Travel Industry

I recently wrote about how United was raising its change fee and why that could cause defection to low-cost carriers. Well, according to one article, the change fee doesn’t even make the top 10 list of most obnoxious fees. So what is the most obnoxious and why isn’t this one of them?

Aviation.com’s list puts the fee to use the lavatory as the most obnoxious. Of course, nobody charges for that privilege yet, but let’s be honest — it’s not so far-fetched anymore.

The second most obnoxious fee is for getting a seat assignment. You’ll also see checking luggage, burning frequent flier miles at the last minute, and making a reservation via phone on the list. What is it that these all have in common?

They’re all things that used to be included with the price of your ticket. That’s probably why the change fee didn’t make the list. People are used to paying for that, and that’s another reason United probably thought it would be worth raising the change fee instead of charging for something that was previously free.

Now that doesn’t mean that airlines won’t end up charging for things that are currently free, but it does help present an argument that airlines should look elsewhere before tackling those thorny issues. Carriers will have an easier time gaining acceptance when they find new ways to make money instead of slapping fees on existing services. Look at Ryanair. Yes, they charge for things that are on this list, but they’ll also rent you a car, sell you insurance, etc. They can make a bunch of money on that without angering anyone.

I’ve been playing around with the January T100 data from the DOT, and a press release I saw last week made me focus in on Wichita. Why Wichita? Because when an airport puts out a press release entitled, “Wichita Mid-Continent Airport Continues to Set Passenger Records!,” I have to comment. (And yes, the exclamation point was actually included.)

In the release, the airport likes to brag . . . a lot. It’s a great airport, great city, blah blah blah. They brag about new nonstops to Orlando/Sanford on Allegiant, LAX on both Delta Connection and United Express, and Frontier (actually Lynx) to Denver. But how are those flights doing? Not so well.

If you dig into the actual data from the DOT, you’ll see for January, the Allegiant flight filled just 57.3 percent of seats, the Frontier flight 45.7 percent, and the United Express flight edged out Delta Connection by filling 42.2 percent of seats compared to 36.9 percent for the latter.

Now this doesn’t tell us what kind of fares these flights are getting, but I think it’s safe to say that they’re not high enough to make 36 to 57 percent full flights profitable. Those are absolutely dismal seat figures, and no amount of PR spin can hide that fact.

Starting today, I’m on vacation. Actually by the time this gets posted, I’ll already be wandering around Peru. While I’m there, I won’t be writing a thing, but through the magic of the internet, you’ll still see a post here every day while I’m gone. Ok, maybe that’s not magic. I just wrote a bunch of posts beforehand, and the editors here at BNET will be posting one per day until I return in the middle of next week.

Of course, this is a little problematic. For all I know, there could be some huge story in the industry right now. Did Southwest buy Qantas? Maybe JFK has decided to expand and merge with LaGuardia. Could UAL chairman Glenn Tilton actually have said something intelligible? While most of these are unlikely, it’s entirely possible that something interesting is going on, so I’d recommend you take a look at a couple of my favorite blogs to stay current while I’m away.

• Evan Sparks’s Aviation Policy Blog - I’d say there’s a good chance that if news breaks this week, it’ll be regulatory considering the recent merger hearings. Evan Sparks does a good job of covering the goings-on in Washington, so go take a look.
• PlaneBuzz - Holly Hegeman has been writing about this industry from a financial perspective for a long, long time. If you don’t subscribe to her weekly PlaneBusiness Banter, I’d highly recommend it. But at the very least you can find out about the big things going on in the industry on her blog.
• Towers and Tarmacs - My friend Benet Wilson writes this blog for Aviation Week, one of the best known aviation trade publishers. If any news comes out about airports, you’ll find it in here.

Hopefully those three can hold you over. I’ll do my best to respond to any comments when I return, and I will of course, return to covering more timely issues then as well.

On Tuesday, the Department of Homeland Security (DHS) released a proposal for how to deal with non-U.S. citizens departing the U.S. Will it surprise you to hear that it’s a disaster for the airlines?

If you’re an American citizen, you may not know that most foreign travelers are now required to have their fingerprints and photos taken when they come into the U.S. Now, the DHS is proposing that these travelers also have their fingerprints and photo taken when they leave the U.S. so that the government can do a better job of keeping track of people coming in and out of the country. Now, we could sit here for hours debating whether or not fingerprinting and photographs are the best way to welcome people to the country, but that’s a discussion for another day.

Instead, let’s just assume that it’s the right thing to do. So why do I say it’s a terrible plan? When people come into the country, it’s the U.S. Customs and Border Protection people that take the fingerprints and photos. Now look at the fine print of this plan. DHS wants the airlines to be responsible for the fingerprints and photos of people who leave the country. Arrrrrrggggggghhhhh!

I think the International Air Transport Association (IATA) has done an admirable job of defending the airlines lately. I really like what the director general has said on a number of issues, and this one is no different. Here’s what Mr. Giovanni Bisignani had to say in a recent IATA press release:

“Border protection and immigration are government responsibilities. Airline counter staff are not a substitute for trained border patrol officers. And outsourcing exit formalities to airlines is not a responsible approach.”

The airlines already have fuel prices stacked against them. The last thing they need is some very expensive government program to make their lives even more difficult. Even forgetting about costs, it is just a bad idea to have airlines be responsible for exit duties. Let’s hope someone in the government realizes that.

So if I called United’s $500 million loss yesterday dreadful, then I’m going to have to come up with a far more sinister word for Delta and Northwest’s more than $10 billion loss today, right? Well, not really.

Losing $10 billion is just silly. Though it’ll make great headlines, and you’ll see it splashed all over the various news sites, it means just about nothing. Both airlines were in bankruptcy, and when they came out last year they used fresh start accounting. That means you throw all the old numbers away and create brand new ones. It’s as if the company had just started operating. So, each airline has to set fair market value of each asset and that helps build the value of the company.

Now that Delta and Northwest are merging, there is a financial transaction taking place between the two. Because of that, it’s effectively setting a current value on each airline, and guess what? That value is WAY below what they thought it was last year. Yeah, fuel may very well be the culprit here, but it just doesn’t matter. They have to write down their value on their books, but that’s all it means. So, you can ignore the headlines.

The numbers that matter? Excluding special items, Delta lost $274 million for the quarter and Northwest lost $191 million. Now we’re back into the realm of normalcy. The only problem here is that year over year comparisons aren’t very good. Both airlines were still bankrupt last year, so it won’t tell us much. But we can try to look at analyst expectations.

Delta lost 69 cents per share while expectations were for a loss of 51 cents. At Northwest, the airline lost 78 cents per share with analyst expectations at 34 cents. My understanding, however, is that those analyst numbers for Northwest are somewhat like comparing apples and oranges because the analyst expectations included some things that the Northwest numbers did not. So, Northwest came out about as expected.

No, these aren’t good numbers, but they aren’t the terrible numbers that the mass media would have you believe either.

Did anyone catch the name of that bus that hit United Airlines during the first quarter? The airline turned in an absolutely terrible performance followed by an announcement that another 10 to 15 planes will be removed from the fleet above and beyond what’s already announced. In addition, just over 1,000 jobs will be disappearing; half from management and the other half from the front line. Wall Street was clearly spooked by these results, because the stock lost a shocking 36 percent yesterday alone. So what exactly happened?

If you look at the results, it was a combination of a lot of things. The airline reported a net loss of $537 million this quarter versus $152 million last year. More important than that, the operating loss increased from $92 million to a whopping $441 million. Fuel was of course a big part of that. It increased by north of $500 million; more than a 50 percent increase year over year. But every airline has faced these problems and none of them have underwhelmed as much as United so far. I mean, the airline lost $4.45 per share and the analyst consensus was only for $3.41 a share. Why is that?

Well first, revenues were weak. United predicted a RASM increase of 9 to 10 percent, but it came in at only 8.6 percent. And then there’s the cost side. Regional affiliate expenses were up 12.6 percent. My guess is that some of that is due to the airline having to contract with ExpressJet during the quarter to pick up some flying that it couldn’t get done under existing contracts. Then things like “purchased services” were up 15.9 percent and my personal favorite, “other operating expenses” were up 9.1 percent. For an airline that likes to claim that it has control of its costs, it sure doesn’t appear that way.

Had regional affiliate expenses, purchased services, and other operating expenses not changed year over year, the airline could have saved $159 million. That would have put a big dent in the operating loss, bringing it down to $282 million. This tells me that they’ve got a management team so hell-bent on merging that they forgot to actually run the airline. Ouch.

I know I recently wrote about the wonders of ancillary revenue, but I think it’s important to note that not all attempts at creating this kind of value are going to work. One airline is trying to put that theory to the test . . . United has raised its change fee from $100 to $150, and I’m not so sure this is going to work out well for them.

It’s far easier for an airline to bump up existing fees than to actually be creative and come up with something new to help generate more revenue. And that is why I imagine United is doing this. In the past, airlines have raised change fees with impunity since there generally aren’t many other options for the customer who needs to change his itinerary. At some point, my guess is that fees will hit a tipping point that will push customers to fly on other carriers.

How high can traditional airlines go when Southwest charges nothing? At what point will the low-cost carriers end up swaying travelers with their low (or non-existent) fees? I’m sure United predicts that a fee hike won’t impact consumer behavior that much. Even if it does have an impact, the airline could still see the number of passengers paying change fees cut by a third before it would be a money-losing proposition. But looking at this change from such a narrow perspective can be dangerous because it doesn’t consider big picture changes over time. At some point, the airline will go too far and there will be a slow exodus away to better options. The question that nobody knows how to answer is . . . what is that point?

As the economy turns down, airlines may find unmanaged business travelers start moving more toward airlines that don’t penalize so harshly for needing some flexibility. For example, let’s say that you need to go from L.A. to Baltimore on June 20 and return June 30, but that may change. The lowest fare on United is $473, and Southwest is up at $539. Maybe in this instance you still buy that United ticket with the $100 change fee and take your chances. But at some point, this fee will become too high and you’ll start looking elsewhere.

Now I don’t think this change in particular will cause a sweeping defection to another carrier, but it’s like removing one more piece from a game of Jenga. At some point, it’s going to topple, but you just don’t know when.

You may have seen the op-ed piece in the Wall Street Journal that Delta CEO Richard Anderson and Northwest CEO Doug Steenland put together. They argued that there are six myths about airline mergers that are all wrong. I’ll argue that they’re (mostly) full of it.

Myth One: Airline mergers cause big job losses.
I suppose it depends what you consider to be a “big” loss. If you can’t cut redundant jobs in a merger, then you’re doing something wrong. Notice that they say, “We will furlough no frontline employees as a result of this merger.” That doesn’t mean there won’t be job losses. They may try to slim down with voluntary leaves or attrition, but the jobs will go away. And you may notice that they don’t talk about corporate jobs. Those will certainly be slashed.

Myth Two: This deal will jeopardize employees’ benefits.
Well, this one probably is actually a myth. I’m just not sure it’s one I’ve heard before. And frankly, I don’t see why anyone would think that would be the case.

Myth Three: Prices will go up as a result of the merger.
Again, if fares don’t go up, then you’re doing something wrong. The whole point of a successful merger is to be able to trim capacity and gain more pricing power. If you can’t raise fares, then you’re going to have a hard time paying for those merger costs.

Myth Four: We need to close hubs to justify synergies.
There’s not much that makes me cringe more than the word “synergy,” but there’s no question in my mind that they need to close hubs. Memphis and Cincinnati are prime candidates for going away. On their own, neither Delta nor Northwest will want to get rid of those hubs because neither of them have a way to replace those connecting opportunities (nothing else is nearby). But together, those hubs become unnecessary because there are other hubs close enough to serve the same markets. That doesn’t mean service will necessarily disappear, but it means that it needs to be drastically scaled down to serve only the routes that can be supported on a point-to-point basis in the local market.

Myth Five: Consolidation will result in service cutbacks for customers.
This one sounds suspiciously like Myth Four above. I doubt cities will lose service completely, but there are bound to be cutbacks.

Myth Six: This is all being driven to fatten profits for Wall Street and hedge funds.
Well, I’m not in the board room, so I can’t say for sure, but it’s hard to argue that this isn’t about Wall Street. If the leaders aren’t looking to maximize shareholder value, they’re being negligent. (Now whether they actually do increase shareholder value is another story.)

This is a very thinly-veiled PR piece for the merger, but it also points out a roadmap of how NOT to do a merger. If all of these things were true, there wouldn’t be much logic to the merger itself. Of course, the more they spin these things, the more they’ll need to backtrack and break promises later on. Still, I suppose they’ll do anything necessary until the merger officially goes through.

It’s not really a shift in strategy, so much, as it is an expansion. Allegiant has made a great business bringing tourists a couple of times a week from small towns to major leisure destinations. An announcement this week that the airline would begin flights from Bellingham (Washington) to San Francisco and San Diego shows that they aren’t planning on being a one-trick pony for much longer.

Up until now, the model was pretty simple. It all started with a base in Vegas. The airline would fly extremely infrequent flights (couple times a week) to and from small cities that often had no other service. The idea was to bring people in from those small towns to party in Vegas and then send them back home. This has been wildly successful, and the company expanded beyond just a Vegas base to include three cities in Florida and one in Arizona.

The first sign of a change in this strategy was announced at the end of January when the airline said it would start basing a couple aircraft in Bellingham. Why Bellingham? Well, it’s about 50 miles south of downtown Vancouver and 100 miles north of Seattle. International taxes, of course, can add extra money onto a ticket price. For example, a $450 ticket from Vancouver to Phoenix will see an additional $100 in taxes and fees piled on. That’s about $40 more than you’ll get on a similarly-priced ticket out of Seattle. Combine that with Allegiant’s lower fares, and there’s definitely enough reason for a price-sensitive family to cross the border to catch their flight.

Allegiant has apparently seen this, and this week they came out with those flights to San Francisco and San Diego. So while the company normally tries to get traffic from the small town spoke cities, now it’s looking to get traffic from the area around its base and fly those passengers to large cities around the country. That’s a different tactic, but one that can work.

Are they risking the wrath of competitors? How will Air Canada up in Vancouver and Alaska Airlines down in Seattle react to an attempt to grab local travelers? Though Allegiant may be using a slightly different strategy this time, it is keeping an infrequent flight schedule that targets solely the price-sensitive leisure traveler. That’s not exactly a passenger type that most airlines are fighting over, but flying to busy airports like San Francisco and San Diego is likely to at least raise some eyebrows.

Even if larger airlines flying to the area do decide to pick a fight, Allegiant has shown in the past that it wastes no time pulling routes that it can’t win (e.g. the on-again, off-again love affair with Greensboro), but this might be different.  It’s one thing to walk away from a spoke that has a couple flights a week, but would they be willing to walk away from a base?  That’s certainly something they won’t want to do, and if they do, it’ll give other airlines incentive to fight every move they make.  This could get very interesting.

It’s earnings season, and I think it’s a safe bet that American’s $328 million loss is just a sign of things to come. Airlines are acting like animals heading into winter. They’re trying to store up as many nuts (cash) as they can in order to wait for the long winter (recession/oil prices) to pass.

American, not having slashed and burned its way through bankruptcy, is probably feeling the pressure more than most right now. It ended the first quarter with about $4.5 billion in unrestricted cash. You’d think that would be enough to last for awhile, but with oil touching $115 per barrel today, the money will disappear quickly. I think the headline from their press release says it all:

“AMR Corporation Reports a First Quarter 2008 Net Loss of $328 Million as Record Fuel Prices Drove $665 Million in Added Cost Compared to a Year Ago”

These are just huge numbers we’re talking about here. And oil prices (at least in dollars) have only continued to climb.

American is apparently concerned enough about this that the company has announced plans to sell its asset-management subsidiary for about $480 million, most of which will come in the form of cash. Might as well shore up that cash balance now, because if fuel continues at these levels and fares don’t rise substantially, this is going to be one long winter indeed.