In travel, what lies just behind often dictates what lies just ahead, and what lies just behind for airlines is a yearlong stream of fare increases and merger frenzy among the nation's biggest carriers. What lies ahead? Let's say we're just getting started.
After months of bankruptcies and dismal financial filings, a couple of major airlines reported actual profits last week, or at least a better go of things. As has been the case throughout much of the economy, it has been generous consumer spending that driven the recovery. Prices have crept upward, but planes remain full; with fuel prices trending downward, all this should, by most folks' logic (although not always by airline logic), lead to profits. And profits should lead to better, or at least more stable, airfare prices.
Well, not necessarily. The airline business is far from stable, and much as the industry sometimes foolishly feeds consumer appetite for ridiculously low fares ($133 RT cross-country, anyone?), so they will test our willingness and ability to pay ever-higher base fares -- at least away from the highly competitive routes on which many airlines are willing to take a loss (and which they must subsidize with higher prices anywhere they can get them).
Whither Airfares for 2007?
Airfares have trended upward for months now; airline experts noted at least 10 distinct across-the-board airfare increases in 2006. As I have said here, most fliers don't care about the $3 - $4 average amounts that usually mark these increases, but many recent fare hikes were in the $10 - $20 range -- do that a dozen times a year and customers will finally take notice.
And notice it they have; snagging the stellar airfare even on a popular high-volume route has become harder to do almost by the week over the past few months. Deals are still out there, but almost always on the least popular and least convenient flights, such as very early morning flights, grueling redeyes and time-consuming connecting flights.
For example, a recent search on several short and long-haul routes produced a late riser's nightmare; for every hour past 7 a.m. that a plane was scheduled to take off, you could expect about a 50 percent increase in airfare, up to about 300 percent by mid-morning.
In my way of speaking, this translates to "flights you hate you can afford; flights you want you can't."
On the bright side, all of this should serve only to strengthen and even embolden the discount airlines, which are already setting the standard for sensible pricing and service levels. The major airlines' attempts to offer a "discount" product seem willy-nilly or misguided at best, and seem to try to end-run the "fair product at a fair price" that has made such a force of the discount airlines. For example, witness United's "bare fares" approach, where low-priced fares would no longer entitle you to check bags, collect frequent flier miles, obtain seat assignments, or enjoy any number of other typically routine services; these services would be available a la carte, for a fee of course.
My view of 2007: barring any cataclysmic events in the oil market, we'll see a series of small to modest price increases that will eventually test the tolerance of average fliers, and will abate only when travelers tighten their purse strings (a benchmark I believe is not so far off -- I have already opted out of two flights in 2007 due to poor flight choices). What we'll get instead are sporadic now-you-see-'em sales that are limited to a fairly small number of seats, and low fares limited to routes on which there is plenty of competition from majors and discounters alike.
How do the big airlines propose to bridge this disconnect? By getting even bigger, naturally; hence the recent merger mania in the airline sector.
Merger Scares
Where do mergers come in? United and Continental have been casting long glances across the room at one another, while US Airways, fresh out of bankruptcy protection (and with its merger with America West still incomplete on the operational level at least), made a hostile bid for Delta, which remains in bankruptcy.
That accounts for four of the Big Six airlines. Also-bankrupt Northwest sits in the position of possible Continental spoiler (a current relationship between the two could hamstring any Continental mergers). American, the only one of the six to post a profit in the fourth quarter of 2006, would seem poised to acquire or merge with Northwest or Alaska; rumors of an America-Northwest deal surfaced amid all the other speculation late in 2006. Delta, meanwhile, has eyes for Northwest; the whole thing scans more like daytime TV.
US Airways' bid for Delta was hostile in more ways than one. The rhetoric and number games on both sides of the talks were snippy at best, and sometimes downright contemptuous. United seems extremely motivated to make something -- anything -- happen; CEO Glenn Tilton has said "We continue to believe the industry would benefit from consolidation and that change of that kind is overdue." Aviation consultant Michael Boyd put it more colorfully: "Tilton is so anxious to move that airline, I'm surprised he didn't put it on eBay yet."
All of that said, the bottom line, for now at least, is this: nothing has happened. The roadblocks to a big merger are numerous and multifold, from unions and stockholders to stubborn executives and elected officials (Congress is poised to take a look at the issue later this month).
So what would a big merger mean for travelers? Mergers typically result in "streamlining" of operations; in plain English, this typically means fewer flights on fewer routes, with consistent demand vs. reduced capacity overall, resulting in higher prices with diminished choice.
So long as planes are full, airlines will test how much travelers will pay for a seat. There is a limit to how high prices will go before customers start choosing not to travel, and as I note above, you can bet the airlines will be willing to test that limit before they ease prices back.
So imagine that the Big Six become the Big Three (let's say Continited, the Northwest Delta, and American Airways -- or just check out this chart of potential pairings by airline). Does that mean we'll have less choice and higher prices, end stop? Nope.
With load factors at record highs, "if some or all of the Big Six merge and reduce their capacity, alternate airlines will simply step in to fill the gap," says Joe Brancatelli of JoeSentMe.com. "And since fares, on average, tend to decline when alternate airlines add capacity and markets, the Big Six won't be able to increase fares, either."
Finally: Operations Flounder, but the TSA Straightens Up (Maybe)
In the midst of all these executive machinations, many analysts believe that the operations side of running an airline -- you know, the actual process of getting people and their stuff from one airport to another -- will continue to suffer. I think we can expect increases in lost luggage, long lines, late arrivals and departures, and tarmac delays, to name a few.
It's not like this is really news -- lost luggage rates have risen every year since 2002, with an 11 percent increase in 2006 from the previous year. In October of last year, airlines lost over 12,000 pieces of luggage every day, according to the Department of Transportation. Just a couple weeks back the news was filled with stories of passengers enduring seven- and eight-hour delays trapped on the tarmac in Austin -- conjuring memories of the problems that forced the airlines to adopt their bogus Customer Service Initiatives in 1999.
Meanwhile, the DOT inspector general also found that yes, it is in fact more difficult to use your frequent flier miles.
However, there may yet be a silver lining. It would be hard to imagine the Transportation Security Administration making as many missteps in 2007 as they did in 2006, what with the constant flip-flopping on their liquid and gel policies. So even if we can expect another topsy-turvy year on either side of the security checkpoint, perhaps passage through the metal detector might actually go a little more smoothly this year.
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