The Hindu Business Line : Airlines struggle as air travel loses its charm

Air travel isn’t the same anymore. With oil selling at about Rs 6,000 a barrel, one cannot fly with the same abandon as one did when it was Rs 3,000, not too long ago.

C. Gopinath

The flight purser on my US Airways flight from Philadelphia to Milan announced the name of the movie that would be screened and offered to provide us headphones for $5 or 5 euros. That did not make sense on two levels. Firstly, five dollars (Rs 215) is not the equivalent of five euros (Rs 340). Secondly, after having collected several hundred dollars from me for the ticket, they now wanted an additional five for headphones?

Air travel isn’t the same anymore. There was a time when long distance travel by air meant perquisites like good hot food and metal utensils, alcoholic drinks, and a range of entertainment choices that came with the package. Now, some airlines are either giving them up or charging extra for them, making what was part of the product now becoming priced support services. These may well emerge as a basis for competition in the future. Perhaps the airlines will allow competing food services (McDonald’s or Taj Catering?) to offer their meals in the flight for a fee and you choose your travel depending on whose food you want!

Soaring costs

But US Airways has been profitable during the last two years, after two consecutive years of losing money. Although they are underperforming market averages, they are doing better than other network carriers. Costs of running an airline are soaring as it should at today’s oil prices. But charging extra for headphones is hardly going to cut it. US Airways has since announced that it would remove in-flight movie systems from domestic aircraft. The number of people paying for the headphones had dropped and the systems added weight to the aircraft, increasing fuel use. The airline is expected to save about Rs 43 crore a year on fuel because of this decision.

Air travel has changed in many other ways too, driven by factors that have had both positive and negative effects on the GNP. The increased security checks and restrictions on what can be carried as part of hand baggage is a new irritant that seems difficult to get used to. But think of all the hundreds now employed to do security checks, and the new technologies that have emerged for x-ray scanning of persons and luggage. And the hundreds of bottles of liquids (water, juice, shampoo, etc.) that have to be thrown out by absent-minded travellers and re-purchased once they cross the security gates. It certainly must have added a per cent to global growth, and I have not heard of a single thanks expressed to the terrorists by any of the world leaders.

Turnaround measures

Major airlines in the US are hurting and searching for turnaround measures. Unlike the oil companies which, blessed with inelastic demand, continue to make profits like highway thieves in an era of high fuel costs, airlines are in a more competitive environment. Jet fuel costs have increased over 80 per cent in the last year and are cutting what thin margins were left. Union agreements undertaken in times of plenty keep costs at a level that does not leave much room to play with. This has reduced many airlines to desperate measures that have provided fodder for the stand-up comedians of the late-night television shows. Beginning last year, one by one, they have announced extra charges for checked bags. Only what you carry on-board is included in the ticket price. (Can you visualise all the passengers now wheeling one of those small suitcases on board and trying to stuff it in the overhead carriage while you wonder if it will fall on you?)

Smart move

Southwest Airlines, which has not (yet) introduced such charges decided to make fun of it. In a cheeky full page advertisement, they ask ‘What have they been smoking?” about their rivals. They list how others are charging fees for checking in a second bag, extra for making a phone reservation (as compared to reserving over the web), extra for snacks served on board, extra for checking-in at the curbside of the airport, and extra for window or aisle seat preference, all of which Southwest offers free.

Southwest has been smart with regard to oil costs too. They have an active hedging programme which has resulted in lower average costs for oil, so they are expanding flights on routes that others are cutting back. Their recent stumble when they had to ground several planes for safety checks does not seem to have hurt them. It is reported that very soon, many US airlines are going offer wireless Internet facility in-flight. Of course, for a bit extra. Americans have an expression for this. They call it being “nickel and dimed” for everything. Even with rising costs, competition has become severe that airlines sometimes trick you into believing their fares are really low by excluding taxes and handling charges in the advertised price. Now, the EU parliament has approved a bill to prevent such advertisements.

Merger to cut costs?

Delta Air Lines (#3 ranked in the US) and Northwest Airlines (#5) are finalising their merger which is due to be completed by the end of the year. In preparation for this, Northwest has entered into an agreement with its pilots union giving them pay parity with Delta, which will raise their salaries and enable the merger to take place more easily, they say. Now wait a minute, I thought the merger was to control costs! But the two CEOs, in a letter to a newspaper published recently, have claimed, with all the enthusiasm that they need to display prior to shareholder approval, that they will generate revenue and cost benefits significantly more that one-time transaction costs.

Most of the others have preferred to enter into alliances. United Airlines (#2) and Continental Airlines (#4) have agreed on a marketing alliance that would streamline their domestic and international routes. Alliances are easier to arrange and obtain regulatory approval than mergers, although they require as much work as a merger if the intention is really to derive benefits. Mergers would more efficiently eliminate overlapping routes, redundant aircraft and employees than alliances would. British Airways and American Airlines are said to be working on a deal too.

Low customer satisfaction

Meanwhile, do you want to know what the fliers think about all this? A survey by J. D. Power & Associates finds that customer satisfaction with the US airline industry has hit an all-time low. Customers understand that airlines are facing higher costs and will have to charge more. They don’t mind paying for it. But higher charges with lower customer service? That they cannot stand for!

JetBlue, a low cost carrier, got high marks in the survey for its service. This airline introduced a Customers Bill of Rights in February 2007. It declared that they want to bring humanity back to air travel. No, that does not mean that you will not be herded into space like a concentration camp. It only means that you get cash or vouchers if the plane is overbooked, flights are cancelled, and if there are delays onboard and on the ground, or in departure. A good start, for it is an admission that these cause inconveniences to passengers and a uniformed employee shrugging his or her shoulders is not enough.

With oil selling at about Rs 6,000 a barrel, one cannot fly with the same abandon as one did when it was Rs 3,000, not too long ago. But did we change our habits from when it was Rs 1,500 a barrel! We should care more now since apart from affordability, we know more about what happens to the environment from all the fossil fuels that we burn.

The best, of course, is to cut back on flying to a bare necessity, so that we reduce the opportunities we give airlines to inconvenience us. In addition to costs of travel, reducing the carbon footprint is another reason to think twice before boarding the aircraft. Unfortunately, global interconnectedness for work and pleasure is not going to make air travel go away. So you will perhaps keep flying and think of the good old days when we did not have to carry that anxiety about security checks, surcharges, or global warming.

(The author is a professor of international business and strategic management at Suffolk University, Boston, US. He can be reached at cgopinat@suffolk.edu)

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