 16 cents a mile. But the 374-mile flight between Atlanta and Cincinnati costs $734.50 one-way. That's a staggering $1.96 cents a mile.