April 8, 2014 on 2:00 am | In Airline Service, Deregulation, Trivia | No Comments
It might come as a surprise that you really can’t sue an airline in a state court. For just about anything.
Instead, you have to file your lawsuit in Federal court which means you have to have a basis of your lawsuit that is founded on Federal law. Since Federal law generally doesn’t address nuances (that’s generally left to states) and sets a high bar (because a lower bar is what States are for), lawsuits against airlines generally lose.
Oh, it’s quite possible to do a personal injury suit against an airline in Federal court when there is a crash. But that has as much to do with the bad publicity as it does the law.
You see, airlines managed to have most issues against them (for all practical purposes, all issues) moved to Federal court by an act of Congress back when Deregulation was occurring.
This sets the bar very, very high for winning a lawsuit against an airline. It is a very protected place to sit as an industry.
And unfair. You can sue Exxon wherever you want but you can’t sue American Airlines wherever you want.
As a result, airlines are able to write egregious contract terms and abuse passengers on a daily basis with the clear knowledge that virtually all passengers can’t sue them. Imagine the change in attitude and service an airline might experience when it has to face a jury of its peers in East Texas after losing luggage, holding people hostage in an airplane and then arbitrarily cancelling their flight.
I honestly struggle to find the justification for airlines to have such a protected status in 2014. Virtually all other service oriented industries manage to do just fine without such protections.
We shouldn’t forget the purpose of a civil lawsuit: It’s to correct a wrong *and* take punitive action against an entity when it intentionally does that harm. By design, this is to give incentive to companies (and individuals) to Be Nice and Behave.
Wouldn’t that be a near revolution in the airline industry?
November 5, 2013 on 1:00 am | In Deregulation, Mergers and Bankruptcy | 1 Comment
I have a friend who bought American Airlines stock at 50 cents per share. That friend asked me what on earth was going on that the stock rose to just over $10 per share.
These are strange days when an airline stock is actually worth quite a bit while in bankruptcy, on hold with a merger because of a lawsuit. Strange days indeed.
The answer is that there are settlement discussions going on with the Florida Attorney General and with the Department of Justice.
The talks with the Florida AG are to build momentum and whether or not a settlement is reached there is really immaterial.
The talks with the DoJ are serious and Attorney General Holder has come out with bluster stating that the airlines would have to sell assets to get a settlement. The airlines wisely declined to make a comment.
In the world of lawsuits, he who is quiet is usually the one who is winning.
American Airlines and US Airways are very quiet on this.
September 6, 2013 on 1:29 pm | In Airline Service, Airports, Deregulation, Mergers and Bankruptcy | 2 Comments
Over the past week, I keep thinking about a few things related to the US Government’s stance on the US Airways / American Airlines merger and, specifically, their cited concerns about the merger. Here they are in no particular order:
- The DoJ was remarkably absent when the Wright Amendment undoing was being done. Love Field Airport was essentially made a single airline airport . . . forever.
- American Airlines now controls the following terminals at DFW International Airport: Terminal A, Terminal B, Terminal C and parts of Terminal D. The remaining terminals available to other airlines are . . . Terminal E
- Delta . . . Atlanta . . . enough said.
- No one seems to be trying to preserve flights to and from small cities in other parts of the country but anyone who wants to remove silly flights into Reagan National is deemed a danger.
- Delta . . . Minneapolis . . . enough said.
- Delta . . . Detroit . . . enough said.
- United . . . Houston . . . stranglehold.
- Southwest . . . Love Field and Midway airports
By the mandate cited by the DoJ, the antitrust department would appear to have a strong duty to investigate and correct these defects as soon as possible.
August 18, 2013 on 1:00 am | In Airline News, Deregulation, Mergers and Bankruptcy | No Comments
Let’s talk about competition among airlines. Has competition been damaged over the past 8 years?
Truth be told, I felt it would be when the Merger Mania started. I really did. I thought that choice would go down, pricing power would go way up and airlines would become even challenging to fly for even business travelers.
That really isn’t what happened.
Before I go further, let’s all acknowledge that the financial crisis, resulting recession and US economy has impacted the airline industry in the worst ways. Airlines have been smacked around on an unprecedented level. Remember how much fuel has risen over the past 8 years? Milk? Even the guy who mows your lawn?
What makes you think those rise in costs are any different for the airlines? Even the cost to borrow money in that industry is exceptionally high relative to prime interest rates. No one believes in the long term viability of airlines much. So, it’s hard for you and it’s hard for the airlines and their prices may be somewhat higher but they are not double or worse. They climbed as did most of your other costs related to transportation. That isn’t inappropriate.
I have railed at the “lock” that American Airlines has on DFW and how much higher people in the Dallas / Fort Worth area pay for air fares to other major cities as a result. Similar situations exist in Atlanta, Chicago, Denver, Salt Lake City, Minneapolis / St. Paul, Detroit and elsewhere. But it has been quite bad in the DFW area for years despite the competition provided by Southwest Airlines via Love Field Airport.
That has changed dramatically now. Airlines are now competing with American Airlines in the DFW area for the first time in decades on many routes. There is now real choice when going to Chicago or Denver. I can fly to Newark (NYC) for fares less than $700 for the first time in a decade.
And the same is true in other cities now. Those cities are seeing airlines which finally have enough scale and network that they are comfortable making a play for passengers in new, non-traditional markets without just buying the customers.
Witness Delta’s recent announced intention to take the West Coast Shuttle traffic away from the incumbents (United and Southwest Airlines.) That would never have happened even 3 years ago.
We often talk about Southwest and the Department of Justice recently referred to them as largely irrelevant in competition when they filed their lawsuit. But wait! Southwest is already competing strongly against airlines such as American Airlines, United Airlines and Delta Airlines in their fortress hub cities and to take them as irrelevant is just silly.
Need I remind people that Southwest has entered non-traditional markets such as New York La Guardia and Newark Liberty Airports? Southwest *bought* its way into the Atlanta market and it gave a world class beating to Frontier in both Milwaukee and Denver. In fact, United got its head kicked in by SWA in Denver as well. Continental was so afraid of Southwest that as United it went to war against them operating (potential) international flights out of Houston.
There is more high profile competition in place today than we have seen in almost 2 decades. Let’s celebrate that for a moment because it *is* good for the consumers.
Even the casual traveler has seen new options in the form of the ULCC carriers such as Spirit and Allegiant Air. In fact, those ULCC carriers are actually keeping LCC carriers such as Southwest (who really isn’t an LCC anymore), jetBlue and Virgin America honest.
Even I can admit that I’m wrong and I admit it. We *do* have considerable competition today and it is more healthy competition in the right ways than in the last 30+ years.
July 16, 2013 on 10:54 am | In Deregulation | No Comments
There are many fans in the airline world who freely speculate on what would have happened if someone or something were different when it comes to their favorite airline. I see this a great deal in the Braniff International world.
There are schools who believe that Braniff’s CEO Harding L. Lawrence ran that company into the ground singlehandedly. Some believe that deregulation did the company in, some think it was American Airlines who struck at Braniff and some think that if Braniff had continued to be managed by its CEO Chuck Beard, it would be here today.
The big “What If” isn’t just with Braniff. It’s with virtually every beloved airline that has disappeared. What if the unions at Eastern had not gone nuclear with Frank Borman? What if Pan Am hadn’t suffered an image problem from the Lockerbie 747 crash?
I want to talk about deregulation. What if deregulation hadn’t happened?
Well, the truth is that that was never an option. We think it might have been but it really wasn’t. Regulation of the airline industry was inhibiting economic growth. If it was not deregulated, you would have seen the United States a highly regulated environment playing against a highly deregulated environment that would exist in the rest of the world. Want to know how ugly that would get?
Alitalia, Air India, Aerolineas Argentinas are 3 great examples of what the US airline industry would look like as a protected, regulated industry operating against deregulated airlines.
This country nor its airlines are in control of the changes that occur naturally throughout the world. There is no altering the dynamic forces of change to fit the needs of an airline.
The truth is that deregulation hurt all US airlines. Not a single US airline was prepared for deregulation. Most airlines were led by people who had no concept of how to cope with deregulation.
Successful airline industry titans either left as the writing showed up on the wall or were violently ripped from their companies as they held on too long. In Braniff International, Harding Lawrence bet heavily on deregulation being reversed and lost badly. Continental’s Bob Six lost his entire airline because his company was poorly equipped in leadership for deregulation. American Airlines’ Albert Casey made an orderly departure but only because he did have a leader equipped to deal with deregulation: Robert Crandall.
Lest you believe that only legacy airlines were affected by this, let’s take a look at airlines such as the original LCC carriers. People Express died being started and run by people who still thought that marketshare was king. Air Florida: Same thing.
There is just one major airline who survived deregulation and thrived ever since: Southwest Airlines
Arguably the best prepared airline for deregulation since it started in a threatening and competitive environment and had to fight for its existence for the first 20 years of its life. It started in an deregulated, intra-state environment and learned how to fight before moving out of state.
What if the leaders of legacy airlines were right and deregulation didn’t happen? It’s a question premised on the idea that deregulation might not have happened. That’s a false premise. It did happen, it would have happened no matter what and timing was the only issue at hand and even that was somewhat predetermined to happen within 10 years or so of when it did happen.
April 9, 2013 on 12:37 pm | In Airline Service, Deregulation, Mergers and Bankruptcy | No Comments
I like how Turkish Airlines has operated its business. Over the past decade, the airline has transformed itself from a primarily government owned entity to a primarily private owned entity that is earning an impressive profit. Turkey has focused itself on supporting its airline business by promoting growth through the development of new airports that could serve as “Middle Eastern Hubs”.
The Turkish government has managed itself well in these economic times and considering their strong desire to enter the European Union, you have to give them credit for being aggressive. It’s notable that they are not suffering economic crisis despite the fact that their mediterranean neighbors largely are bankrupt and in smoking heaps presently.
Turkey committed itself to modernizing how it interacted with its airlines and realized that by making themselves an attractive country for international hub operations, it would attract investment into other segments of the nation’s economy.
Contrast that to how Italy has behaved with Alitalia or Ireland with Aer Lingus. Both of these supposedly more modern, more liberal and more free nations have worked exclusively towards protecting the employees of those airlines by propping up those airlines with support.
As a consequence, the airlines operate poorly (Aer Lingus is OK on the long haul front but that amounts to 7 aircraft presently) and are shoved around by their own unionized employees. If someone suggests selling the airline, particularly to an aggressive company, or doing anything to improve productivity, the unions call a strike to teach the government and airline managers a lesson.
Why would anyone do business within such a framework? The answer is that no one does. Many may have disapproved of Ryanair taking over Aer Lingus but there would have been some pretty strong benefits to Ireland.
Alitalia is simply once again on the path to a merger with a larger, better run European airline. Unless the Italian parliament can find a way to preserve domestic ownership without running afoul of EU regulations.
I can’t think of a government run airline or airline industry today that is running successfully. I can think of many which are jobs programs but that’s it. What’s crazy about this is that the countries suffer massively as a result.
Countries like Ireland, Italy, India or Argentina all suffer far worse economic impacts overall from a failure to address the “airline problem” within their countries than they benefit from providing a jobs program. Those jobs programs are heavy concrete shoes for those nations economies and they signal that those countries aren’t prepared to do business in a fair and equitable manner.
Yet the supposedly backward and inferior Turkey and its airline get out front and decide to make something of itself. The contrast is remarkable.
July 15, 2010 on 1:00 am | In Air Traffic Control, Airline News, Airline Service, Deregulation, Frequent Flier | 1 Comment
A number of airline and aviation bloggers have been writing posts about the 3 Hour Rule since statistics for on-time departures, arrivals, cancellations and delays came out for the first full month under this rule. The Cranky Flier feels certain that this rule is inconveniencing more people now. Dan Webb writing Things In The Sky thinks it might be too early to make a final call on the rule. PlaneBuzz speculates on whether or not the FAA will send a fine to the airlines who exceeded the 3 Hour Rule in that first full month (There were five 3 Hour Rule “violations” in May).
For readers of this or any other blog on airlines, there are a few things to keep in mind about this rule and the statistics. First, this rule wasn’t put into place because of statistics. If statistics had driven the rule making, we wouldn’t have a rule. The rule was driven by egregious delays that far exceeded 3 hours and it was far more political than fact driven.
Second, the first month of statistics on this mean absolutely nothing. Frankly, if you were going to use statistics to judge this rule, I think you would need, at minimum, 24 months of contiguous data at the least. A 5 year data set would be far better. It isn’t just airline decisions driving these statistics. It’s weather, passenger trends, disrupted airport operations (for non-weather related reasons) and other factors. The variables in play here are far too many to make a judgement based on statistics.
Third, airline fans tend to favor airlines or, rather, they favor airline operations. And that subset of airline fans we know as frequent flier freaks are even more favorably disposed to airline operations. We’re a biased group because we see things from both the inside and outside and we tend to excuse events that appear to occur because of one-time conditions. We tend to excuse what isn’t in the norm because of conditions that are outside of an airlines’ control. While we may think we have far more than average knowledge and therefore better equipped to make that judgement on a 3 hour rule, we really aren’t. We have the same bias that airlines as a whole have.
A politically driven rule generally occurs because of a general public perception, not statistics. The general public perception, whether its based on fact or fiction, is really the controlling factor and the public perception of these delays is *bad*. It’s bad because airlines have done nothing to change that perception and its bad because those who are trying to explain these delays are coming off as apologists for airlines rather than as subject matter experts. There is a disconnect between the airline industry and the public consumer in that industry.
In many ways, this problem of delays could have been solved by some saavy marketing. The defensive posture airlines have taken during these events has done them no good and apologizing profusely and promising to “fix it” going forward now sounds hollow because these events continue to happen and airlines continue to often appear to have no clue about the passengers being affected by it.
Airlines have received a lot of bounty from the public over the past several years. Special considerations have been granted to the industry over and over, particularly since the tragedy of September 11th, 2001, and the airline industry has not acted very grateful nor very responsive in that same time period. To the contrary, airlines have generally responded with acts that, to the public, appear overtly hostile to the customer. The general public, right or wrong on its facts, is now entirely resentful of the entire industry.
This is much more an airline marketing and PR problem than it is an airline operations problem.
The rule isn’t going to go away and anyone who thinks there is a chance that it will is enjoying a nice fantasy. The rule is a consequence of airlines doing a poor job to fix an admittedly tiny problem and then acting officious with anyone challenging their behaviour. Failure to self regulate and respond *and* communicate during these problems created the rule. There is a lack of public trust when it comes to airlines and that will take a decade or more to fix. The best any airline or the industry itself can ever hope to accomplish is to hold off even more restrictive rules in the future and that will only be done by being better public citizens themselves.
Do I think the 3 Hour Rule is a success or failure? I have no idea. I would note that, anecdotally, the public isn’t crying out to the news media about being delayed an extra 12 hours because of a 3 Hour Rule cancellation. Until they do, I am extremely hesitant to declare the 3 Hour Rule a failure.
July 13, 2010 on 1:00 am | In Airline Service, Deregulation | 1 Comment
Do we need regulation for better passenger service in the airline industry? Well, I don’t think we need regulation for price or route frequency or food. We don’t. We’re fine. Aircraft are transporting people just fine every day and doing it credibly.
However, where we could stand some government oversight is in how airlines meet or, rather, don’t meet obligations that are implied in the sale of a seat on a flight. If airlines are going to charge baggage fees and term it a service, then there is an obligation on their part to transport your baggage as reliably as they are transporting you. I do think some government regulation on this is appropriate. For instance, if you don’t transport a customer’s baggage and deliver it back to them upon arrival, you should be required to refund that fee in full and get them their bag as soon as possible.
Do we need them to regulate how they conduct their flights? No but we do need a minimum service standard for things like delays on tarmac. We have the 3 Hour Rule and while I think the jury is still out, there is some strong evidence that this rule is having its intended effect.
Do we need to insist food be served? No, not for free certainly. But providing some kind of food and water in the event of a long delay isn’t unreasonable.
Should airlines be allowed to set their prices? Absolutely. But when they set those prices, we should have a standard that enforces that *all* costs and/or potential costs are displayed *before* the purchase rather than just a base fare with taxes and fees.
If an airline has to cancel a flight should the be obligated to transport you on another aircraft immediately? No, they shouldn’t. Airlines would have to carry tens of replacement aircraft at every major station and that’s unreasonable. However, should be able to put you on a flight 5 or more days in the future? No, they shouldn’t. Once flights commence, 24 hours or less should probably be the standard in most cases.
Yes, there is a place for regulation but it should be miminum standards and in areas where the airlines make a service promise but write contract language to absolve them of the very obligation they imply that they have.
July 7, 2010 on 1:00 am | In Airline Service, Death Watch, Deregulation | 1 Comment
For the past 3 years or more, we’ve heard virtually every airline CEO talk about the need for consolidation and the problem of too many seats chasing too many passengers. Now we have Northwest Airlines fully consolidated into Delta and we’re about to see United and Continetal merge together as well. But does that really solve the long term problems in this industry?
One the one hand, I admire how the airlines are using their dire straits to argue for greater dominance in their industry. It’s the legacies doing this and their “poor me” story is working very well among the public as well as among their own employees.
I would argue that, if anything, we need even stronger competiton in the industry for the long term. The greater dominance we allow isn’t necessarily going to raise prices all that much but what it will do is make it ever more cost prohibitive for new entrants into the market. That’s the ultimate goal of consolidation: keep the new guys out and keep the current competition neutralized as much as possible.
Quite honestly, what we really need is for a legacy airline to go out of business and liquidate. I had long hoped it would be United who had to do this but, sadly, they scrapped by and made it to the other side. US Airways is often pointed to as a candidate and while I’ll agree they are potentially the most vulnerable, I’m not sure I want to see them go.
I’d like to see one of our behemoths leave.
Yes, it would put a lot of people out of work for while. It would lead higher fares in the short term. It would also allow room for new entrants who’ll bring fresher ideas, staff, aircraft and, wait for it . . . , lower fares.
It will help break the stranglehold that unionization has on this industry.
What I’m really proposing is that we need a revolution in the US airline indudstry rather than an evolution of the legacy carriers one more time.
We need airports to have room for new airlines to enter their markets and establish footholds that result in lower fares. That means someone has to go.
This country needs to quite looking at each individual airline as an essential industry to our economy. They aren’t. Not anymore. If one legacy went out of business and liquidated, the other airlines would move so fast to establish new business in those markets that it would make our head spin.
In other words, they would grow the old fashioned way: through competition.
It’s interesting to me that the airlines who have managed to weather the economic recession so well also happen to be the airlines who didn’t contract but, rather, grew themselves as legacies withdrew from unprofitable routes.
It is often claimed that we need the legacies because they serve the small communities. I wonder how the small communities feel about paying a disproportionately high fare in the current systems. The truth is, there are lot of markets that I question the need for air service in many areas.
Does Waco, TX really need flights from Dallas and Houston? Probably not. Those residents should probably be driving to Dallas or Houston for their flights. It costs about $30 to drive to Dallas from Waco. Air fares between those two cities are currently advertised from $130 to $600 one way at present. It’s economically wasteful to take that flight.
We, as a country, should be looking to create more opportunities for new airlines as well as existing LCC carriers who want to enter markets but are bullied away from them at present by the established legacy carriers dominance.
October 9, 2009 on 10:57 am | In Airline Fleets, Airline Service, Airports, Deregulation | No Comments
The Cranky Flier had a post today discussing Continental’s new moves in LAX which include new flights to Hawaii. Continental will have an all 737 base in the Los Angeles area with two 737′s serving new flights from Orange County to Hawaii. It made me think.
Back in the pre-regulatory days, flights from the mainland US to Hawaii were served by large aircraft such as the 707, DC-8 and, later, the 747, DC-10, L-1011 and even the 767. The routes allowed airlines to serve huge numbers of customers with large aircraft and make money. Braniff International had the franchise for Dallas to Honolulu in the 1970′s and served it with a 747 and an amazing 16 hours per day utilization.
Then deregulation came and airlines slowly began to develop new routes. It was no longer necessary to fly to a “gateway” city to catch a flight to Hawaii. More and more cities found themselves being served with those routes to Hawaii. Again, Braniff International, at one time, had a 747 flight from Portland, OR to Hawaii. (It carried little traffic, however.)
There was some consolidation after airlines learned that not everyone in a particular city was dying to fly to Hawaii. But the big change for Hawaii has been ETOPS or twin engine flights overseas. This allowed airlines to serve smaller markets with aircraft both capable of the loads as well as the distance. The truth is, when the airlines don’t have to feed 150 passengers a day to a gateway city but can fly them directly, they make more money. 20 years ago, I would have chuckled if someone told me that 737-700 aircraft would fly to Hawaii from the mainland.
Boeing and Airbus have different views for the roles of widebody, large capacity aircraft. 10 years ago, Boeing forecast that the market would continue to fracture with more and more direct routes being employed as opposed to large capacity hub to hub flying. Airbus, however, believed that the crowded skies would force more large capacity hub to hub flying onto the airlines. It turns out that Boeing was more right.
The markets drive these changes and when an airlines can make more pure profit using right sized aircraft flying direct, they will. Yes, the legacy airlines of the US (and other parts of the world) continue to follow a hub and spoke model primarily but they’re all learning that more direct flying where the loads fully justify it is a good and profitable thing.
Accordingly, this is where I think Boeing continues to have a winning strategy with its 787/777 product line. Yes, there are a few airlines capable of filling an A-380 and those airlines will make money from using that aircraft. But as more and more nations open up their skies to more competition, that is going to change. Having the right aircraft for the right route will be key to a manufacturer’s success and Boeing seems to have a better feel for the world market whereas Airbus seems more plugged into the Euro/Middle East markets they already do so well in.
I’m no longer sure there is a real place for the new 747-8 aircraft. Boeing’s 777-300 is just as capable in almost every case and carries a massive number of passengers without being so big that it adds risk during seasonal low periods. The same is true for the 777-200.
And what happens when aircraft such as the 787 family begin flying? This family is roughly 767-sized in capacity but its range is far greater and that means even more markets can be accessed via long haul direct flying. An international airline can probably make more money (through passengers *and* cargo) using the 787 and 777 families for more direct flying with aircraft that are “right sized” for the markets than they can using much of the Airbus family.
Airbus has one aircraft model suitable for this right now. The A-330. the A-340 is essentially dead since it under performs against the 777 in virtually any mission. The A-330 is right sized for a number of the current markets and many more of the future markets. The A-380 is suitable for only a few markets and those are already dwindling for some airlines. For instance, QANTAS has introduced the A-380 on their routes to the US. However, with a new Open Skies treaty between the two countries, there are also new entrants to the market like V Australia and Delta who are vying for customers with United and QANTAS very competively. Those airlines understand that it will take a while to develop their routes and build relationships with airlines in both countries to feed traffic but it will happen. As that traffic shifts from what was originally two airlines (QANTAS and United) to four airlines (QANTAS, United plus V Australia and Delta), what happens to each airlines’ loads?
It’s notable that QANTAS flies the 747 and A380 to the US and United flies the 747 exclusively. The new entrants are using the 777-300 and 777-200 for their flights. The 787 and it’s longer range capabilities will quite possibly fracture that market even more by making it possible to fly from the interior of the US to Australia instead of having to use a west coast gateway city. At that point, I don’t know that QANTAS has a use for very many A380s or 747s and, additionally, they don’t have any right sized aircraft for the route(s) until they start receiving their 787s which are late and somewhat deferred.
The Airbus A350 is capable of competing on many 777 routes and while it does have slightly lower trip costs vs the 777, it also has less revenue capabilty because it can’t haul as much cargo on the same missions.
The world’s airline routes are going to continue to expand internationally and at a far greater rate than traffic grows between any two nations. Having the right equipment for the right moment is going to be key for any international airlines survival. Those who don’t plan for it now and have it arriving in the next 5 to 10 years are going to wither to a slow death.
January 13, 2009 on 10:00 am | In Airline Service, Deregulation | No Comments
We often hear the claim from airlines, particularly legacy airlines, that it is the business class passenger who pays for the bulk of a flight but is that true? Well, maybe.
The frequent business flyer does provide much of the profit that an airline might earn but the business class passenger on today’s domestic flight is often a frequent flier who paid for a coach ticket and who received enough upgrade points to move to Business Class. But that passenger doesn’t necessarily make for a profitable flight either.
If the full fare business traveler was the most profitable passenger on an aircraft, then all of those business class airlines formed over the years would still be around, wouldn’t they? Over the years airlines like Legend (a business class airline that flew from Dallas to major trunk destinations in the 1990′s) and like EOS and MAXJet (who flew the NYC to London trunk routes) tried the all business class model and it never worked.
Some would say it was because there just aren’t enough business class travelers any one day for a particular flight. Others would say it was because the legacy airlines fought back with greater frequency, frequent flier awards and unprofitable fares that put them under. The truth is, it was probably a bit of both but if an all business class airline made sense, it would have succeeded by now.
Everyone pays the the way for a flight in reality. Most often, it’s those last 5 to 10 passengers on a flight that provide any real profit for an airline and those last 5 to 10 passengers are often passengers who wouldn’t have flown but for a discounted fare being available. Airline revenue management dictates that an airline has to sell as many of those seats on a particular flight for a price that people are willing to pay. Some people are willing to pay $1000 for a seat that others only value at $200. Airlines manage this demand by offering unrestricted fares for a high price and discount fares with a string of restrictions that most business travelers can’t accept. These different fares create enough demand for a flight and if it is done the right way, that flight earns a profit.
If those low discount fares didn’t make sense and add profit to the bottom line, the airlines wouldn’t offer them. You, the consumer, wouldn’t benefit from those low fares if there weren’t a certain number of people willing to compete for them at a low price by conforming to the restrictions placed on them.
When the airlines reduced their capacity in the latter half of 2008, they essentially bet that there would be increased competition for those last few seats and that the competition would raise fares for those same seats. Now it appears that that theory had a fault. Once more airlines have realized that at a certain higher price, those last 10 passengers will either forgo that airline trip or find another means to make the trip. When they start declining those opportunities, airlines have to reverse course and make a concerted effort to win them back by offering fare sales through expensive advertising.
Why would airlines routinely engage this activity? Because that is what competition is about. It’s a natural part of any business cycle and it means that the market is constantly adjusting to its present circumstances.
With the rather dramatic fall-off of demand, we are, once again, seeing low fares blossom again. It isn’t because fuel is cheaper. Cheaper fuel makes a fare sale a bit more possible but what happens if an airline sells a ticket for late April and finds itself paying twice the cost of fuel in January? They lose money. No, low fares show up because filling those airplanes is critical. If they take off with an empty seat, it is giving up a revenue opportunity forever.
January 12, 2009 on 10:00 am | In Airline Service, Deregulation | 1 Comment
The Cranky Flier made this post to his blog last week. In short, CF decried a woman’s New York Times Op-Ed on the demise of the glory days of travel which she apparently experienced as a flight attendant for TWA. The Cranky Flier reckons that the changes that deregulation has brought on are what has made air travel affordable and to bring back the high service given in the 50′s, 60′s and early 70′s would deny that access to most of us. Quite honestly, I do agree with him but I think a point was missed in Ann Hood’s Op Ed as well.
I’m pretty sure that Ms. Hood was decrying the loss of the great meals, comforting flight attendants and more correct behaviour but I think what prompted her Op Ed was actually a perceived lack of service on *any* level by airlines today. I don’t think anyone realistically expects air travel to include 3 choices of meals, pillows and blankets and free cocktails anymore. However, what causes people to continue to get upset is the generally poor nature of any service provided by most airlines.
I experienced that service as an airline brat from the late 1960′s to the early 1980′s and it really was pretty remarkable in many respects. However, I don’t miss the Chateau Briand on Braniff flights between Dallas and Portland and I really don’t seem to miss the first class seat or the pillows or drinks. OK, I do miss the seats but that is because I’m a 6’2″ man weighing 260lbs with long legs.
What drives this perceived lack of service is airlines not keeping promises made when you buy a ticket. Those promises are outlined by airline advertising which is quite good at showing a relaxing customer on an airplane enjoying a drink as he or she flies to their destination with the expectation that the airplane will be kept at comfortable temperature and will arrive on time.
Let’s look at what an airline passenger might enjoy from the time they decide to book a flight to the time they arrive back home from their trip. First, they must book their flight online. Most people not only don’t mind this, they prefer it these days. However, none of us are amused when we attempt to book a flight online only to find the website overloaded from a fare sale or network disruption caused by weather. If the customer tries to phone the airline to book they’ll be faced with long phone queues, surly reservations agents and the threat that their airline ticket is now going to cost them a bit more for booking via phone.
The customer is gratified at being able to check in early through the web but when they arrive at the airport they discover that checking in their suitcase requires them to stand in another long line in order that they might essentially check-in a second time so they can check a bag. Even if they only have one bag, they’ll have to pay a fee to check it unless they are a road warrior with some sort of privileged status with the airlines’ frequent flier clubs. Then they get to stand in yet another line while watching those same privileged fliers go through an express line with the TSA.
Once at the gate, they’ll have to work to find an open seat to sit in while waiting for boarding call because aircraft are flying much more full these days and most gates at most airports aren’t designed to accommodate the loads that many airlines serve on their narrowbody aircraft. At the boarding call, they get to watch those same privileged fliers board first onto the aircraft (even if they aren’t flying first class that day with their free upgrades they still get to board first) and then wait for their group to be called while some fellow passengers cheat and just board early anyway. Since most customer service agents at the gate are unwilling to enforce the rules in many cases, these cheaters get away with that move.
If the passenger has a boarding call in the last 1 or 2 groups, they get to discover that all the other passengers have apparently carried their life’s possessions with them and occupied all the overhead luggage space. If they say anything about the lack of space, some flight attendant will inform them that they might have to gate check their bag or put it under the seat in front of them. Putting a bag under the seat in front of you hasn’t really been possible for adults since the early 80′s when airlines reduced seat pitch in coach from an accommodating 34 to 38 inches of space down to a tight 30 to 32 inches of space. So, they put their coat in a crammed overhead bin and hand over their luggage to a surly flight attendant who is annoyed that they now have to catch the attention of ground personnel so the bag can be loaded in the luggage compartment.
Once seated, the passenger waits and waits for departure from the gate which is delayed a few minutes. Finally after watching their watch for an additional 13 minutes, someone hurriedly closes the door and the pilots get a pushback. Technically, the flight has left on time at this point. Only the pushback results in them taxiiing slowly towards the runway where they run into a traffic jam of aircraft waiting to take off because most airports are woefully lacking in the infrastructure to accomodate the number of flights trying to depart at the same time.
After another delay of 20 minutes, the aircraft takes off. As it levels off, the surly flight attendants go to work immediately to serve their one beverage service during the 2 hour flight. Now, the passenger knows that soft drinks (and virtually any other beverage) now costs money so they ask for water when it is their turn and find a surly flight attendant telling them that will be $3 for the half litre bottle of water they offer. The passengers declines the water and tries to recline their seat only to discover that while the seat may recline, it reclines right into the knees of the passenger behind them who objects loudly.
Upon arrival at their destination, the passenger collects their things and moves slowly towards the door. In some cases, they now must wait on the airbridge for their gate checked luggage to be brought up to them and in other instances they must now trudge off to find the baggage carousel to collect their things. Because these aircraft are flying so full, this amounts to another delay of 20 minutes or more.
Once they have their baggage, they make their way to the curbside and take out their cell phone to call the person picking them up to tell them they are at the curbside now. They have to do this because security no longer allows anyone inside the terminal and the airport management is now charging $7 to park in the parking structure for less than an hour to pick up their party.
Go through that kind of experience each way and it is no wonder that passengers are decrying service from airlines left and right. If you only experienced half of what I’ve described just now, you’ll loathe and hate the airline you just flew. Not because you weren’t served a 3 course meal but because the airline who implicitly promised you a safe, relatively pleasant and on time experience didn’t even really pretend to try to deliver that promise.
What people want is for an airline to be honest in what they’ll provide and to honestly deliver it with the possible exception of extraordinary circumstances. Oh, there are a few airlines who do deliver on such things and they quite rightly also make a profit. Southwest, jetBlue and Continental all come to mind as airlines that really do delivery almost every time. However, for much of the US traveling public, those three airlines aren’t an option nearly as often as they would like.
Indeed, the situation I just described is almost precisely what I experienced flying Airtran last year from Dallas to New York City. It’s disappointing at the least and offensive in most respects. Did I like the ticket price? Sure. But if you accurately described the more likely service scenario and then asked if I wanted to pay $50 more to just get where I wanted to go without that scene playing out, I’d happily dive into my wallet and hand over the cash.
The problem isn’t that we’re addicted to the lowest fares possible. We’re not. We, the passengers, are too stupid to realize that the airlines aren’t really going to deliver on those implicit promises. Like the co-dependent wife who keeps taking back her alcoholic husband, we keep going back to the airlines and expecting a different experience. The truth is, if we would examine our last service experiences with various airlines and seek a different choice until we found an airline that treated us well, airlines would pay attention.
Why? Because it quite literally costs nothing extra to deliver what an airline generally promises today. jetBlue, in particular, gets that concept and that is the biggest reason why they have succeeded flying from JFK airport in spite of all the known obstacles to flying from that airport. So does Continental as they have huge hubs at weather delayed airports too but they understand that giving the customer the implicitly promised service leads to greater success on their part. Southwest promises less service than either of those two airlines but has some of the highest customer satisfaction of any airline because they DO DELIVER ON WHAT THEY DO PROMISE.
It isn’t the glory days of service that we miss. It’s the constant disappointment we experience on airlines today that causes us to lament a lack of service. It simply doesn’t exist for most passengers. We are treated better, on average, at an inexpensive restaurant where we spend about $9 for for a meal than we are on an airline where we spend $200 or more for a flight. Most airlines’ attitude is to chastise the passenger for complaining. That’s the motivator for the glory days. In the glory days, airlines didn’t act like you should be grateful just to have a seat on their aircraft. They acted grateful that you chose them to make you trip on.
January 8, 2009 on 10:00 am | In Airline News, Airline Service, Deregulation | No Comments
Pilots and flight attendants are perceived as having jobs that are easy and financially secure. This is largely due to the fact that flight crews commonly have several days in a row off each month where they are able to enjoy a different schedule and life. Flight crews, in fact, have just as much stress, fatigue and constraints as any other job.
Many in the flight crew start out augmenting their income with 2nd and even 3rd jobs they work during their off-duty hours because they earn so little money at the start of their careers. A fully trained and qualified pilot starting out on his career can expect to make as little as $20,000 / year and flight attendants often earn less than $16,000 / year to start. So in order to pay their rent and other living expenses, they take on flexible 2nd and 3rd jobs. Later, when they are earning living wages, they tend to keep those jobs because their needs and wants have continued to grow in proportion to their total income. In other words, they become a bit financially addicted to the supplemental income those 2nd and 3rd jobs provide.
Airlines pay so little to start because the lifetime costs to employ that flight crew members can be very expensive when they enter the last half of their career. Unions have negotiated contracts that are first and foremost dependent on date of hire seniority and flight crew turnover is therefore very small compared to other industries. There is no incentive to look for another job with another airline unless your present employer goes through a significant contraction or bankruptcy and has to lay you off. Even then a flight crew member may well have incentives to earn supplemental income and wait for a callback rather than seek employment with a new airline.
But it is airline management that has created this problem because they’ve failed to redefine the job positions to fit a new economic reality. They exacerbate their situation by treating their employees (and unions) as hostile entities to be fought at every turn rather than finding new, more efficient ways to employee people.
Airline management needs to first realize that the lifetime earnings of flight crew are unlikely to go significantly down or up. But there is a way to distribute that income during the flight crew career in a way that provides better job security, more productivity and in a way that provides the stability employees want.
First, stop paying flight crews horribly low salaries in their early years. These people are trained and qualified professionals and deserve to be paid a wage that is more commensurate with the job skills they must possess to perform in those roles. In other words, it’s time to pay a living wage right from the beginning. Pilot’s should earn from $40K to $50K to start, for instance, And pilots should recognize that in return for a living wage right from the start, they have to offer more flexibility in work rules. They need to be willing to work on a more daily basis but for fewer hours per day so that airlines can begin scheduling them in a more rational manner.
Second, airlines should pay salaries that are roughly equivalent to engineers. A senior engineer (not manager but engineer) can earn as much as $100K / year at the zenith of their career but not $300K. For that kind of wage, an engineer must enter management and exhibit performance that justifies that wage. Pilots should have retirement plans that are also commensurate with engineers. Not pensions that pay out by the years of service but, rather, modern investment plans such as 401k plans that allow them to manage their futures and have some opportunity for portability. Pensions are tied to seniority. 401k retirement investment plans are tied to the person and smart choices.
Why is such a system better for a pilot? For one, it reduces their dependency on one airline. They are far less tied to the fortunes of their employers and have more opportunity to leave a badly managed airline in favor of a better managed airline. Let’s face it, who wouldn’t want to work for a better managed airline in favor or a badly managed one? Making that possible industry wide would provide more opportunity for pilots to manage their stress and the demands their job makes on their personal lives.
Unions should focus less on maximizing wages and more on improving the quality of life for their members. Unions have the power to negotiate better work rules that alleviate horrific fatigue and stress and which provide a more humane way of living. Happiness really doesn’t come from a top wage. It comes from a living wage and having a real life. Unions should seek more security for their members by negotiating flexible work rules that might allow flight crews to fly part time or job share with someone else. That kind of flexibility would allow airlines to schedule flights more rationally and earn more profit and be better positioned to offer wage increases more regularly rather than fight them at every contract negotiation.
Airline management must recognize that the largest variable controlling their financial success is their flight crew. Flight crew represents the largest part of their costs and the biggest factor in determining the service product they offer. Treat them humanely and pay them a living wage and airlines can begin to experience more profit which will only make their investors happy.
Unions have to recognize that the work rules in place now were only fitting for airline up to the late 1970′s. It’s time for them to define how to best serve their members by identifying all the variables involved in a prosperous career rather than simply wages. They should push for company financed training, better scheduling and work rules that permit both parties to profit from extra effort put forth serving a flight.
The go! Airlines pilots mentioned in yesterday’s post were fatigued because they were flying 8 leg segments for multiple days in a row. Why? Because under the present system of compensation and work rules, airlines must schedule pilots intensively in order to get the most for each dollar spent. Airlines would actually be more flexible with hours worked if pilot’s earned a salary and had a negotiated minimum and maximum of hours to be worked each month.
Under a new system such as I described above, pilots (and other flight crew) would no longer feel tied to working for an airline that punished them with a grueling schedule week after week. They could seek better employment elsewhere without necessarily taking an enormous pay cut to do so. Airlines would have more predictable labor costs, greater productivity and an incentive to take better care of their crew.
It would also solve another looming problem for airlines. A shortage of pilots. Presently, the barriers to entering a career as a pilot are huge. Airlines require new hires to obtain their minimum qualifications for hire at the employees expense and then pay them near poverty level salaries for the first several years of employment. Fewer and fewer people can afford the $100K to $150K price tag to obtain those initial qualifications and certainly find the idea of earning a poverty wage after being hired unappealing.
Under a new system of training the pilots and paying a living wage initially, airlines can attract new people to the jobs and ensure a steady, well trained and stable work force that wants to come to work and offer an efficient service product. Potential pilots (and other flight crew) have better opportunities to enter the profession and a career that is more stable in the early years and entirely profitable throughout the lifetime of the employee.
January 7, 2009 on 12:34 pm | In Airline News, Airline Service, Deregulation | 1 Comment
I want you to imagine waking up at 5:00am on a Monday morning and then being at work by 6:30am. Once at work, you’ll be climbing into another car and driving 1 hour trips across a busy metropolitan area such as Chicago or Dallas or Los Angeles. At each stop you’ll have about 5 to 10 minutes to go to the bathroom or to get something to drink or munch on through the day. You do this from 7:30am until 7:30pm at night.
Once finished, because you are far away from your home, you get a motel room and go someplace to eat like Chili’s. You do get to sleep by 10pm (and mind you I just gave you only 2.5 hours to find a motel, get something to eat and then get yourself prepared to sleep which sounds like a lot but really isn’t) but you are in a strange, hard bed and your sleep is disturbed somewhat.
You get up at 5:00am again, shower and pack and get a ride back to your duty station and climb back into a car to drive from 7:30am to 7:30pm again under the same conditions described above. Once done, you do get to go home and sleep and arrive home at around 9pm. You have to eat, get to sleep and, once more, get up at 5:00am to do this routine one more time all day.
How tired are you going to be on that third day of duty? Almost anyone, physically fit or not, is going to be pretty exhausted. He or she will be prone to make mistakes in their daily work and will find it difficult to stay awake at the wheel at certain points of the day. That’s the life of a domestic airline pilot. It’s really not any different for flight attendants, by the way. Oh and before we go on, I want to point out that that pilot working those duty hours will actually only be paid for about 8 or 9 of the 12 hours they’ll be working on such a schedule.
Now, some people might be tempted to say they could or did handle such a schedule and it wasn’t any big deal. Really? No big deal? Well, I’ll agree that many of us have had to work such a fatiguing schedule (including myself during my courier driver days 20 years ago) but let’s not act like it isn’t a big deal. It is. Under such situations, most people will make bad mistakes, act irritable towards fellow workers or even customers, they’ll eat poorly and they’ll be prone to falling into micro-sleeps (nodding off for brief moments) during their work.
Is that who you want flying you from Chicago to Cedar Rapids? Well, you have probably a 2 in 3 chance that your pilot on such a flight will be just that fatigued. Think about that for a few moments.
Earlier in 2008, two pilots (an experienced captain and first officer) fell asleep while flying a go! Airlines (a subsidiary of Mesa Airlines) commuter flight in Hawaii. The NTSB has released a final report on that incident which can be found HERE. In short, both the captain and first officer had flown schedules not unsimilar to the scenario I described at the start of this post and both fell victim to fatigue. While there was no harm suffered from their falling asleep, it is a disturbing development. Mesa fired both pilots as a result of this incident which, in part, ultimately came to light from their self reporting the problem (as well as the problem being originally identified by ATC when they tried to clear them to their destination.)
It highlights a problem that is growing among pilots over the past 20 years. Fatigue and work rules to mitigate it are a major subject of many, if not most, union contract negotiations. Airlines are fighting new work rules as proposed by the FAA in court now. Pilot unions are refusing to cooperate with work rule variances on many new ultra-long haul routes that have the potential to be major money makers for airlines. Two years ago, American Airlines bid to fly a route from DFW airport to China and ultimately had to amend their proposal because the pilot’s union refused to give a work rule variance for the 18+ hour flight. American Airlines lost the bid as a result.
In Part 2, I’ll discuss the opportunities to make a real change in this problem that could benefit both pilots and airlines.
January 3, 2009 on 10:00 am | In Airline Fleets, Airline Service, Deregulation | No Comments
In keeping with the theme set with yesterday’s post, let’s continue on with some predictions.
The MIddle East
Emirates, Qatar and Etihad: All airlines that have aggressive growth plans (both in fleet size and the capacity of their aircraft) that don’t seem to be based in reality. While each of those airlines has successfully developed themselves into eastern hemisphere global airlines, what’s next? There are few opportunities to grow to the United States or the Far East (both range and regional prejudices apply there) and that leaves Europe (somewhat saturated already) and Africa (not a real place to grow due to low demand). But they have to fill an amazing number of widebody aircraft they’ve ordered. We won’t see a merger or a bankruptcy here but I do believe we’ll see these airlines start to reconsider the orders they have on the books and they will slow their growth by deferring these orders.
China’s airlines have been on a buying binge as well but, again, with a weakening domestic economy as well as a weakening international economy, they have no place to go. Like the Middle East contenders, they are likely going to start deferring orders as well.
The Far East
Airlines based in Taiwan, Korea, Japan, Thailand, Indonesia and Singapore will all maintain their status quo more or less. There is some possibility that some orders may be deferred but I will bet that some airlines will actually make new orders for new aircraft although not for growth but for greater operating efficiency.
QANTAS and its affiliate Jetstar have made major investments in new aircraft and major plans in new market development. However, development of new routes in the Far East and Southeast Asia will slow or even contract as reduced demand continues. What’s worse is the new competition they’ll experience on their routes to both Europe and the United States. I expect some order deferrals (probably for the 787) and growth plans will be slowed or deferred altogether as they retrench in the face of competition.
Virgin Blue / V Australia will be challenged in several ways. They’ll likely continue to do well in the Australian domestic market but now they face competition in the Australia / United States market not only from QANTAS, Air New Zealand and United Airlines but also from Delta. There will be too many airlines chasing too few seats in this market and the two most vulnerable airlines, in my opinion, are United and V Australia. United because its service product pales in comparison to any of the other airlines and V Australia because their business model is based more on economy travel than business and first class.
We’ll not see any real growth (with one exception) and we’ll likely not see any real failures here either. The governments of South American countries tend to jump in and save their national airlines when doom is near.
Aerolineas Argentinas should be Argentina’s Alitalia but I suspect a takeover of this airline from Grupo Marsans (a Spanish conglomerate) by the Argentine government will happen sometime this year. Aerlineas Argentinas will continue to muddle through with a incoherent fleet of Airbus aircraft funded by the government and Argentina will see no growth and possibly some severe contraction in their markets because of a failed air traffic system and a very weak economy.
Brazil will continue to be stable more or less but existing Brazilian airlines will have to now contend with David Neeleman’s new airline, Azul. Neeleman (who holds dual citizenship in Brazil and the United States) understands Brazil and will be offering a highly competitive, high service airline founded with Embraer E-190 aircraft that are very well suited to the Brazilian market. It will be jetBlue all over again in Brazil for the next 5 years. However, I expect this new Neeleman airline will one day become an international airline flying both in South America as well as to Europe and the United States. I’ll go ahead and predict this development for 2014 and they will use Airbus equipment.
Not much to say here. African airlines come and go with stunning frequency and usually without much notice. Delta will continue to develop routes to Africa but this will be aimed towards the very few, relatively stable, major cities Africa has. South African Airways will find someway to continue to exist but I expect a switch from Airbus aircraft in their long haul services (A340 aircraft currently) to a Boeing fleet using the 777-200LR and 777-300ER and GE engines. This switch alone could make them profitable. My prediction is that we’ll hear about a Request For Information (RFI) or a Request For Proposal (RFP) by the end of the year but more likely at this year’s summer airshow in Paris. It will be a small order, at first, and quite possibly contingent upon Boeing finding new owners for the A340 aircraft they already own.
With their new, highly competitive market, India has become a rather intense version of the US market. With a weakening economy here as well, I look for consolidation and liquidation as the answer. Look for Kingfisher to merge with someone else such as Jet Airways with Jet Airways being the name retained by the end of 2009. Another possibility will be forced mergers and/or liquidations by the Indian government particularly if the current party loses power. The rather laissez faire experiment in airline deregulation in India has left a bad taste in many people’s mouths, most particularly in the opposition parties not currently in power. India’s current Prime Minister Singh holds degrees in economics and is widely credited with economic reforms in India but the fractured and unsuccessful airline industry is something for the opposition to make a point of.
Stay Tuned for Part III
October 24, 2008 on 11:19 am | In Airline Fleets, Airline News, Deregulation | No Comments
The Fort Worth Star Telegram Sky Talk Blog has written about the APA pilots union representing American Eagle Pilots now has a new contract and there are a few things of interest to me. First, this contract got negotiated in almost absolute silence. There was no real posturing in public and neither side managed to say inflammatory things to the press.
Second, the instructions to the APA (Allied Pilots Association) negotiating team was to obtain real life improvements to the pilots quality of life and work. Increased flexiblity (for pilots) and other tangible but not necessarily measurable changes were obtained but no salary concessions were given. American Eagle got a contract amendment that apparently satisfied both sides needs.
Now, American Eagle pilots are not overpaid to begin with but they are well paid and they do have a pathway to upgrade into American Airlines’ mainline system which is a bit unusual for a regional airline. American probably did not need to obtain wage concessions but I suspect that they wouldn’t ever mind paying less too.
The really striking thing about this development is that American Eagle pilots apparently realized that there were no wage gains to be made but they *could* obtain a better quality of work life. Such concessions from American Eagle may have cost them little or nothing to give. Both sides won.
This is in direct contrast to the Allied Pilots Association representing American Airline mainline pilots. These guys have decided that there need to be “givebacks” and that their world is severely impacted by executives who won bonuses. Personally, I do agree that awarding bonuses to executives when the company has *not* financially performed nor rewarded its lower level employees is wrong. Very wrong.
However, if AA pilots think that there is room to give back $3 Billion (yes, that Billion with a “B”) in wages, they are kidding themselves. If they think there is room give back $1 Billion, they are kidding themselves. I suspect they could gain quite a bit of work life improvements themselves if they were willing to offer some concessions on productivity.
And they face yet another problem. In This Blog Entry, I describe the history of how pilot compensatioin began and why it is a problem today. American Airline pilots realized that with the announcement that AA is buying new Boeing 787 aircraft, the old model might not fit for compensation. You see, the 787 is considerably lighter (as a function of its high carbon fibre reinforced plastic construction) than it would ordinarily be. Much lighter. A very dim light has come on over their heads and they have begun to realize that, perhaps, pilot pay should be based on criteria having to do with something other than weight and distance.
You see, the new 787-9 aircraft are capable of carrying almost as many people just as far as a 777-200 but with a lot less weight. The pilots will want compensation equal to or at least close to a 777 pilot and they’ll begin to look for justifications for that. Those justifications will inevitably lead to a discussion on all pilot pay because future aircraft such as the 737-RS will also likely be constructed in such a way as to offer the same capacity at less weight as current generation 737 models.
For once there will need to be a rational agreement on how to pay pilots that involve new measurements instead of the ones in use for 80 years. This is an opportunity for AA to obtain some sort of deregulation on the cost side of the equation and set new negotiating precedents for other union relationships in the future.
October 2, 2008 on 10:57 am | In Deregulation, Trivia | 2 Comments
A fair fare would probably be identified by most people as an air fare that accounts for the true costs of flying from point A to point B non-stop using the right aircraft to supply the capacity. As a matter of fact, that was what the Civil Aeronautics Board tried to adjudicate when setting fares.
Now, such a model might sound familiar. It sounds like what LCC carriers such as Southwest Airlines and Airtran do. In many sense, yes it is. Legacy carriers, focused on hubs, hurt themselves with those hubs every time they carry a connecting passenger. The hub and spoke system demands that they carry more passengers a farther distance using more resources and economies of scale no longer allow them to make a profit doing so.
Let’s use as an example travel from Midland / Odessa to Albuquerque. You have 3 basic choices for travel in this scenario. You can fly Southwest Airlines non-stop for about $260 round trip or you can choose another carrier for a non-direct, connecting route that starts at about $550 round trip. Another carrier might be American Airlines, Continental Airlines or Delta Airlines.
If you choose American Airlines, you’ll fly EAST to DFW and then WEST again to ABQ and it will take . . . wait for it . . . from 4.5 to 6.5 hours to complete your travel. Since you are connecting via DFW, you’ll be making two take-offs and two landings and one of those landings (remember, part of an airline’s cost is a landing fee) will be at a major hub airport. Take offs are expensive too. They are the part of the flight that consumes the most fuel so two take-offs is bad.
If you fly Continental Airlines, you’ll connect through IAH (Houston) and the economics are the same but the distance flown is even greater. If you fly Delta, you’ll first fly to Houston and then to Dallas and then to ABQ and your price will be in excess of $1000 round trip. By the way, your total travel time using Delta will be over 10 hours.
Now, if American Airlines or Continental Airlines (let’s just leave Delta out of this because such a scenario is absurd) want to compete for the passengers traveling from Odessa to Albuquerque, they have to offer a fare that is somewhat competitive. If they do, they’ll come at least close to matching Southwest’s fare of about $300 and that means that their costs are higher and they make less profit or no profit. Since Southwest has the lowest costs, they get to set the price.
Now, some people such as Robert Crandall advocate re-regulation of fares in some form. In a speech to the Wings Club in June 2008, Mr. Crandall offered that this might take the form of mandating a “minimum fare” that is the sum of “locals”. What he suggests is that a fare between two cities that connects via a hub should be the sum of the fare(s) between Point A to Point B (a hub) and Point B (a hub still) to Point C (the final destination. In the alternative, he suggests that flights that connect via a hub be required to have a “connection” charge. His goal is to remove any incentives airlines might have at present for operating a hub. It becomes officially un-economic to fly that route via a hub.
Quite honestly, I find that a poor solution since he proposes to disrupt the systems of the very airlines that his solution purports to help in the long term. It disrupts a 30 year institution among legacy carriers and assumes the staff and leadership who have operated in such a manner to be able to adjust to a new model that they have no experience with. It is, at best, a very awkward solution to the problem and only addresses revenues (once again) instead of the whole equation. Even more important, it is hard to imagine the political will required for such a change.
No doubt the adjustments have to be made and I would suggest that might need to take the form of actually allowing a large legacy carrier to go out of business (which then removes some barriers to entry for other, more efficient carriers) or you have to find a way to reasonably deregulate costs so that airlines no longer must use hubs to fight for their very existence. Those costs are principally labor. The latter solution is better (both in the short and long terms) because it doesn’t necessarily involve massive unemployment or relocation for employees.
An airline needs to be able to efficiently locate staff at various “base” cities in a way in which costs are not concentrated in one particular city because it is merely a popular place to live. You don’t want all of your high cost employees (i.e. the senior staff) to locate themselves in Miami where much of your traffic might be low yield leisure travel. Second, an airline needs to be able to competitively bid for staff on an open market. A seniority system as used by airline unions ties staff to one airline and forces the airline to “wait out” their term of employment (as much as 40 years) until they can hire new, lower cost staff to fill a particular position. Further, it denies them access to qualified personnel for expansion because staff won’t leave another airline for a new job because they don’t want to start out at the bottom of the seniority list.
If we deregulated (by legislation) the seniority system in airlines as a first start, airlines could suddenly re-allocate labor and gain more productivity and reduce their costs on routes where necessary. For a first round, you could even leave in a seniority system for earning pay and determining furloughs but just remove the seniority system as it pertains to bidding for line routes and it would allow the airline to locate their labor (by cost) where they most needed it and gain more productivity. That change alone might well serve to offer legacy carriers a legitimate opportunity to earn a profit regularly (with all other things being operated effectively). It would at least be a good first step in trying to solve the problem.
October 1, 2008 on 12:07 pm | In Deregulation, Trivia | No Comments
Almost all airlines in the United States operate from hubs. Going from West to East, they are (in no specific order), Phoenix, Salt Lake City, Denver, Dallas / Fort Worth, Houston, Minneapolis / St. Paul, Chicago, Detroit, Cincinatti, Memphis, Atlanta, Cleveland, Philadelphia, and NYC. There are a few other cities that some might argue are hubs but which I think are more “focus” cities than the above cities.
One way airlines have reorganized themselves to meet the cost pressures of non-deregulation on the costs side of the airline industry is to simply start “connection” and/or “feeder” airlines or to contract with those airlines. Some examples are American Eagle, Mesa Airlines, Comair, Compass and Express Jet. There are others too. These airlines fly regional aircraft (regional jets and turbo-prop aircraft) on behalf of the mainline airlines. Unions permitted these airlines by getting “scope” clauses in the contracts that limit the size of the aircraft to be operated.
Often those scope clauses originally limited airlines to flying regional aircraft that had 50-odd seats or less. What they didn’t do was limit the kind of flying such aircraft might be asked to do. As things evolved post-1978 deregulation, airlines began to establish large hubs with multiple banks of flights each day. They did so in order to “concentrate” their operations and take advantage of economies of scale. Over time, mainline aircraft departing from a hub either went to other hubs or to larger 1st and 2nd tier cities. Mainline aircraft stopped serving the smaller third tier cities (for example Des Moines or Jackson, MS.) It never occured to unions to limit both scope and distance in those contracts because originally it was assumed that regional aircraft couldn’t serve route sectors of much more than 200 to 300 nm.
Instead, mainline airlines used their feeder airlines to pick up traffic in those cities and carry it to a hub where the passenger then transferred to a mainline aircraft or another regional flight to get to their final destination. For instance, a passenger might fly American Eagle from Des Moines to Chicago, transfer to an American Airlines flight using mainline aircraft and continue on to a final destination such as Los Angeles.
Prior to 1978 deregulation, American Airlines might have flown a route from Chicago to Los Angeles with intermediate stops in Des Moines and, say, Salt Lake City. Remember this is a hypothetical example. While hubs were beginning to develop or had developed, those entities really resembled what we call focus cities today. It was a concentration of traffic and opportunity to rotate aircraft through maintenance facilities but it wasn’t a fortress hub that we see in places such as DFW or MSP today.
Over time, new aircraft such as regional jets that had greater capacity and speed than original “feeder” aircraft such as the EMB Brasilias or SAAB 340 aircraft were introduced. These regional jets were capable of mainline aircraft speeds and altitudes and were capable of flying route segments in excess of 400 nautical miles. Since the cost structure for such aircraft was an order of magnitude less than that for mainline service, airlines began to realize that they could use these aircraft to serve routes that contained a lot of O&D traffic for more point to point flying.
Suddenly, American Eagle wasn’t just serving cities from DFW that were in Texas and surrounding states. With regional jets, it began serving medium haul, thin traffic routes from DFW. One example is the one I gave yesterday: DFW to MKE. That route has a lot of O&D traffic (Origin and Destination) but very little connecting traffic. What that means is that people flying from MKE to DFW were terminating their trip at DFW instead of necessarily continuing on to another destination and vice versa. If a MKE passenger wanted to get to Denver, they would fly either to Chicago or MSP to connect or possibly direct on a United Airlines “connection airline”.
The feeder/connection airlines evolved into the “point to point” service provider for small to medium markets. The reason is that airlines can only afford the flight crew labor costs for routes where the yield (profit from revenue) justified those costs. The only way to find that yield is to concentrate flights through hubs. One example, again, is DFW. American Airlines “feeds” traffic from all over its network (including American Eagle’s network) into DFW where they “concentrate” that traffic and redistribute it to other routes. This means that those routes load factors remain very high for each flight.
On the surface, that sounds efficient. However, there are some underlying factors that reveal it to be inefficient to operate such hubs. First, it means that you have to schedule your traffic in banks of flights. You want your flights to arrive at about the same time and then take off again at about the same time. In order to manage that, your departure times at outlying stations may have to be excessively inconvenient to passengers. Your airport service staff tends to work in concentrations with excessive idle time in between banks of flights. You still have to pay them and they remain there because you service large banks of flights at one time. An airline must have that staff in place over the full duty period to accomodate those peak periods.
Such hubs also tend demand fleets that are largely homogenized. American Airlines, for instance, standardized on the MD-80 for these flights (and now is doing so on the B737-800) and therefore has to find routes that fit the aircraft instead of aircraft that fit the routes. Because they must fill so many seats on mainline routes to make a profit, it drives them to feed more and more traffic into the hubs.
Hubs also can cause system wide service disruptions. A bad weather day in Chicago can wreck two major legacy carriers systems (United and American Airlines) for multiple days because any disruption ripples outward through the whole system. Since all flights go to or depart from the hub, there is no flexibility to “route around” the problem city.
All of those issues inhibit a legacy carrier from earning long term profits and they haven’t earned reliably for over 20 years now.
The best example of how best to operate in today’s airline market is, no surprise, Southwest Airlines. While they do have several cities that look and feel like hubs, they really aren’t when compared to other airlines. They are focus cities. Those focus cities permit some concentration but they really exist to provide some operational flexibility and maintenance.
Southwest Airlines focuses on flying point to point routes and high frequency commuter flights. If you try to get from one city to another on Southwest’s system, you are very likely to fly there direct and in many cases non-stop. The percentage of traffic on flights from focus cities that is “connecting” is relatively small compared to legacy airlines.
When a flight from Southwest Airlines departs DAL (Dallas Love Field) for ABQ (Albuquerque), it isn’t coming back that day most likely. Instead, it will continue on to, perhaps, Phoenix and then to Portland where it will turn and head to Los Angeles and then, maybe, to Denver. The plane goes through 3 focus cities but at all times it is carrying O&D traffic primarily.
That point to point system with focus cities permits them to offer highly convenient flights that fly direct (in other words, a passenger doesn’t have to get off the plane and board another one) and they get a higher utilization rate out of both the aircraft and crew because they aren’t sitting at hub for 1 to 2 hours waiting for their flight to depart again. Instead, Southwest crews do fast turnarounds at focus cities (20 to 40 minutes) and depart for still another city. Southwest not only gets high utilization from their aircraft but they also get high utilization from their flight crews.
Southwest Airlines’ crews are paid competively and even generously but the airline also gets far more productivity from them in a given duty period. Ironically, Southwest crews also fly less fatiguing schedules overall and spend more nights at home than most other aircrews. Southwest captains earn as much or more than any other Boeing 737 captain but because they negotiate not just raises but flexibility in their contracts, their standard of living is quite a bit higher than it would be at most legacy carriers. They offer more productivity in return for working an easier duty period at a competitive salary.
They also don’t fly small commuter aircraft and they don’t avoid flying to 3rd tier markets. Southwest flies B737 equipment to cities such as Indianapolis, Odessa, Corpus Christi and Brimingham. Every other airline serves those markets with primarily regional jets and Southwest manages to earn more profit flying to those same cities using mainline aircraft that is more than 100% larger. Not because their crews are “cheaper” but because their crews (and their unions) bargain for more than just money. It’s a competitive negotiation with real give and take and, as a result, Southwest gets high productivity without working their crews longer hours, bad morale or high turnover.
Next we’ll look at why seemingly “fair” fares can’t earn real profits for most US carriers.
September 30, 2008 on 10:50 am | In Deregulation, Trivia | 1 Comment
Deregulation in 1978 was never full deregulation. It was, instead, deregulation of the revenue side of the equation. Airlines were suddenly free to fly routes and set fares as they wanted. The barriers to entry on a route were no longer regulatory but, rather, business cost. My father phrased the start of a route as “starting a new business” and I must say that that is true. Airlines have to invest in infrastructure, new employees and market their services when entering a new city or route. The airline is essentially starting a new business.
What never got deregulated was the labor cost side of the equation. Flight crews were fully unionized (with the notable exception of Delta’s Flight Attendants) and the union approach to wages and work rules was and always has been to negotiate for more each contract. When the game changed with regulation, the airlines were still inhibited from negotiating freely for their labor on an open market because the unions had 30 years of precedent and enormous political power. God help the airline who had pilots striking against it because it denied *any* revenue to the company and airlines are cash intensive businesses. They go out of business very quickly if that cash stream is interrupted.
Using pilots as example, take a look at their negotiating power in 1978. First, the barriers to entry in a career as a pilot were (and to some degree remain so) very high. A typical pilot spent 7 to 9 years in the military flying multi-engined aircraft and when they exited, they got their ATP license and went hunting a type certificate to fly for an airline. Once in an airline, they entered a seniority system that made it very difficult to leave because every airline had the same system. If you started at one airline, made captain on an aircraft type and then wanted to leave, you had to start over again. The union(s) set a contract and work rules in place that essentially made each airline a fiefdom.
The airline union is the lord and the pilots are the serfs. Well paid serfs in their later years but serfs nonetheless. Not only is there no incentive to seek work elsewhere, there were strong incentives to stay and play the game no matter what. Even when an airline is by all measures about to fail.
This situation remains true for most airline unions to some degree or another. What the government never did was deregulate labor so that airlines could compete for qualified people to fill their staffing needs. One interesting by-product of this is that airline pilots work terrible schedules today. They do so because it is enormously expensive to have a pilot sitting on the ground doing nothing. Airlines fly pilots on different schedules than their flight attendants (at least at most airlines) and they do so because they want to extract all possible value from them because the cost is so high. Ironically, a more ratioinally paid airline pilot would work an *easier* and more rational schedule that impacted their lives (both personally and professionally) far less if their pay were more in line with a free market competition. Mind you, they wouldn’t be underpaid, just paid more in line with the demands of their job.
My father thinks that a free market salary for a pilot would be about $70,000 / year and there would be far less range between entry level and an experienced level. I personally believe that number would be higher. About $100K to $120K. I think so because the costs to become a qualified airline pilot and the skill required still make for a rather rare person today. The pilot still has to become qualified under FAA rules by getting time first on single engine aircraft, then multi-engine aircraft and turbine engined aircraft. Flying also takes talent. Being an commercial pilot also means having a great understanding of engineering (many pilots gets undergraduate degrees in engineering for just this reason.)
What the airlines needed was an opportunity to negotiate for new labor under new rules. It would have been impractical and politically difficult to “break” the existing unions. It would have been better to set new rules for airline unions and airline flight crew going forward. For instance, eliminating the seniority system but making one’s qualifications and types fully transportable between airlines for the same pay would have made it more fair to both sides. A pilot who was “captain” qualified on a Boeing 737 would be able to take those qualifications and fly at any airline for market pay.
Suddenly a pilot would not be married to just one airline and have to deal with fear of furloughs and bankruptcy multiple times in their career that could reset them back to “zero” in their career. Instead, they would be able to seek positions at other airlines for a commensurate career salary. The same could be true for any flight crew. It would even have the benefit of further “harmonizing” best practices among various airlines.
Over the years, some airlines have made some attempts to re-negotiate this situation. American Airlines introduced the A/B pay scales in the 1980s. That worked very well for many years but the advantage was lost because the “B” scale employees still worked for the original union and the “A” scale employees had a vested interest in raising all salaries for everyone.
There is nothing wrong with unions existing in the workplace. However, when a union’s sole focus is on raising salaries to everyone else’s detriment, it begins to lose value. Unions can and should enforce good work rules, good working conditions and even qualification standards and salaries. They should not, however, distort their own labor market or their airline goes down.
Another way airlines have gotten around this is by starting commuter feeder airlines. American Airlines has American Eagle for instance. These “new” airlines have employees who are hired at “market” rates and who remain employed by unions. Now the airlines use these airlines to fly mainline routes at higher frequencies because it is more cost effective than flying the route with less frequency but greater capacity using mainline equipment.
A great example of this is American Airlines and how they served the DFW – MKE (Milwaukee) route a couple of years ago. They used 50 seat ERJ-145 aircraft in their American Eagle subsidiary and flew as many as 5 cycles a day. What’s worse, they frequently turned away people or re-routed them through Chicago because their aircraft were either capacity limited or load limited. The aircraft had average load factors far in excess of 85%. The better solution would have been to fly either mainline MD-80 or Boeing 737 aircraft 2 to 3 times a day. That would have offered better service (more reliable and not load limited), more comfortable seating and slightly shorter flights. But they couldn’t because AA MD-80/B737 pilots for such routes would cost 4 times more than American Eagle pilots.
The demand was there. The fares actually offered great revenue opportunities (when compared to average DFW – ORD fares) but the expenses were still too great on the labor side. So people were offered a cramped ERJ with all coach service that, by the way, eventually lost passenger traffic to Midwest Express (who flies more comfortable MD-80s and B717 aircraft) and to other mainline airlines who would service Dallas via Chicago or Minneapolis-St. Paul.
Regional Jets were never built for serving such markets and they do so very inefficiently. Regional aircraft should never be serving route sectors greater than 400 nautical miles and certainly should never be serving mainline city pairs such as MKE-DFW. They should fly from Odessa to Dallas or Cedar Rapids to Milwaukee.
Could labor be less regulated in the airline world today? I don’t know. It would require great political will and I frankly don’t see that on the horizon. It would require the airline industry to be both realistic and cooperative with each other and it would require unions to recognize that not every contract means “more” but maybe it means different and more accomodating instead. It should also offer some job security and certainty too.
In the next part, we’ll take a look at how the lack of full deregulation has distored air travel in the United States and caused inefficiencies.
September 29, 2008 on 10:20 am | In Deregulation, Trivia | 1 Comment
This weekend I had a series of long and very interesting conversations about airline economics and deregulation in the airline industry with my father, a former executive vice president of Braniff. I have been following the airline industry since the mid 1990′s and very closely since the early 2000′s and after this weekend I can only say there is still more I don’t know.
The insight I gained on the industry this weekend isn’t easy to get anymore. Much of what takes place today in the airline world overshadows the history of the industry. But I thought I would share my new insight in a series of stories this week on airline economics and deregulation. Information presented as fact comes from my father. The opinions are mine unless otherwise attributed to someone else.
The first of these stories is quite naturally about the history and background of the airline industry. What almost any fan knows is that the airline world as primarily fostered by air mail contracts originally. It wasn’t until the DC-3 (and similar aircraft) that an airline could really earn profits from passengers and even then air mail was an essential part of earning a profit as an airline. In other words, passengers reduced the importance of air mail but it was a long time before it diminished the importance of air mail revenue to a point at which it could be considered relatively unimportant.
Prior to air mail, the fastest way to move mail around was by train. Trains had reliable schedules and a robust network of lines that made it easy, for the first time in history, to move mail in a timely manner. Since many infant industries are heavily influenced by more mature industries, it comes as no surprise that many of the “best practices” used by railroads were “inherited” by airlines as they began to operate.
One good example of this is how engineers on trains were (and still are) paid. It was based on time, distance and weight. An engineer who operated a long, heavy train on a transcontinental route quite obviously was going to A) Be away from home. B) Need skills and experience to operate that train over different terrain. C) Be able to know how to stop such a leviathan in an emergency without completely destroying the train itself.
The engineers were paid a scale of wages that took into account their skill and experience as well as punishing time away from home and long duty hours required to push that train to its destinations. In other words, an engineer who had to stay on duty for 12 hours a day driving a 1/2 mile long train over a mountainous area would be paid much more than an engineer who drove a feeder line over a short distance delivering boxcars to factories in an industrial area. Quiet naturally, this kind of thinking was quickly adopted by airlines and airline pilots.
Very early in the game, airline pilots were paid according to the size of their aircraft (a DC-3 pilot earned much more than a pilot of a Ford Tri-Motor) and the distance they traveled. They are paid in the same manner today. A pilot who flies a Boeing 737 on 4 or 5 flight segments for 10 hours is paid less per hour than a pilot who flies a Boeing 777 for one flight segment that takes the same time. The argument is and always has been that the B777 pilot is responsible for a larger aircraft, more souls on board and therefore works harder for those same hours.
The reality is really quite different. Most of the work a pilot incurs is on takeoffs and landings, not during cruise flight. It requires no great difference of knowledge to fly a B777 or a B737 and, in fact, it may be easier to fly the B777 with its more sophisticated flight management computers. The number of souls on board sounds like a good argument but, as my father pointed out, is it? After all, in almost any aircraft crash, the pilot(s) are the most certain to be casualties. So, isn’t it in their best interest to fly that aircraft as best they can no matter how many others are on board? Of course it is. Practically speaking, we regard it as a tragedy if 20 or 200 people are killed or injured in a crash.
So, who should be paid more? If it is about how hard the work is, then many regional feeder pillots should be paid far more than the B757 pilot who might only fly 3 or 4 segments in a day. That same feeder pilot might work twice as hard for the same duty time because he or she is making 5 or 6 or even 7 landings and take-offs per day. Both pilots have to know a complicated set of systems. Both planes have just 2 engines. Both airplanes have to navigate the same kind of airspace and altitudes. Who is working harder? The regional jet pilot is.
But he or she is also the least paid. Regional jet pilots just starting out make as little as just $20,000 to $25,000 per year. A B757 pilot is likely making 5 to 8 times that much money for the same or less duty hours.
All because airlines adopted the same pay models that railroads used. It suddenly becomes more clear why airline managers often resent pilots the most. In the mid 1970′s, a Braniff 727 captain made as much as 50% more than a senior Braniff executive. Did the captain work more hours? No. In fact, if he worked 80 duty hours a month and if you allowed a 20% bump in hours for time worked but not paid, he or she still only worked 96 hours in a month. That same airline executive was paid for 160 hours per month and probably worked about 200 hours per month. The airline can’t run profitably or reliably without either person so who was overpaid? The pilots, of course.
In the next part, we’ll take a look at how pilots (and other aircrew) distorted the the 1978 deregulation of the industry.