The State of the Airline IndustryJanuary 1, 2016

2015 Brought Changes — Some Good for Passengers, Some Not — and 2016 Appears to Offer More of the Same By
January 1, 2016

The State of the Airline Industry

2015 Brought Changes — Some Good for Passengers, Some Not — and 2016 Appears to Offer More of the Same


North American airlines have legitimate bragging rights to two elements of air travel these days: They are among the safest airlines in the world and they can claim the highest per passenger earnings of all airlines in the world ($18.12) and a 7.5 percent net profit margin.

In noting the industry’s overall $29.3 billion net profit in his state-of-the-airline-industry speech at the 2015 annual meeting of the International Air Transport Association (IATA) in Miami, director general and CEO Tony Tyler emphasized that those profits only translate to an overall 4 percent net-profit margin.

“Let’s keep things in perspective,” he said. “Apple, a single company, earned $13.6 billion in the second quarter of this year. That’s just under half the expected full-year profit of the entire airline industry. We don’t begrudge anyone their business success. But it is important for our stakeholders, particularly governments, to understand that the business of providing global connectivity is still a very tough one.”

The comparison is somewhat disingenuous. Computer buyers still have plenty of choice in the type of product and the price they pay for it. Agreeing to purchase increased memory or a better camera because you want them is not the same as having to purchase a business-class seat for many hundreds of dollars more because you’re 6 feet 3 inches tall and coach seats don’t even comfortably accommodate a 5-foot-4-inch woman these days.

Airline travel is not the luxury it once was; it is a necessity for business travelers in an increasingly global setting. As more and more companies go global, flights for executives and other employees are of a longer duration and often on shorter notice when deals are nonexistent.

The increase in global businesses translates directly to an increase in global meetings and conventions, meaning many meeting planners and attendees spend much of their time in the air on international flights. Business travelers typically have to be ready to work when they land, so comfort on these flights is not a luxury or an option; it’s a necessity — and the airlines can bank on these travelers paying premium prices as a result.

Nickel-and-Diming Passengers

The true state of the airline industry can be summed up realistically in several ways, as airlines do legitimately struggle to increase their relatively low profit margins.

First, airplanes are being designed with an increased number of seats in space that has not increased. Seats are closer together and dimensions are shrinking front to back and from side to side.

Airlines are continuing to consolidate, leaving passengers fewer options for comparison shopping.

And passengers are being charged an array of extra fees for an array of “services,” and the fees might or might not be apparent when tickets are purchased. Depending on the airline you fly and the class of ticket, you might be charged for checked baggage, carry-on baggage, snacks, water, Wi-Fi, extra leg room, earlier boarding and other “conveniences.” Some airlines have considered charging for use of bathrooms! At the root of the fee structure is a 2009 ruling by the IRS holding that these fees are not subject to taxation, providing huge incentive for airlines to charge them.

Airlines maintain that “à la carte” charges provide passengers with options so they pay only for things they want. Whether food, water or the need to carry clothes with you on a trip really can be considered “options” is up for debate. In terms of the transparency of fees, the U.S. Senate and passenger rights groups have taken the airlines to task.

In a report released in August 2015, Senate Democrats accused the airlines of “nickel-and-diming” passengers with fees. “The traveling public is being nickel-and-dimed to death,” said U.S. Sen. Bill Nelson of Florida in a statement. Nelson, top Democrat of the Commerce, Science and Transportation Committee, continued, “What’s worse is that many fliers don’t learn about the actual cost of their travel until it’s too late.”

Consumer groups have long complained that the fees are a money grab for airlines looking to rack up record profits at the expense of passengers. “This report echoes the same issues Travelers United has been speaking about with the Department of Transportation (DOT) and members of Congress for years,” says Charlie Leocha, chairman of Travelers United, a passenger advocacy group.

Consumer Advocacy

Leocha says there is much work to be done on behalf of airline passengers, who have very little to celebrate while airlines have much. “Airlines are flying more passengers on fewer planes than ever before, which means travelers are packed into these aluminum tubes like sardines. The airlines are making more money than ever in history. Jet fuel prices have plummeted and airfares have remained steady — obviously not a great outcome for passengers. Airlines are making comparison shopping as difficult as possible and fighting DOT at every point whenever the department and consumers call for more transparency.”

But, Leocha notes, there is good news as well. “The consumer presence is stronger than ever in Congress and at DOT,” he says. “Finally, consumer groups such as Travelers United have gained credibility in the battle for customer service. Change comes slowly, but the recent adoption of the full-fare advertising rule and 24-hour change rule has made a big difference.”

Such changes don’t come easy, according to Leocha, who says the airlines contest every sentence of the written rules — and more. “The airlines sued DOT in the Washington, DC, District Court of Appeals, claiming that the new rules went beyond DOT’s mandate to protect consumers,” Leocha says. “But the final court ruling was a full vindication of DOT and Travelers United’s positions.”

Fee Transparency and Tax Reform

Travelers United hopes to soon have a new rule in place for transparency of seat-reservation fees and baggage fees. “The 24-hour rule and the full-fare advertising rule were part of Passenger Protection 2 rulemaking, Leocha says. ”Passenger Protection 3 rulemaking has already been drafted and comments are closed. We are expecting a final rule by spring, which will mandate that more ancillary fees must be disclosed by airlines through all points of sale during the sales process. That will mean that travel agents will be able to tell passengers exactly how much seat reservations will cost and the specifics of baggage and other fees.”

Washington, DC, is the epicenter of plans to create a better air-travel system across the board, a charge led by the U.S. Travel Association and its president and CEO, Roger Dow. In June, U.S. Travel presented its plan to Congress, a plan aimed at fixing the nation’s struggling air-travel infrastructure and promoting a healthy, well-functioning passenger aviation system. Central to the plan is a tax cut designed to offset an adjustment to the Passenger Facility Charge (PFC), the local user fee that finances airport projects. According to U.S. Travel calculations, tax cuts would reduce fares by $9.50 to $25.50 per ticket.

The specifics of the plan call for the elimination of five passenger aviation taxes, including the Domestic Passenger Ticket Tax, the tax on international arrivals and departures, the tax on mileage rewards and the tax on flights between the continental U.S. and Alaska or Hawaii. It also allows local airports to increase their PFC to adequately fund improvement projects. U.S. Travel believes these tax changes also will eliminate airlines’ incentive to collect all those ancillary fees, a boon for passengers.

While the plan is complex with multiple parts, U.S. Travel’s desired result is to move the country toward a set of national aviation policies that is pro-competition, pro-growth and pro-traveler.

It’s all part of a bill to reauthorize the Federal Aviation Administration differently — and better — than in the past. Dow put it this way: “FAA reauthorization presents an amazing opportunity to address a host of issues in our air travel system, and we should not squander it by only addressing a couple of the needs of our air travel system. The FAA bill should represent a comprehensive approach.

“The issue of infrastructure financing is particularly contentious. We continue to believe that the PFC, as a pure user fee, is the ideal means to address our severe infrastructure challenges. But finding the math to be able to include an airfare tax cut is a critical new piece, and has been expressly designed to address the concerns of some who have attacked the PFC approach.”

In the final analysis, Dow says, “We are supremely confident that on this platform, we will be able to build strong support for modernizing our infrastructure financing model, fostering a competitive aviation marketplace that benefits travelers and finally giving this country the air transportation system that it needs and deserves.”

The Bigger Picture

Why is all of this so important? It’s not really a matter of how much profit airlines make or how much snacks cost on a flight, as much as these ruffle the feathers of passengers who just want an easy, comfortable way to travel where they need to go. It’s the big picture. It’s about a strong economy that’s critical for North America and its citizens. Delays, cancellations, costs and other travel headaches cause citizens to take fewer trips, to meet via Skype instead of in person, for example. That costs the economy billions. In 2013 alone, it cost the U.S. economy a staggering $35.7 billion.

Big-picture plans don’t negate the growing array of specific changes and airline policies that U.S. Travel, Travelers United and other groups have to fight. Between June and December 2015, U.S. Travel made statements about a variety of issues, including a bill that proposes to take funds paid by airline passengers to the TSA and Customs and Border Protection (CBP) for security and divert them to the nation’s highway fund. While Dow praised the bill for taking a long-term approach to infrastructure improvements, he noted that U.S. Travel does not agree with diverting the funds.

“Airline passengers should not be a piggy bank to pay for highway investments that benefit highway users,” Dow says.

Leocha was more blunt in his opposition: “CBP fees are going up, and that extra money is going to fill potholes instead of to the security of airline passengers.”

Closing the Open Skies?

One of the biggest conflicts between the airlines and groups with passenger and broad economic interests in mind has been related to the longstanding Open Skies policy, which has welcomed foreign carriers into U.S. airports to serve international routes not served by many U.S. airlines, promoted competition, created relationships and partnerships between U.S. and foreign airlines and provided millions of dollars to U.S. airports. Now, American, United and Delta want to alter the terms of Open Skies and limit a growing fleet of Middle East airlines from expanding into the United States. Because some of these airlines are subsidized by their governments, “the Big Three” claim they represent unfair competition.

U.S. Travel, Travelers United, the U.S. Conference of Mayors and many others disagree, stating that the goal of the Big Three is simply to stifle competition, which will ultimately hurt passengers and the U.S. economy.

“When the Big Three first embarked on their lobbying campaign against Open Skies, they had our attention because they claimed that their position was about protecting U.S. jobs,” Dow stated in June. “But it took about 30 seconds of reflection to realize that breaking those agreements is likely to have terrible consequences for U.S. employment, and now we have research in hand conclusively illustrating that.”

An Oxford Economics analysis found that passengers connecting from the Gulf airlines to U.S. carriers generated $140 million in revenue for U.S. airlines, and that more than half of the 620,000 passengers who transferred to U.S. carriers transferred to flights operated by the Big Three. The data also doesn’t support claims that the Gulf airlines “stole” passengers from U.S. carriers. Of the 1,700 routes the U.S. airlines and Gulf airlines flew in April 2015, they competed on only two. And when they did compete, the data found that they served different passengers from different parts of the globe.

Said Dow: “The travel community weighs every policy proposal against a very basic set of criteria: Is it pro-competition, pro-growth and pro-traveler? The Big Three’s move against Open Skies epic-fails every part of that test.

“Moreover, momentum in Washington is starting to turn against them. I implore my friends at American, Delta and United to abandon this folly and invest the resources in far more valuable pursuits, like real investments in the passenger experience that will get more people traveling.”

Some battles will be won by travel industry and consumer groups and others will not. Passengers should probably assume that planes with more seats and less room are coming, but also that air travel continues to be very safe and affordable — if not excessively comfortable for coach passengers.

More upscale options also will continue to be available to those who can book business and first class, but most of us should pack our own water and food and be savvy enough to take advantage of programs such as TSA Pre-Check and Global Entry that reduce our time in security lines, as well as early-boarding options that guarantee room in overhead compartments for our bags. C&IT

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