While Airlines Are Profiting Again, Fliers Are Suffering
Jan 26th 2011 11:15AM
Updated Jan 26th 2011 1:12PM
It's amazing to me that the business community ever thought President Obama was against it. In his second year in office, profits and cash for Corporate America hit record levels, while high unemployment remained a valuable lever that businesses could use to keep workers' wages from growing. And prices of consumer goods from cotton to corn have hit record levels -- keeping the economic squeeze on Americans.
But of all the industries that have achieved record profits under the current administration, none have had a more remarkable rebound than the airline industry. For the first time in a decade, airlines are on a glide path to profitabilit, earning $5 billion in 2010 and forecast to make at least as much in 2011 and 2012, according to the Associated Press. And how is the industry doing this? By squeezing its customers.
The airline industry's primary tactics to drive up profits have included:
- Cutting money-losing flights. This made it easier for airlines to raise fares for the smaller supply of seats after demand recovered. AP reports that airfares are up 14%.
- Replacing gas-guzzling aircraft with more fuel-efficient planes. As a result, airline fuel use fell 11.4% to 11.39 billion gallons for the first nine months of 2010. Thus, although jet fuel prices spiked 20%, the net rise in industry fuel spending was a relatively modest 6%.
- Adding new fees. Travelers now must pay for such once-free services as checking luggage (between $25 and $35 per bag) and rebooking on a different flight (about $150 for a domestic flight, more when flying overseas). Those highly profitable -- and highly annoying -- charges amounted to $4.3 billion for the first nine months of 2010, up 13.5% from the same period in 2009; The trend does have a small upside, however: As Danny King reported for DailyFinance, the airlines are looking to add some luxury services to their a la carte fee menus.
- Merging the competition out of existence. Delta Air Lines (DAL) bought Northwest in 2008, and United (UAL) and Continental combined in 2010. That reduced the number of so-called network carriers -- major airlines that route their passengers primarily through hub airports -- from six to four.
To argue the industry's case, it's hard to see how carriers could survive if they keep losing money. And as the AP reported, the Air Transport Association calculates that the industry lost $60 billion between 2000 and 2009 -- making a profit only in 2000, 2006 and 2007 -- and it has cut 160,000 jobs.
A Microcosm of American Business
Reducing capacity has made a major difference for the industry: Profitability is up because flights have fewer empty seats. As I wrote in a DailyFinance article in December, the so-called load factor -- the measure of how full planes fly -- is at a record 82%. But the resulting lack of flexibility in the system is why I -- and thousands of others -- had to wait at least five days to get on new flights on Republic Air's (RJET) Frontier Airlines after a major snowstorm hit the Northeastern U.S. on Dec. 26, 2010, causing our original flights to be canceled. (We eventually decided to make a two-day drive from Milwaukee to Boston instead of waiting to fly. This boosted the cost of our trip by 66%.)
Not surprisingly, customer complaints have skyrocketed. According to the Boston Globe, passengers filed 30% more complaints with the Department of Transportation through November 2010 than they did during the first 11 months of 2009. The primary subjects were cancellations (up 22% since 2009), delays, missed connections, damaged bags and poor customer service.
But the airline industry is really just a microcosm of the American economy. Businesses make record profits by squeezing their employees and taking more money from customers' wallets even as the quality of service often declines. Fortunately for economic policymakers, consumer pain doesn't make it into the inflation measures -- food and energy prices are considered volatile, and are therefore excluded from consideration when they spike.
It's only when consumers demand and get higher wages that the Fed gets nervous about inflation. When it comes to competitiveness -- a major topic in President Obama's State of the Union address -- the (wrong) idea will be to cut taxes and regulations on businesses so even more of those record profits can go into executives' pockets.
Real competitiveness, as I described in my book, Value Leadership, is winning by having skilled and motivated employees provide customers with ever-improving quality for their money, while enhancing the communities in which the company operates. The American airline industry is flying away from that elusive ideal as fast as its wings can carry it.