The Airlines' Long Hot Summer

Looks like it could be a long, hot summer for air travel. While the American airline triumvirate has launched World War III with the Gulf carriers, they may have some skirmishes to deal with back on the home front.

The airlines are making more money than they ever have, in a historically unprofitable business. But they are getting a lot of bad press lately.

A few days ago I came upon this article on NBC News: “Airline Profits Soar as Fuel Prices Drop, but Fliers Face Bumpy Ride.”

I can’t say it was big news. In a general sense these are not new stories. It was more of an update, a grim reminder on how the airline industry is evolving. It was a good summary of where things are right now for the airlines.

Airline profits are soaring, 80 percent higher than just last year. American Airlines was the top performing stock on the Nasdaq in 2014, up 112 percent. For the airlines and their profitability, what they are doing is working spectacularly.

For passengers, not necessarily quite so spectacularly. Not all of the things that are boosting the airlines’ profitability are so popular with the passengers. In fact few of them are.

The basic formula that has raised the airlines to the greatest profitability in aviation history is a pattern of scaling back every kind of service, turning services that were included in the price into options and charging for them, squeezing more people onto the planes, offering fewer flights, canceling more flights, dropping routes entirely in some less profitable markets, and so on.  

The NBC article reported that consumer airline complaints to the Department of Transportation had also surged, as much as 55 percent in March over the previous year.

Airplanes are flying full and the industry is working on ways to cram more seats into the planes. The sky is the limit. Or maybe there is no limit.

The huge plunge in fuel prices has been a great boon to the airlines. At one point years ago the airlines imposed fuel surcharges after the price of oil had gone so high it practically broke their backs.

But now that the prices have dropped more than 50 percent, that part of history is washed down the memory hole. You think you might see a price break based on that drop in the airlines’ largest expense? Don’t count on it.

The fuel surcharges are still on your ticket, only under a different name. The Wall Street Journal reported that the airlines renamed the oil surcharges “carrier-imposed charges” in 2012 to avoid penalties from the Department of Transportation for using the term “fuel surcharge” to raise ticket prices without having to raise base fares when there is no factual basis linking the charge to the price of oil. The taxes, fees and airline surcharges can be as much as the base fare, sometimes even more.

Surcharges also subsidize the frequent flyer system. When you use frequent flyer miles to purchase a ticket, you don’t pay the ticket price, but you do pay the taxes, fees and surcharges.

Miles are a whole separate economic system. If the world financial system collapses, there’s a good chance the frequent flyer economy will continue, maybe even take the place of the current economic system. Indeed, the industry is flying high.

But is it leaving passengers behind? New York Times writer Andrew Ross Sorkin recently said the airline industry “is increasingly looking like an uncompetitive monopoly.”

Prices will not go down to reflect the drop in fuel prices, Sorkin said, because “mergers over the last several years have left the nation with only four main airlines — Delta, United, Southwest and American-US Airways — which deliberately don’t compete on some routes.”

Alleging that the four carriers that constitute 86 percent of the U.S. airline business “deliberately don’t compete on certain routes” is a serious charge. But the airlines have said very close to the same thing in public statements, and that’s why the Times’ legal department is not worried about a libel charge.

A casual observer can see that the airlines don’t compete in terms of trying to attract customers with better offers in price or service. The big airlines divide the market in a gentlemanly way, responding to each other’s moves in the marketplace, but not aggressively going after each other, and not distinguishing their offerings from their competition.

When it comes to the question of competition, American Airlines CEO Doug Parker told CNBC’s Jim Cramer last May that the industry has changed. In the video, Cramer remarks on how unusual it is for an airline CEO to be taking payment in stocks, as Parker is doing.

Parker says that the fact that he, an airline CEO, is taking pay in stock is “a great indication of how the industry has changed.” The stock is good currency now, says Parker, because it is a sure thing. There’s no risk anymore. And he explains why.

“The reality is now we have an industry that is a real business,” explained Parker. “And I don’t think there is any chance that the stock is going to be near as volatile as it has been in the past. I think it’s a real currency and I’m happy to be paid in it.”

Cramer says to Parker that it had seemed at one point that “competition seemed to have died down,” and then asks, “Is it coming back?”

Parker chuckles, as if the word “competition” sounds charmingly quaint to him.

“Well, competition’s good,” he says with a shrug. “We’re happy to compete. We’re in a competitive business.” He adds a little growl to his voice on the words “competitive business.”

“And we’re good at it,” he says, “so we’ll keep competing.” Then he goes off on an explanation that sounds rehearsed but doesn’t seem directed to the question of competition.

Fuel prices went down, he says, but some of our competitors are adding capacity, so we’re going to respond, but …

Okay. Cramer pulls it back to the competition issue. In a tone of complaint, he says, “It’s not the old days when guys were slashing fares to try to get me in the seat.”

“It’s not the old days,” Parker affirms.

“This is nothing like the past,” he says, “when all of the sudden the industry would get a whiff of profitability and airlines would say, ‘Look I made this much money with 100 airplanes, I could make 50 percent more if I had 50 percent more airplanes…”  

There’s a translation issue here. When Cramer speaks of competition, Parker doesn’t hear the word in terms of competing in the marketplace by attracting customers with a superior product. He instead starts talking about competing with the other airlines on size. Who is going to have the biggest fleet?

Okay, so once again trying to pull back to Cramer’s original question of whether or not there will be a return of competition in the marketplace, Parker then touches on that issue.

“It’s much better than it’s ever been,” says Parker. “It’s nothing like in the past when you’d see all airlines fighting for share. These are individual airlines making individual decisions. They’re going to have to figure out how to compete with that growth.”

Very quickly he’s back to talking about growth in capacity, but on the way he assures us that indeed, it’s not going to be like it was in the past, when “you’d see all airlines fighting for share.” They don’t do that anymore.

Competing in the marketplace is not even a subject of discussion for them anymore.

The mega airlines have won their war. They have conquered the American airline business. They reign supreme, and that very small club of four airlines controls almost the whole country’s airline business (86 percent).

They have won and now they can play with each other with kid gloves, mimic each other’s business practices and pricing, and just divvy up the spoils among themselves. It’s a more gentlemanly game than real dog-eat-dog competition, the kind the Sherman Antitrust Act, that the airlines won immunity from, was designed to protect.

On June 17, the New York Times reported that Senator Richard Blumenthal asked the Justice Department to do an investigation on whether "engaging in anticompetitive behavior and colluding to limit capacity and drive up fares."

So are the airlines private businesses or public utilities?

Okay, so the airlines stopped flying to your city -- you don’t like it? So what? The airlines are emphatically not public utilities. They are in business to make money, not to provide a public air transportation system. At least that’s true when they are making money.

If the systems or markets they depend on break down, as they did after 9/11, the airlines become a public utility again and then they are more inclined to emphasize the fact that they are the circulatory system of the country and of the world and without them we are all screwed.

Too big to fail? Yes. And absolutely essential to the maintenance of our civilization.

 

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