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Study Forecasts Turbulent Years Ahead for Airline Services
Posted On: Nov 11, 2012

By D.R. Stewart--

Amid rising consumer complaints about the quality and cost of airline service, a federal study forecasts passengers are not likely to see significant improvements in the years ahead.

"Aviation Industry Performance: A Review of the Aviation Industry, 2008-2011," released by the Department of Transportation's Office of Inspector General on Sept. 24, finds U.S. airlines are just now making money after a decade of losses.

As unpleasant as the airline experience has become for consumers, the federal study finds U.S. carriers are surviving high fuel prices and the economic recession by reducing flights, flying smaller planes, increasing fares, introducing ancillary fees and merging with other airlines.

"Ultimately, the trends presented in this report suggest that the changes in the number of airlines controlling the industry, fare increases and capacity reductions that began in 2008 are not a brief phase, but rather are signs of a greater shift in the industry that will remain for years to come," the DOT report says.

"Although the industry is still in transition, the data in this report suggest that some of the most significant trends of recent years - including but not limited to a more consolidated industry with less competition, fewer flight options for small communities, and revenue-enhancing baggage and other fees - may continue for the foreseeable future as airlines further improve their adaptability to changing market forces."

End of tradition

Industry officials and analysts in Tulsa and elsewhere concur with the conclusions of the DOT report.

The end of the traditional airline economic model of slashing fares to win market share began with the 9/11 attacks, the federal study and industry analysts say.

And then the traditional model got buried under high fuel prices.

"The 2008 fuel price spike had a salutary effect on the industry," Embry-Riddle Aeronautical University instructor Darryl Jenkins says in his analysis regarding what lies ahead for the airline industry.

Jenkins presented his analysis in September at Embry-Riddle Aeronautical University.

"Of primary importance and significance, (the 2008 runup in fuel prices) imposed both route and pricing discipline for the first time ever," Jenkins says. "Airline managements became very worried about near-term circumstances like cash flow from operations, rather than other objectives such as market share. This was a truly watershed moment.

"Since that time, we have seen airlines pull in capacity each year. The current aggregate capacity level is similar to that of the mid-1990s. The industry has taken more than 15 years' worth of seats out of the system."

Airline service at Tulsa International Airport mirrors the national trend.

From 2001 to 2012, the eight airlines serving Tulsa - American, Continental, Delta, Great Plains, Midwest, Southwest, TWA and United - were reduced to four: American, Delta, Southwest and United.

During the same period, airlines in Tulsa cut daily flights 30.4 percent while reducing seating capacity by 37.3 percent, Tulsa Airport Authority statistics show.

"It's unreal today," said Bobbie Needham, owner of Owasso Travel, Independence (Kan.) Travel and Miami Travel Service.

"Our population is increasing, but our options are getting fewer and fewer. There are less flights and fewer airlines. There is no comparison whatsoever between the (airline) service we have today and the service we experienced five years ago, 10 years ago.

"Before, you looked forward to flying. Today, people fly because they have to."

Fuel-spurred guillotine

Fuel costs hang over the airline industry today like a guillotine suspended by a fraying rope.

A motorist facing high fuel prices can conserve, walk or bike more, take the bus or train.

An airline can pay the higher fuel bill or go out of business.

Because the industry spent $31 billion for fuel in 2011 - triple its fuel costs in 2000 - carriers have had to look for other revenue sources, the DOT study finds. Or be like Delta Air Lines, who earlier this year purchased their own oil refinery.

Airlines have increased revenue by implementing fees for services such as checking baggage, preferential seating, food, blankets and entertainment.

"Baggage fees alone contributed $2.7 billion in additional revenue to the airlines in 2011," the DOT study says.

Ancillary fees for such add-on services increased by $19 per roundtrip (from $3 to $22) between 2000 and 2010, said Airlines for America, the industry trade group.

"Right now, we're paying fees for more legroom," said Chuck Mai, spokesman for AAA Oklahoma. "I don't think it's too far down the road before we'll see pay toilets."

Robert Herbst, a former American Airlines pilot and founder of AirlineFinancials.com, said airline service remains a bargain, despite consumer grousing about higher fares and the "cattle-car" experience.

"If air fares were adjusted for inflation from 20 years ago, they would be twice what they are today," Herbst said. "It just isn't going to get any better."

It could get worse

But it could get worse, Jenkins said.

Since 2000, 51 U.S. passenger and cargo airlines have filed for bankruptcy, including American Airlines, which employs 7,000 people in Tulsa.

After years of losses, several of the major carriers reported profits in 2010 and 2011.

But Jenkins wonders what would happen to this chronically cash-short industry in the event of another fuel price spike in the range of $200 per barrel.

"The biggest issue is always aircraft valuation, which is a particularly sticky issue as all airlines use aircraft and aircraft parts for securitization," Jenkins said. "With airline fleets as large as they are, a major liquidation would flood the market with so many aircraft. The overall valuation of all aircraft would fall so substantially that few loan portfolios could withstand the decline.

"The second big issue to consider is that when salaries and debt are cut as part of reorganization in bankruptcy, who gets new stock? At what point do the various labor groups and debtors end up owning so much of the company that there is little left for those who would provide the cash necessary for operating successfully?"

 



Evolving airline service at Tulsa International Airport, 2001-2012

  2001 2007 2012
Total daily flights 92 85 64
Total airports 17 23 17
Total cities 15 21 15
Total seats 9,428 7,244 5,914

Source: Tulsa Airport Authority

 

Flight cutbacks at hub airports

City hub Airline Flights June 2007 Flights June 2012 Percent change
Cincinnati Delta 12,781 4,710 minus-63.1 percent
Cleveland Continental 9,070 6,684 minus-26.3 percent
Memphis Northwest 8,227 5,308 minus-35.5 percent
Pittsburgh US Airways 7,462 4,470 minus-40.1 percent
St. Louis American 9,503 7,127 minus-25.0 percent
Total five hubs   47,043 28,299 minus-39.8 percen

Source: Federal Aviation Administration


     
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