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Airlines Are Driven to Nickel and Dime
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By SUSAN CAREY
Harried travelers might not want to hear this, but in terms of cold economics it's a miracle U.S. airlines are still in business.
Average domestic airfares, adjusted for inflation, have fallen 16% since 1995, according to the Transportation Department. A round-trip ticket that in 1995 would have cost $410.30 (in 2010 dollars), including nominal bag and reservations fees, now goes for $337.97, and that includes $21.66 in bag and reservations charges, the DOT says.
Stripping out those fees, the current fare is down an inflation-adjusted 21% from 1995.
This dismal math is wreaking havoc, particularly at AMR Corp.'s American Airlines. American is the weakest of the major airlines, in part because it avoided bankruptcy proceedings earlier in the decade, unlike its big rivals, who were able to cut costs during their stays in bankruptcy court. It also missed out on an industry consolidation wave.
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AMR's stock price collapsed Monday, losing 33% of its value, on renewed fears that the nation's No. 3 airline by traffic might be forced to file for bankruptcy-court protection. The stock partially recovered Tuesday, gaining nearly 21% to end 4 p.m. New York Stock Exchange trading at $2.39, as investors hunted for bargains.
AMR said Monday that there was no company news to explain the stock volatility. The carrier reiterated that it doesn't aim to restructure in bankruptcy court and is working to improve its performance.
But what plagues American still bedevils the rest of the airline industry, which has racked up $55 billion in losses in the past decade.
Structurally, the business is capital-intensive, labor-intensive, highly leveraged and fiercely competitive. It is also vulnerable to external shocks, including terrorism, oil-price spikes, waning consumer confidence and high taxes.
Even though the industry generates billions of dollars in annual revenue, it rarely is able to cover its huge expenses, much less show a decent return on invested capital.
Passengers love to accuse the airlines of gouging, and a dizzying array of fares adds to the outrage. A new raft of fees for better seats, expedited security lines and meals on board only makes passengers angrier.
But airlines, caught between a steady decline in fares and rising costs, have no choice but to look for every nickel they can find. Passenger tickets now account for just 71% of U.S. airlines' total passenger revenue, down from 88% in 1990, according to the DOT. The rest comes from fees it charges for, among other things, reservation changes, standby service, checked luggage, in-flight food service and transporting pets.
American, like its rivals, is trying to boost these alternative revenue sources. In the second quarter, the Fort Worth, Texas, carrier took in $659 million in "other revenue," a sum that was up 5.5% from a year earlier. But $659 million was only 11% of its total quarterly revenue of $6.1 billion. The company posted a net loss of $286 million for the quarter and analysts say it is on track to lose money for the rest of this year and all of 2012.
Despite many mergers over the years, competition in the domestic industry remains white-hot. Discount airlines, which tend to act as the price policemen, now cover about three-quarters of the domestic landscape.
More
Airlines Balk at Tax Proposal
"Ultra low cost" airlines have sprung up, led by Spirit Airlines Inc., which sells tickets for as little as $9, and makes its money charging passengers for such things as seat assignments and carry-on baggage.
Overseas flights tend to fetch higher fares but account for less than half the major U.S. carriers' capacity. And even with $1,000 coach tickets to Asia in its portfolio and $5,000 business-class flights to Europe, United Continental's second-quarter average fare–revenue divided by number of passengers, excluding taxes paid by those passengers–was $273. By contrast, Southwest Airlines Co., a budget carrier that flies only domestic routes, had an average one-way fare for the quarter of $143.
Darin Lee, an aviation economist for consulting firm Compass Lexecon, says years of consolidation would suggest less competition and higher fares.
But "there is no significant change in the secular, long-term cycle of prices—which is, they are going down," Mr. Lee says. "If airlines had pricing power, they wouldn't be rushing to buy more fuel-efficient planes and trying to eke out every little efficiency."
Fuel prices are a huge problem. For the first five months of this year, jet fuel was fetching $2.84 a gallon, up 243% from 1995 levels after adjusting for inflation.
While most airlines hedge some of their fuel needs, that is a costly form of insurance. So they are taking other steps to become more resilient. They no longer chase market share for its own sake and instead have trimmed underperforming flights, so they can charge higher fares for the fewer seats remaining.
Longer term, says Jeff Smisek, chief executive of United Continental, there has been a move "to professional management, as opposed to more charismatic, cowboy management," which is helping airlines behave more maturely, stabilize their businesses and focus on earning their cost of capital. "Investors are fed up with us destroying capital," he says. "They're fed up with us destroying capital," he said, and they're holding our feet to the fire, and that's a good thing."
Article
Stock Quotes
Comments (35)
MORE IN BUSINESS »
Save
↓ More
smaller
Larger
By SUSAN CAREY
Harried travelers might not want to hear this, but in terms of cold economics it's a miracle U.S. airlines are still in business.
Average domestic airfares, adjusted for inflation, have fallen 16% since 1995, according to the Transportation Department. A round-trip ticket that in 1995 would have cost $410.30 (in 2010 dollars), including nominal bag and reservations fees, now goes for $337.97, and that includes $21.66 in bag and reservations charges, the DOT says.
Stripping out those fees, the current fare is down an inflation-adjusted 21% from 1995.
This dismal math is wreaking havoc, particularly at AMR Corp.'s American Airlines. American is the weakest of the major airlines, in part because it avoided bankruptcy proceedings earlier in the decade, unlike its big rivals, who were able to cut costs during their stays in bankruptcy court. It also missed out on an industry consolidation wave.
Enlarge Image
AMR's stock price collapsed Monday, losing 33% of its value, on renewed fears that the nation's No. 3 airline by traffic might be forced to file for bankruptcy-court protection. The stock partially recovered Tuesday, gaining nearly 21% to end 4 p.m. New York Stock Exchange trading at $2.39, as investors hunted for bargains.
AMR said Monday that there was no company news to explain the stock volatility. The carrier reiterated that it doesn't aim to restructure in bankruptcy court and is working to improve its performance.
But what plagues American still bedevils the rest of the airline industry, which has racked up $55 billion in losses in the past decade.
Structurally, the business is capital-intensive, labor-intensive, highly leveraged and fiercely competitive. It is also vulnerable to external shocks, including terrorism, oil-price spikes, waning consumer confidence and high taxes.
Even though the industry generates billions of dollars in annual revenue, it rarely is able to cover its huge expenses, much less show a decent return on invested capital.
Passengers love to accuse the airlines of gouging, and a dizzying array of fares adds to the outrage. A new raft of fees for better seats, expedited security lines and meals on board only makes passengers angrier.
But airlines, caught between a steady decline in fares and rising costs, have no choice but to look for every nickel they can find. Passenger tickets now account for just 71% of U.S. airlines' total passenger revenue, down from 88% in 1990, according to the DOT. The rest comes from fees it charges for, among other things, reservation changes, standby service, checked luggage, in-flight food service and transporting pets.
American, like its rivals, is trying to boost these alternative revenue sources. In the second quarter, the Fort Worth, Texas, carrier took in $659 million in "other revenue," a sum that was up 5.5% from a year earlier. But $659 million was only 11% of its total quarterly revenue of $6.1 billion. The company posted a net loss of $286 million for the quarter and analysts say it is on track to lose money for the rest of this year and all of 2012.
Despite many mergers over the years, competition in the domestic industry remains white-hot. Discount airlines, which tend to act as the price policemen, now cover about three-quarters of the domestic landscape.
More
Airlines Balk at Tax Proposal
"Ultra low cost" airlines have sprung up, led by Spirit Airlines Inc., which sells tickets for as little as $9, and makes its money charging passengers for such things as seat assignments and carry-on baggage.
Overseas flights tend to fetch higher fares but account for less than half the major U.S. carriers' capacity. And even with $1,000 coach tickets to Asia in its portfolio and $5,000 business-class flights to Europe, United Continental's second-quarter average fare–revenue divided by number of passengers, excluding taxes paid by those passengers–was $273. By contrast, Southwest Airlines Co., a budget carrier that flies only domestic routes, had an average one-way fare for the quarter of $143.
Darin Lee, an aviation economist for consulting firm Compass Lexecon, says years of consolidation would suggest less competition and higher fares.
But "there is no significant change in the secular, long-term cycle of prices—which is, they are going down," Mr. Lee says. "If airlines had pricing power, they wouldn't be rushing to buy more fuel-efficient planes and trying to eke out every little efficiency."
Fuel prices are a huge problem. For the first five months of this year, jet fuel was fetching $2.84 a gallon, up 243% from 1995 levels after adjusting for inflation.
While most airlines hedge some of their fuel needs, that is a costly form of insurance. So they are taking other steps to become more resilient. They no longer chase market share for its own sake and instead have trimmed underperforming flights, so they can charge higher fares for the fewer seats remaining.
Longer term, says Jeff Smisek, chief executive of United Continental, there has been a move "to professional management, as opposed to more charismatic, cowboy management," which is helping airlines behave more maturely, stabilize their businesses and focus on earning their cost of capital. "Investors are fed up with us destroying capital," he says. "They're fed up with us destroying capital," he said, and they're holding our feet to the fire, and that's a good thing."
