Airline Profits Come at Agents’ and Travelers’ Expense

The airline industry has been able to maintain profitability for the last four years by shoehorning more and more passengers into crowded cabins and charging more fees. As large investors evaluate where to place their next stock bets, the incentive for airlines to continue squeezing passengers and agents likely will intensify.

In back-to-back sessions at the American Society of Travel Agents’ (ASTA) Premium Business Summit, Wall Street Journal reporter and columnist Scott McCartney, and Kevin Crissey, senior analyst for Citi Research, presented opposing views about how the airlines are implementing changes that make investors happy, but are causing pain for travelers and agents.

McCartney walked attendees through the recent history of declining seat pitch, the result of airlines squeezing more and more seats into the same aircraft cabins, allowing them to extract more revenue and higher profits.

For example, a new version of the 737 is being introduced to major airline fleets, featuring seat pitches around 30 inches. “Airlines couldn’t make the billions they are making unless they densify the planes,” McCartney said.

Other carriers, like United, will add a tenth seat in each row of their Boeing 777s, reducing seat width to 16 inches. Most airlines will retain their nine-across configurations in aircraft that were initially designed for eight seats per row.

Following McCartney’s presentation, Crissey made no bones about how he and Wall Street investors are happy with the “densified” planes. “The airlines are trying to do more things” to increase their profits and make their stocks more attractive, and these moves will come at the expense of travel agents and travelers, unfortunately. “Maybe we are going to reach a balance at some point where you and I can be both happy,” he told the audience.

McCartney did express his hope that the pendulum might swing back in the consumers’ favor. The mainline carriers have to ask themselves, “What kind of airline do you want to be? It’s fine for Spirit to be at a 28-inch seat pitch. But, if American wants to be at 29 inches, what kind of airline are they? Nordstrom in the front of the cabin, and the Dollar Store in the back?”

While carriers like American Airlines are adding more rows of seats, they also will introduce a new, more comfortable seat. “No more hard metal seat pans or metal backs,” he said. “What you have is a web mesh, like fancy office chairs, these days.”

In other good news, McCartney joked to chuckles from attendees that the reduced seat pitch will reduce the impact on your head and neck in the event it encounters the seat in front of you during an emergency landing.

Ancillary fees entrenched in airline business model
McCartney and Crissey both agreed that ancillary fees are here to stay. The carriers net about $4 billion a year from fees, constituting the bulk of the airline industry’s profits. However, McCartney isn’t sure the airlines can add any new fees. “After all, what can they do, install a card swipe on the bathroom door?” he joked.

He also predicted a continuing adoption of premium economy seats, which McCartney called “the most profitable real estate on a flight,” as they offer limited extra benefits at 50 percent premiums above coach class fares. Delta Airlines is installing premium economy rows on its new A350s and will have 11 in service by end of this year, he said.

McCartney noted how basic economy fares are the airlines’ “new Saturday night stay” requirement, a way to fence off business and leisure travelers. This is causing some consternation for travel agents, as the airlines are not presenting basic economy fares to all of their corporate clients through the GDS and other direct channels. Thus, a corporate traveler might see a basic economy fare listed on the airline’s site, or at a consumer online travel agency, and then get upset with agents when the agent isn’t presented with the fare class on their system.

“This takes some explanation on the part of the agent, and it is a real issue,” McCartney said.

Crissey countered that while agents and travelers may be frustrated with the marketing of premium economy and basic economy products, they are core to the airlines’ strategy for maintaining profits.

“The airlines are going to continue experimenting and giving you new products like premium economy,” Crissey said, describing how at a recent Citi conference, attendees discussed whether the airlines would offer commissions to agents selling higher premium seats. “United and American might be thinking about this,” Crissey said. “I think the airlines will pay for what they are lacking – high-yield customers.”

One Premium Business Summit attendee asked Crissey his opinions about what the airlines will do with the New Distribution Capability communication channels they are building to distribute fares and other inventory more dynamically.

“I came here to find that out from you all,” Crissey countered. His investor clients are very curious to get agents’ opinions. He noted how “the airlines are taking a quieter position on the challenges on distribution costs.” He proposed that it might have more to do with dynamic packaging of airfares and other inventory, tied into the airlines’ customer relationship management tools.

Longer TSA lines are an unintended consequence of bag fees
One of the drawbacks from the airlines’ bag fee strategy is that more passengers are stuffing more into their luggage so as to avoid the fees. Since contemporary x-ray machines cannot see through thick items, “the TSA keeps failing safety testing. So, you and your clients no doubt run into this with having to undergo more searches and empty more items for scanning,” McCartney said.

Since TSA does not have the money for the latest generation, smaller CT scanners, the airlines are purchasing the technology and donating it to the government, McCartney said. CT machine scanners are being tested in several airports in the U.S. currently.

Finally, McCartney warned that as the industry moves away from paper boarding passes, and the government moves forward with REAL ID security rules, agents need to ensure that their client’s name in their travel profile matches the identification they present at the airport. “If it doesn’t, TSA won’t find their itinerary, and they will be pulled out of line,” he said.

REAL ID could be implemented as early as this coming October, as more states comply with the security standards the federal law requires.

Only 30 states currently comply with REAL ID, McCartney said, and he believes that with the midterm elections in November, more extensions will be provided to states that do not meet the October deadline. “What government wants to anger voters right before an election?” he asked rhetorically.

McCartney also reviewed the regulatory environment, and how with a Republican administration and majorities in both houses of Congress, “it’s kind of open season on consumer protection. It will be interesting for you and your travelers to see how that unfolds.”