Cheap Fares, Bumpy Ride
I flew to Florida on vacation recently, and would like to apologize to American Airlines for the boorish behavior of my fellow passengers. Most of them did a lot of complaining -- about the long lines at security, the scarcity of food and the inadequate onboard entertainment. None of these ingrates, as far as I could tell, paused to acknowledge the airline’s generosity. It’s a noble endeavor, this charitable airlift that flies millions of people across the country each year at a staggering cost to airline investors.
The airline industry as a whole seems to have gone nonprofit. The entire U.S. airline industry has posted a cumulative loss of roughly $15 billion since 1938, according to the Air Transport Assn.’s analysis of government data through 2003, and estimates for last year. The industry is expected to lose $5 billion more this year, and this in a strong economy.
No wonder Warren Buffett once quipped that if a capitalist had been present at Kitty Hawk, he would have done future investors a big favor by shooting down that first flight.
Airlines deserve plenty of the blame for their financial plight. There is something about boys and their shiny planes that gets in the way of managerial discipline. I know that when I was a kid banging out my own make-believe airline’s timetable on a manual typewriter, I’d put 747s on such cool-sounding, exotic routes as Belo Horizonte-to-Liverpool, oblivious to the economics.
And remember People Express? The early 1980s phenomenon had a simple formula and low fares and costs, but it just couldn’t help itself. Before you knew it, the airline was flying 747s to Brussels.
The one consistently successful airline over the last quarter of a century, Southwest, thrived in part because it never stopped thinking of itself as little more than a glorified bus company, and a new generation of carriers, such as JetBlue, are trying to emulate that success.
The airline industry’s overly clever pricing schemes have also backfired spectacularly. Unlike a movie theater that will usually charge the same amount for a seat, airlines perfected “yield management” systems that amounted to a continuous auction of each seat on every flight. In the late-1990s boom, airlines could often auction off those last few coach seats on transcontinental flights for a couple thousand dollars.
It makes sense to have different pricing levels pegged to demand, but the industry’s extreme version of the strategy served to convince passengers that there is no inherent value to an airline seat, separate from the bidding game. And that’s a game that consumers now win every time because the Internet has empowered them with information, and overextended airlines have too many planes to fill.
Air travel’s cost per mile is half of what it was in 1978, adjusting for inflation. But airlines also are victims of what Gordon Bethune, until recently Continental Airlines’ chief executive, calls the “sense of entitlement” felt by their various constituents, which include the government, labor unions and the aircraft manufacturers, none of which treat the industry as one driven by market forces.
And don’t get Bethune started on you, the flying public: “Passengers will get a $99 ticket each way from one end of the country to the other, but in the event of thunderstorms that wreak havoc on the system, they’ll pound the table demanding to be put up at a Four Seasons,” he said in a recent phone interview.
Airlines were deregulated back in 1978, at which point the industry was comfortably in the black, but Bethune argues that in many ways they are still treated as public utilities. Members of Congress love trying to legislate such things as bereavement fares and a loopy passenger bill of rights. And Washington has hobbled airlines with excessive taxes and fees to cover post-9/11 security costs that should be paid by society as a whole. The fees and taxes on a $200 ticket add up to $52, or a whopping 26%. Passengers consider this as part of the overall ticket price, which makes it harder for airlines to raise fares.
Unions, for their part, are still fighting to protect work rules that date back to a time when their members worked for inefficient utilities guaranteed a certain profit by government-approved fares. The government unwisely limits foreign investment in airlines, and the nation’s bankruptcy laws have prevented a timely and necessary shaking out of the industry by keeping failed carriers around too long.
In Florida, we boarded a cruise ship, on which my fellow passengers revealed none of the boorishness they might have on an airplane. Gone was the sense of entitlement, replaced by an innocent sense of awe and an appreciation for the logistical challenges faced by the mightily profitable cruise line. Wasn’t it amazing the ship could pack so much food? Wasn’t it amazing that the crew seemed so fanatic about safety? Small glitches were met with understanding.
When was the last time anyone stood in the middle of an airline terminal and gasped, “Gee, it’s amazing how this tightly choreographed commercial aviation system will safely fly some 2 million people today between nearly 400 airports”?
Who knows how much longer this charitable mass airlift can continue.
