Washington Post business columnist Steven Pearlstein had his own version today of a James Kunstler column on our economic “readjustment” going on right now — just without JK’s colorful metaphors. Most of it is about all the “mirage economies” and the bubbles that were all very related to each other. But there was one interesting nugget about the fundamental repricing of airline travel going on right now, which perhaps surprisingly is not 100% about skyrocketing fuel prices.
The reality is that for too many years, airlines have sold too many tickets at prices that failed to reflect the real cost of providing the service passengers want and expect. That includes such things as cleaning planes; handling reservations, check-ins and baggage without undue waiting; serving a decent meal when necessary; and treating passengers fairly when flights are canceled. But they also include costs that may be less obvious, like keeping up with preventive maintenance, hedging fuel costs, paying a decent wage to front-line employees, investing in modern air traffic control systems, and paying a price that reflects the true value of scarce air space and landing rights.
Airline executives will say that if they were to charge enough to reflect all these costs, they would have many fewer passengers. That’s the point: A sustainable equilibrium will inevitably involve a smaller industry with fewer planes, fewer flights, fewer passengers and fewer employees.
So with airline travel continuing to scale back if the economy continues “readjusting” and fuel prices continue to escalate, what is going to be the alternative for speedy, cost-effective, city-to-city travel?
With 1/3 of all flights measuring 350 miles or less, a big national investment in improved passenger rail or even new high-speed corridors (H/T to Ryan and Yglesias) could prove a boon to our economy: Investing national wealth into something that will create new jobs, new industry, keep cities connected, and cut down on the oil consumption that sends more money overseas.
I think the major issue here is that US carriers have not changed or adapted their business model to changing market trends until now – when it’s almost too late
Struggling to keep pace with deteriorating market conditions, US carriers are finally starting to institute a draconian mix of cost-cutting and fee increases aimed at passing the exorbitant cost of operating a flight onto the end user. Frankly, I am surprised it took this long. The trend, further evidenced by last week’s American Airlines announcement that it will begin charging an extra $15 for EVERY bag checked by an economy passenger, is just the start for US passengers. AA, which also announced cuts in both domestic capacity and jobs, is citing higher fuel costs and a slowing US economy as the impetus for these measures.
Ultimately, this process of “unbundling” is inevitable for the US legacy carriers, who are slowly but surely collapsing under the weight of their bloated, regulation-era operating. For years, low cost carriers in Europe and Asia have recognized the state of air travel as one of artificially low prices coupled with rising expenses, and have done away with the frills American legacies have continued to tout – and the American consumers have come to expect. In contrast, the successful low cost airlines have found a way to sell those ancillary services to passengers, allowing them to personalize their flying experience while the airlines develop new lines of revenue with only marginal per unit cost.
For years, I have developed strategies to help airlines, such as low-cost ones, achieve what airlines like American are clumsily beginning to initiate: a streamlined, nimble operation, represented by a core product and multitudinous extras that can react to consumer and market demands in an effective and rapid way. They were smart because they recognized a long time ago the legacy carrier business model was broken!
These airlines – low-cost- are the future. It’s going to a shock for millions of US passengers who are used to so many “frills” but their business model, which is just now being emulated by large US carriers, is the only way forward.
That is the future of the airline industry.