US airlines cap capacity: Economics or collusion?

A marketing proposition discussed at a recent IATA (International Air Transport Association) conference in Miami has opened a can of worms. It seems that airlines are recognizing that it is in their joint interest to cap capacity so as to maintain airfares if not keep them high. It is a lesson learnt from the global financial meltdown that led to a reduction of capacity and cancellation of unprofitable routes, a lesson that many of the airlines are stretching into recovery, and antitrust observers have expressed concern that this may become permanent.

In more justifiable business parlance perhaps, airline executives are calling it “capacity discipline”. That, however, implemented jointly across the industry suggests possible collusion to limit competitive pricing which the Justice Department is investigating.

The suspicion is not helped by US airlines turning in record profits as the economy recovers, unmitigated by the fact that while jet fuel prices are falling, airfares are not moving in the same direction. In the past two years, US carriers together close to US$20 billion, and higher profits are expected this year as fuel prices remain at their low levels, having already dipped by some 35 per cent compared with last year’s prices. On the other hand, airfares are at a record decade

American<a Justice Department spokesperson Emily Pierce confirmed the probe to look into “possible unlawful coordination by some airlines.” The four major airlines in the US – American Airlines, United Airlines, Delta Air Lines and Southwest Airlines – also confirmed they have been contacted to provide information and would comply. You bet these airlines were not picked randomly. If there were any collusion, they would be the ones in the strongest position to jointly impact the market. Together, they fly about 80 per cent of the nation’s domestic passengers.southwest logo

united logoExcluding Southwest, the US Big 3 are making the authorities reflect on the wisdom of approving the mergers of their erstwhile entities, creating mega carriers that as a consequence results in reduced competition as the merged airlines rationalize their operations to reduce routes and capacity. US politicians are not falling short in criticism of the new reality. US senator Richard Blumenthal warned of widespread “anti-competitive, anti-consumer conduct.” The issue is that airlines are not matching the increased demand for seats in an improved economy, and that can only lead to increased prices. Mr Blumenthal said: “Consumers are suffering rising fares and other added charges that seem to be the result of excessive market power concentrated in too few hands and potential misuse of that power.”

Indeed, as another senator, Charles E Schumer, pointed out, “It’s hard to understand, with jet fuel prices dropping by 40 per cent since last year, why ticket prices haven’t followed.” While some airlines outside the US have bowed to pressure to adjust airfares or reduce fuel surcharge, US airlines have stuck to their guns to not do so but instead return millions to their shareholders. It is a clear indication of where their priorities lie. Yet what could be wrong with that but for the alleged collusion to foster an oligopoly where the customer is deprived of choice, the very situation decried by the airlines themselves and the authorities alike?

Not surprisingly, the US situation in the light of falling fuel prices may suggest the tacit support that the major airlines give each other to not return the savings or part of it to their passengers, that no airline should be disadvantaged by a competitor cutting airfares. The mega conglomeration seems to have made that easier, so Mr Schumer said: “We know that when airlines merge, there’s less price competition. What we need now is a top-to-bottom review to ensure consumers aren’t being hurt by industry changes.”

The problem is magnified when you consider the rising trend of cross border mergers and acquisitions not excluding mega alliances that can wield as much power to jointly ensure that prices are kept high even as oil prices dip, and by their size are able to erect entry barriers to new competitors. Fortunately the environment outside the US is less homogeneous and the market too diverse. There are also socio-political differences, if not often conflicting. US carriers have derided as unfair competition the apparent non-conformity to US standards and other operating situations such as low wages that make it possible for foreign carriers to charge lower fares.

Courtesy Emirates Airlines

Courtesy Emirates Airlines

Interestingly, the Justice Department’s investigation of alleged collusion among US carriers comes at a time when the US airlines (with exceptions) are seeking to block the expansion of Gulf carriers into the US citing unfair competition as they believe those airlines – namely Emirates Airlines, Etihad Airways and Qatar Airways – are advantaged by state subsidies. Emirates CEO Tim Clark has rebutted the accusation by the US Big 3, calling their move “repugnant” while insisting that Emirates is “absolutely not subsidized, and our operations do not harm these legacy carriers, but instead benefit consumers, communities and America’s national economy.” He aptly touched on the goals of Open Skies, which include among other things “greater competition, increased flight frequency (and) consumer choice”, the very issues that the US Big 3 may be guilty of flouting domestically if allegations of collusion were true.

Sir Tim stated in his rebuttal that Emirates is “offering US consumers, communities and exporting companies direct flights to more than 50 cities not directly served by any American carrier… connecting America to some of the fastest growing economies in the world, in Africa, Asia and the Middle East.” And he pointedly asked where the US carriers were. Yet could US carriers be faulted for not operating to destinations of poor demand? But should they then begrudge another airline filling avoid and envy its success in growing the traffic? So much about being the dog in the manger, while not denying it is an intricate issue.

Without competition to differentiate the carriers by product, service, fare, schedule convenience and network, reputation and frills, airlines have a tendency to move towards uniformity. Fuel surcharge is an example. All it took was one airline raising the surcharge in the days of spiralling fuel prices, and others followed quickly. Unfortunately, it is not quite the same when the oil price dips, so US carriers have taken what appears to be a collective decision not to pass on the savings to their customers.
Ever since the introduction of the fuel surcharge as a separate fee from the airfare, airlines learn very quickly to unbundle charges to be levied separately. What appears to be in the interest of the consumer who will pay for only what he or she needs, such as a checked baggage fee, has turned out to be a big money spinner for the carriers. Today, there are charges levied by some airlines for not only checked baggage but also seat requests and physical check-in at the airport. Passengers are often not any wiser about the real cost of their ticket, an issue that authorities in the European Union, US and Canada are taking airlines to task for misleading representation. Checked baggage fee and no meals on domestic flights are the norm in the US. However, US carriers may be disadvantaged internationally by foreign carriers that provide free checked baggage carriage and even meals for the short-haul. It is the competition that will make the airlines work for their money by being more productive and less wasteful, more innovative and more customer-oriented.

As the Justice Department investigates US carriers for alleged collusion, the corollary is whether real competition still thrives in the US. While shareholders’ pockets are loaded up, collusion can have many damaging effects, resulting in bloated, inefficient and costly operations. Or do they even matter considering the speckled history of US airlines seeking Chapter 11 protection and teetering on the brink of bankruptcy?

This article was first published in Aspire Aviation.

Falling fuel prices do not necessarily lead to lower airfare

THE price of crude oil fell to a four-year low. It is today some 30 per cent below the price in June. This should spell good news for airlines, yet don’t be too quick to bet on falling airfare. It’s not a new story. (See The Irony of a Falling Fuel Price, Jan 29, 2009)

While airlines blame high fuel costs for their poor financial results and may use that as a reason to increase fares, it does not necessarily follow that they will lower the fare when they spend less on fuel. Considering that fuel expenses make up as much as 30 to 40 per cent of an airline’s operating costs, the savings should amount to a fair amount. easyJet is expecting its fuel bill to reduce by £50m. (See EasyJet rides on Air France’s troubles, Oct 5, 2014)

In the latest reports on their performances, many airlines have recognized the benefits of the falling fuel costs. Singapore Airlines (SIA) for one reported how its decline in revenue for the first half was cushioned partly by lower fuel costs. (See Singapore Airlines posts flat first-half performance, Nov 8, 2014)

So why the reservation?

For some airlines, it is a reprieve, and they are in no hurry to pass the savings back to their customers.

Falling oil prices may reflect a downturn in the economy. Many airlines including SIA have expressed that concern, which may result in lower revenue.

The falling fuel price may be short-lived. Oil-producing nations are likely to react by cutting back supply which will in turn reverse the trend.

OPECThe good news for airlines is that there may be disagreement among the oil producers, and the trend is likely to last at least until the end of the year as predicted by the US Energy Department. That means their customers can hope – yes, hope – that the sustained trend may cause some airlines to review their fuel surcharges, or that increased competition will lead to it.

Australia will adopt carbon trading scheme

While the European Union’s carbon trading scheme remains frozen following protest by airlines across the globe, Australia has said it will be scrapping its current carbon tax and switch over to the emissions trading scheme similar to that of the European Union.

Qantas is one of some 300 companies affected by the carbon tax.

Photo Oscar Siagan/The Age

Photo Oscar Siagan/The Age

Australian Prime Minister Kevin Rudd said the new scheme would reduce the cost from the current A$25.40 (US$23.42) per tonne to about A$6.00 per tonne, and hopefully the benefits would be passed on to consumers. While the tax is a penalty levied on companies for not being green enough, it is inevitable that the higher cost eventually finds its way to pinch the consumer’s pocket.

It is not clear how the trading scheme, if implemented, will affect Australian and other airlines operating to and from Australian destinations; the universal application of the EU scheme has drawn objection from foreign carriers. Australia may yet have the benefit of learning from the outcome of the EU’s review expected by November – if it comes then – before its own implementation, which will be formalized after the nation’s elections for which a firm date has yet to be fixed. But, only if the Labour party continues to govern the country, for the opposition leader Tony Abbot has said he would do away with a price on carbon altogether if the Conservative party won.

Mr Abbot called the emissions trading scheme a “so-called market in the non-delivery of an invisible substance to no one.” He added: “It’s been absolutely obvious that the world is not moving towards taxes, whether they’re fixed rates or floating taxes.”

Whether it is good or bad news, it is a complex issue. Mr Rudd said the rationale for the termination of the carbon tax in favour of the EU-style trading scheme is “the reduction of costs for small businesses” although the penalty is really one imposed on the big polluters. Whatever the tax mode, the consumer will bear the brunt of the cost. The question is: How much? The trading scheme as introduced by the EU, however, is also aimed at encouraging affected companies to be more efficiently green – they may even gain from the trading. The problem is that most companies are diffident about that benefit and more concerned about the penalty.

So far the International Civil Aviation Organization which has been entrusted with the task to propose an alternative scheme to the EU’s scheme by November has not reported on any significant progress in its review. Do not be surprised that it will be a long time coming, although the EU has said that short of that, it intends to push ahead with its original plan. But if the delay does happen, it would be interesting to see if Australia would take over the lead.

Buffet airfare: Surf Air launches “all-you-can-fly”

Courtesy Surf Air

Courtesy Surf Air

PRICING is the name of the game. The familiar “all-you-can-eat” restaurant menu has inspired a similar offering in airline ticketing. American carrier Surf Air has launched an “all-you-can-fly” menu where for a monthly fee, members – not passengers as commonly referred to – can fly an unlimited number of flights. For now, the destinations are limited to Los Angeles, Santa Barbara and San Francisco in California, for travellers flying from Santa Monica where Sur Air is based.

Who are the likely customers? No doubt, at a monthly fee of US$1,650, it is a pricey proposition that can only appeal to the high-heeled who fall short of owning their own private jet. Surf Air CEO Wade Eyerly has likened his business to “a country club with planes instead of golf courses.” Of course, everybody gets a leather seat on the Pilatus PC-12 aircraft that boasts a “BMW-designed executive interior.”

Will there be adequate demand to sustain the operations? It makes sense if you make frequent and regular trips between Santa Monica and wherever Surf Air offers to take you – not differently from buying a book of cheap tickets at discounted fare, say, on Ryanair, when on the whole you still stand to benefit financially even if you do not use all the tickets. Instead of the country club analogy, the picture may change if you compare it to a time-share property where after the initial years of excitement, it degenerates into a tedious obligation.

There will always be, of course, the elite who can spare the dough to buy the privilege and prestige.

Come to think of it, “all-you-can-eat” and “all-you-can-fly” are not exactly the same. With one, you can almost be certain you will get your money worth of fill, but not quite with the other. But sometimes it is hard to define a good deal, as is said of beauty in the eye of the beholder. Mr Eyerly is confident that his model will work. He explained: “If you drive two to five hours regularly, you need a Surf Air membership. No need to waste valuable work (or play) time stuck in traffic or mile-long security lines. With all that extra time, you work on your golf game.”

Time, he said, is money. You can’t argue with that, except that not everyone plays golf!

Go skinny and save when you fly Samoa Air

Picture: Samoa Air/Facebook

Picture: Samoa Air/Facebook

IN a region where “big is beautiful”, it seems almost an anomaly that Samoa Air should introduce a fare policy to charge passengers according to what they (and their baggage) weigh.

The airline announced the new basis on its website as follows: “We at Samoa Air are keeping airfares fair, by charging our passengers only for what they weigh. You are the master of your Air ‘fair’, you decide how much (or little) your ticket will cost. No more exorbitant excess baggage fees, or being charged for baggage you may not carry. Your weight plus your baggage items, is what you pay for. Simple.”

Passengers (together with their baggage) will be weighed at the airport.

The airline’s chief executive Chris Langton defended the policy, citing how it is not fair to “pay for half of the passenger” seated next to you and that families with children would benefit “because we don’t charge on the seat requirement even though a child is required to have a seat. We just weigh them.”

Seems fair enough, but is it really?

The airline has elicited unhappy comments from travellers who feel that they are being treated like “cattle”. Should someone be penalized for his or her natural weight, give and take some deviation from the norm? Some airlines are already charging extra for obese passengers who cannot comfortably fit into a single seat, and it is an industry practice to charge for excess baggage above the contracted allowances. Those were the days when the trim of the aircraft has to take into consideration the weight of passengers to decide where they should seat to maintain the aircraft’s balance. Perhaps not quite in some places still, as someone recounted to me how boarding was temporarily halted to assess whether the small plane could take on any more passengers.

Samoa Air is said to be the first airline to introduce the pay-by-weight fare. Will other airlines ditch the rule of average and follow suit when there is already in place penalties for deviations? The assumed fairness may not be worth the hassle, adding to the stress of travel.

Changi Airport raises departure tax

Picture courtesy of Changi Airport Group

FIRST comes the impressive news about renovations and expansions that boast more and new facilities.

Singapore Changi Airport has recently completed extensive renovations of its oldest terminal – Terminal 1 – to the tune of S$500 million (US$399 million) and has initiated plans to replace the budget terminal with a new Terminal 4. And it’s not stopping at that. The airport is said to be planning a fifth terminal, citing reasons that it cannot afford to slag behind other regional airports that are fast expanding and becoming more competitive. Hopefully the belief that capacity will create demand will continue to hold true.

Next comes the painful news for air travellers. Changi will raise the departure tax from $28 to $34 – a hike of more than 20 per cent – to take effect on April 1, 2013. Naturally, so said Changi Airport Group, the additional money collected would be used to fund new projects and developments. One might well have foreseen this at some point in time, but note that the last increase by more than 30 per cent was only implemented in 2009. 

The new fee will match Changi with close rival Seoul’s Incheon International Airport but make it more expensive than other regional airports such as Hong Kong International ($28), Bangkok Suvarnabhumi Airport ($28), Kuala Lumpur International ($27) and Dubai International ($27). There are concerns that this is ill-timed in light of the state of the global economy when airlines themselves are struggling to recover. For the travelling public, it does not matter where the hike comes from as it all adds up to the cost of flying.

True, in as much as upgrading programmes will enhance an airport’s competitive edge, they also add to the comfort and delight of travellers. Arriving and departing passengers are less likely to spend more time at he airport than necessary, and Changi as a hub airport is the darling of transit passengers. Last year, Changi introduced a new transit fee of $12. Will this be increased any time soon? Perhaps not, since these passengers do indeed have a choice.

Summer blues for travellers – Spain imposes new tax

TRAVELLERS during the peak summer season must be braced for surprises, not quite pleasant ones unfortunately.

Past years have seen airline and airport staff going on strike at a time when the problem would be magnified, as it is also the time that will hurt the pockets of their employers most. This year, so far not so bad, but keep your fingers crossed.

However, travellers to Spain will find it more costly – even if they had already paid for their tickets in advance for that holiday in the sun. The Spanish government is levying a new airport tax – up to seven euros (US$8.60), varying from airport to airport – which some airlines, amongst them budget carriers Ryanair and Vueling, said they would be passing on to their customers.

Ryanair announced that the tax would be collected retrospectively. Vueling gave its customers the option to back out within seven days of notification or pay up. It is really not much of a choice at this late stage.

The whole affair stinks of a Hector-act with little or no concern about how the effect will trigger down. Once again, it is the helpless and hapless customer that is left holding the can.

Alaska Airlines considers fee for choice seats

THE next time that you book an air ticket, be aware that the fare may not come in the usual package when you last travelled. And I’m not talking about just budget carriers, known for their add-on model that charges a base rate and customers pay additionally for options such as meals. Full-service airlines (the appellation is becoming a misnomer) have adopted this same principle to beef up revenue.

Some legacy carriers are already charging for meals and in-flight entertainment. More airlines have followed the United Airlines example of levying a fee for checked baggage. Singapore Airlines levies a fee for preferred seating with more legroom. And now Alaska Airlines is considering going down that same road, considering a fee for “choice seats”.

Ancillary revenue has become a significant source of boosting profitability for these airlines – as if it is really a new income stream for providing new and additional services to their customers. According to Alaska Airlines CFO Brandon Pedersen, this amounts to about US$300 million annually for the airline, 40 per cent of which is derived from checked baggage. He felt Alaska Airlines was somewhat a laggard in the game. Mr Pedersen said: “We recognize we haven’t done as much as other carriers… We think there is more to do here.”

Alaska Airlines is even considering upping its checked baggage fee from US$20 to US$25 for the first bag – to be in line with the industry norm – and why when it looks like many passengers will travel with at least one checked bag? At the current rate, this is already contributing US$120 million annually.

Lest it be too hasty, Mr Pedersen warned that Alaska Ailrines’ major rival Southwest Airlines does not charge passengers for checked baggage. So how far can Alaska Air go before its customers decide to switch allegiance?

What next, you may ask, and wish for the good old days when the airfare was less complicated and entailed certain basic services without your having to stuff down an early meal before boarding or agonize over what you should throw out of your only bag that is allowed as a carry-on?

Indeed, competition is the air traveller’s last bastion of hope for a fair fare deal. And it behooves upon the authorities to ensure that that stays alive and is not abused through collusions and fare-fixing. Airlines should know that what has happened in recent times is that travellers have become more conscious of the numbers. And that more of them are shopping around than they used to, especially when the product becomes increasingly uniform and the only reason for travelling is to get from one point to another.

Qantas raises fuel surcharge yet again, spinning the same stock explanation

AREN’T we tired of listening to the same stock explanation every time an airline announces increases in the fuel surcharge? The announcement is usually prefaced by how much the prices of jet fuel have gone up, and a reminder to the public that fuel makes up the biggest component in an airline’s operations. And before you call the move unreasonable, the airline will have you know that the increase never fully covers the full impact of the soaring fuel cost, in fact barely.

The latest round of known increase comes from Qantas, which will raise the surcharge for international flights on April 12. Yes, yet again, making it an annual affair. And it is the same story that has been used before by all and sundry in the industry.

You hear it so often that you simply go “blah” these days. You no longer care to question or seek to understand. Raising the fuel surcharge is in reality increasing the fare, because ultimately it is the bottom-line number that matters – the full fare of the ticket to include all taxes and surcharges.

Short of more innovative methods to prop up the business, airlines are falling back on surcharges. Qantas had already in February imposed a carbon tax – to compensate for penalty costs imposed on the airlines by the European Union for failing to meet set carbon emissions standards vis-a-vis a carbon emissions trading scheme.

So much about such charges being cost recoveries, they are really revenue earners. The downside is that they may reduce travel or cause a loyalty shift. For Qantas, its home clientele for international operations has fallen to 20% compared to its stronger domestic market of 65%. More Australians are travelling with competitors such as Emirates and Singapore Airlines, therefore making it more expensive is not going to help.

New revenue source: Easyjet to introduce reserved seating

EASYJET will be introducing reserved seating and charge passengers for it although the budget airline said the objective was not to make money since the initiative would be “revenue neutral”. Its chief executive Carolyn McCall said: “Our aim is to make travel easy and affordable for all our passengers.”

Emergency exit seats with extra leg room come at a cost of GPD12, front row seats at GPB8 and seats elsewhere at GPB3. If you still want a free seat, you will be allocated what`s left. That means possible split seating for passengers not travelling alone.

Rival UK budget carrier charges GPB10 for reserved seats in the first two rows and those next to emergency exits. Full-service airlines have also introduced charges for preferred seating.

For all that Easyjet may be saying about making it convenient for passengers, you cannot deny that the move is revenue generating, even if it is “revenue neutral” at the start, conceding that the carrier – as it said to support its argument – would incur additional expenses to tweak its booking system.

Many airlines are already charging for ancillary services that were previously offered as part and parcel of the ticket fare – and reportedly made good money from them. This helps when you are flying in the red. Easyjet lost GPB153 million in the first half of last year and is expecting further losses of between GPB110 million and GPB120 million for the six months to the end of March.

Ms McCall additionally commented that some passengers found the free-for-all boarding “a nuisance”. That cannot be denied. It can be an ugly sight if the situation gets out of control, and there have been instances of scuffles. But that is what the budget model is premised upon: you sacrifice a certain amount of comfort for the lower fare that comes with no boarding passes, no reserved seating, fewer staff members to assist you and some degree of stress depending upon your constitution.

In the bigger picture (as I have maintained previously), the cost-gap between the low-cost and full-service products is narrowing. That being the case, the cost differences may not fully justify the gap in service. Easyjet and the like are drifting out of a niche market into the bigger arena where value more than cost – whether budget or full-service – will drive the business. Clearly, Easyjet wants to attract more than just people who do not mind sitting anywhere for the low fare; others who may have been deterred to fly budget because of the inconvenience may now come on board. Even more so is the case as Easyjet tries to attract more business passengers.