Up in the Air

Given these turbulent economic times, we examine the state of the domestic airline industry and what it means for you and your clients By: Norman Sklarewitz
A plane in flight // © 2010 Shutterstock
A plane in flight // © 2010 Shutterstock

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Read more about the state of the airline industry in our 2011 Spotlight issue
After all that the aviation industry has gone through these past few years, travel agents are beginning to see some of that turbulence fade away, and there are even a few improvements on the horizon. Although some of these may not have a direct impact on travel agents' bottom lines, others, such as seat availability, pricing and improved onboard features certainly do. Recent trends -- including major mergers and consolidation -- are sure to have an impact on agents' businesses in 2011 and beyond. Just what kind of an impact these will have, however, is still up in the air.

The Year Ahead

Most airline industry executives seem to be in agreement that 2010 will end with an upturn in business and that things will continue to improve in the year ahead, both for carriers and for the traveling public. That is certainly good news for agents.

The Air Transport Association (ATA) predicted that its member airlines will, for the most part, see profits when this year's results come in. All of this follows almost a decade of losses. And although airline executives will continue to point out that their margins of profit are still slim, this year's returns will be an improvement from swimming in red ink, as was the case in recent years.

Airlines are also seeing load factors improve. Fuel prices have stabilized and, while still high, they are half of what they were a few years ago. While domestic seat capacity is still far below what was available before the economic nose dives of 2008 and 2009, agents can expect to see an increase next year.   

More Seats, More Planes, More Deals?

Paradoxically, increasing domestic seat capacity could impact the airlines negatively and the traveling public quite positively.

"My concern is that, as a result of good earnings this year, airlines have begun to increase capacity," said Julius Maldut's, president of the New York-based consulting firm Aviation Dynamics.

Maldut's reasoned that airlines could possibly see downward pressure on pricing that could hurt their revenues and profitability.

Currently, some of the major carriers are enjoying solid revenues thanks to "ancillary services." These include those irksome charges for checked luggage and even carry-on bags as well as some growth in business travel.

If increased capacity may be bad for airlines, as Maldut's predicted, it is somewhat good news for passengers who have seen a substantial increase in ticket prices over the past few years, along with heavily booked flights. There are already clear signs that carriers are moving to offer more seats and that is certainly good news for clients -- and agents.

Analysts estimate that as many as 1,000 aircraft are currently out of service and that these can be dusted off and put back into service in short order. Or, airlines can purchase new ones.

You don't have to look too hard to find evidence of this strategy. American Airlines, for one, expects to start taking delivery of a fleet of 35 of the newest Boeing 737-800s next year and into 2012. These will go into service, supplementing 84 of Americanís new 737s that are already flying.

The new Boeing 737-800 planes replace the MD 80 narrow-bodied aircraft. Including the 35 new orders and 84 Boeing 737s that began arriving in 2009, American expects to have a total of 195 Boeing 737-800s in its narrow-body fleet by the end of 2012. American says that these aircraft will include the new Boeing Sky Interior with a First and Economy Class configuration, bigger overhead storage bins, updated in-flight entertainment systems and more AC power ports.

Alaska Airlines added four 157-passenger Boeing 737-800s this year, replacing three of its 144-passenger Boeing 737-400a aircraft.

While Southwest Airlines plans to keep its fleet size flat, it plans to gain more capacity by adding the new Boeing 175-seat 737-900 model that has 28 percent more seats than the 737-700 model. In fact, Southwest's CEO Gary Keller may make an official announcement regarding the upgrade this month.

The Official Airline Guide (OAG) reported that U.S. airlines have added domestic seat capacity at an "accelerated rate" over the last four months, increasing by 3 percent in November 2010, compared to the same month a year ago. The OAG reported that, "Despite worldwide expansion, U.S. domestic capacity had been declining year-over-year and hadn't seen growth until recently, when it grew 0.8 percent in August, and has remained steady since."

"Confidence in domestic U.S. travel appears to be returning," said Peter von Moltke, CEO, UBM Aviation, the parent company of OAG. "The upward trend in the rate of available seat capacity growth over the last few months is positive for travelers, who are likely to see continuing growth in available seats through the end of this year and into 2011."

All of this expansion will bring on a rash of special ticket deals, predicted Joe Brancatelli, publisher of business travel e-newsletter, JoeSentMe.com.

"For all the talk about industry discipline, airlines are expanding like crazy, especially internationally," Brancatelli said.
"The result will be plenty of empty seats, especially in January and February. For the business traveler, in particular, that means some hot bargains. And, at the very least, prices wonít be going up."

More Mergers

While the recent rash of airline mergers may seem more important to stockholders than to agents, there is almost no question that the era of dozens of major carriers serving the American public has passed. With this shrinkage, agents are left wondering how this will affect their clients and their businesses.

Confusion surrounds the merger of United Airlines and Continental Airlines. Once the deal was closed in October, many agents probably assumed that a single carrier would immediately emerge. One day, perhaps, but not yet. In closing the deal, United made this clear by saying that "full integration [of the two companies] would take between 12 and 18 months ... we will still operate as two separate airlines."

Agents should continue booking flights on each carrier directly. By mid-2011, however, those reservations systems could be joined.

Both airlines' elite passengers will enjoy reciprocity when it comes to access to lounges and preferred seating much sooner. Frequent-flyer programs will remain separate, with a single program not scheduled to debut until January 2012. United said that "alignments" will be made on existing programs so that elite-level flyers have the same benefits on both.
All of this merger mania may be close to running its course, according to Maldut's.

"First, there was the merger of Delta and Northwest and then, United and Continental. Now, Southwest Airlines is in the final stages of acquiring AirTran Airways. There's a possibility that we'll see yet another merger -- perhaps Alaska
Airlines or U.S. Airways will acquire a smaller carrier," said Maldut's.

But, he argued that, despite speculation in financial circles, it won't be American.

"They might grow via some alliances but, in my opinion, there's no way that American would undertake a merger," he said.

More Improvements
In terms of addressing passenger comfort and safety issues, this year saw a major, but controversial, move. Legislation passed this year limits waits for passengers onboard grounded aircraft, penalizing airlines that do not comply.

The U.S. Department of Transportation (DOT) handed down a ruling that caps tarmac delays for domestic flights at three hours. After that, passengers must be allowed to deplane. In addition, the rule requires that, within two hours of being delayed on the ground, the airline must provide "adequate food and drinking water" and maintain operable lavatories. Carriers that do not comply are subject to a fine of up to $27,500 per passenger.

With some reservations, the International Airline Passenger Association said that it agreed with the DOT's efforts to make delay contingency plans mandatory and binding for U.S. carriers.

On the other hand, the ATA saw things quite differently. ATA president and CEO Jim May said that, "The three-hour tarmac delay rule is an example of a perhaps well-intentioned approach that will inconvenience passengers."

He pointed out that "there is no question that return-to-gates and cancellations will increase as airlines are forced to make tough choices to avoid the $27,500 per passenger penalty for delays."

Some results have actually borne out May's prediction. According to one report, U.S. airlines canceled 4,754 flights in September, a 62 percent jump from the same month a year ago, due to the fact that the government requires carriers to let passengers off of delayed flights within three hours. Airlines warned that the requirement would lead to cancelations, and that seems to be happening. As of September, an additional 5,000 flights were scrapped, an 18 percent rise since the rule took effect. Data does not show how many cancelations were prompted by the rule or by circumstances such as equipment breakdowns or foul weather.

The cancelation rate, which rose to 0.9 percent from 0.57 percent in September 2009, increased since the DOT imposed the ruling on April 29. However, delays subject to the rule fell for a fifth straight month to four in September, down from six a year earlier, according to a DOT report. Since May, only 12 flights have been delayed by at least three hours, down from 535 in the same period last year.

More Connected in Flight
Carriers these days are turning to technology that helps speed up certain check-in aspects.

As an example, Alaska Airlines and its companion Horizon Air offer tech-savvy customers the opportunity to check-in for a flight and get an electronic boarding pass using any mobile device. The service, as of mid-November, was available at 48 of the 61 cities that Alaska serves. As with a paper boarding pass, travelers can obtain their electronic boarding passes at Mobile.AlaskaAir.com up to 24 hours in advance and up to one hour prior to departure. Each electronic boarding pass displays an encrypted barcode along with passenger and flight information that is scanned and verified by Transportation Security Administration (TSA) agents at the security checkpoint. Passengers are still required to show photo identification to TSA agents.

AlaskaAir.com is now designed to fit small screens on handheld mobile devices, providing customers with access to flight status information, flight schedules, Web check-in and flight alerts. Customers can also access "My Trips" to view their itineraries, change seats, check their upgrade status and add an Alaska Airlines Mileage Plan number to a reservation.
Airlines may be cutting back on meal service and other familiar services, but most are investing in onboard communications technology welcomed particularly by business travelers willing to pay.

About 70 percent of all Alaska Airlines planes now offer Wi-Fi access using Gogo Inflight Internet service. The service
provides passengers with full Internet access on any Wi-Fi-equipped laptop or personal electronic device at speeds
similar to wireless mobile broadband services on the ground. Charges range from $4.95 to $12.95 depending on the length of the flight and the type of device used, including laptops, and BlackBerry, Palm and iPhone devices.

AirTran Airways is the only major airline with Gogo Inflight Internet on every flight and offers coast-to-coast service on North America's newest all-Boeing fleet. AirTran also offers assigned seating, Business Class and complimentary XM Satellite Radio.

Southwest Airlines will offer Wi-Fi onboard its fleet at a special introductory flat rate of $5 per flight for any device or flight length, using satellite-based technology provided by Row 44. Southwest partnered with Row 44 and began testing Wi-Fi on four aircraft in 2009. Today, Southwest has 32 Wi-Fi-enabled planes and plans to have 60 Wi-Fi-enabled aircraft by year's end, with its entire fleet of Boeing 737-700s (346 aircraft) enabled by the end of 2012.

Over time, American said that it intends to equip all of its 737s with Gogo Inflight Internet service, allowing passengers to surf the Web, check e-mail and send instant messages conveniently during their flights.

Another very high-tech service is in the works at JetBlue. It plans to provide in-flight broadband Internet access and other services using advanced Ka-band satellites. The antenna components and modems will be installed on the airline's Embraer E190 and Airbus A320 aircraft. JetBlue said that the new system will be the first of its kind for commercial aviation and, therefore, the system must be tested and certified by the Federal Aviation Administration prior to installation fleet-wide. As a result, the first installation is not expected until mid-2012.

Given the current state of the domestic airline industry, the broad scope of things is still very much up in the air. But with newer aircraft on the way, increasing seat capacity, more in-flight connectivity and better enforcement of passenger-friendly legislation, it looks like things can only go up.

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