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Leave the Airlines Alone

Daniel Gross

Daniel Gross is executive editor of strategy+business.

 

The American flying public is up in arms about a new injustice. Thanks to several years of economic growth, more intelligent management, and, especially, sharply lower fuel prices, U.S.-based airlines are killing it. As the New York Times reported, the four largest U.S. airlines last year made a combined profit of more than US$21 billion. And yet, the Times notes, airlines aren’t exactly rushing to share their bounty with their customers. Tickets remain expensive. According to the airline industry, the average price of a domestic fair rose 34 percent between 2009 and 2014, far higher than the rate of inflation. Prices haven’t fallen in the past year, the Times notes, even as the price of oil has plummeted. And only a few airlines are starting to offer free pretzels and drinks again.

Depending on the market price of oil, fuel can range from between 20 and 30 percent of an airline’s total costs. So it may seem shortsighted for the airlines not to pass along their savings. Yet another example of an industry that often seems to show contempt for its customers, the critics note: The airlines pack non-premium passengers into cabins that resemble sardine cans, force people to gate-check roller-board bags that could easily fit overhead, cancel flights for no apparent good reason, charge for the checking of baggage, for drinks, for snacks and headphones. Of course they pocket the windfall of historically cheap oil.

But the flying public, simply put, should get over itself. For the fare increases have far more to do with the dynamics of the broader travel marketplace than with the short-term greed of companies. And counterintuitive as it may seem, airlines are making a smart long-term move. The airline industry is notoriously difficult and highly cyclical. Because it has such high fixed costs — labor, fuel, equipment, regularly scheduled flights — it tends to do OK when the economy is expanding but falters quickly when conditions turn against it. Which is why Warren Buffett has called airline investing “a death trap for investors.”

There’s a market-based method to airlines’ current approach to pricing and passenger perks. Most industries don’t cut prices unilaterally unless market conditions, or competitors, force them to. But persistently rising demand proves that airlines don’t need to cut prices to goose sales. For domestic airlines, the load factor — the percentage of seats that are actually occupied — clocked in at 85.1 percent in October 2015, up sharply from 79.8 percent in 2008. In the first ten months of 2015, U.S. domestic airlines carried 581 million passengers, up 5.3 percent from the first ten months of 2014. As for competition, it’s very difficult to start a new airline in the U.S. And the number of domestic flights operated by U.S. airlines has been falling consistently over the past several years.

Having gone through bankruptcy tends to make people and companies a little more conservative when it comes to money management. And U.S.-based airlines have been frequent visitors to the bankruptcy courts in recent years. American Airlines filed for bankruptcy in 2011. Delta Airlines filed for Chapter 11 in 2005. The entire industry had to get bailed out by the federal government in the wake of the attacks of September 11, 2001. Airline managers live with the knowledge that one significant terrorist attack, or a few bad quarters, can render their stock worthless. And so it makes sense to hoard cash when you can, rather than sacrifice profits for the sake of making passengers happy. At the end of the 2015 third quarter, United Airlines had $5.6 billion in cash and short-term investments, up 27 percent from the year before. It may need that money someday soon.

Airline managers live with the knowledge that one significant terrorist attack, or a few bad quarters, can render their stock worthless.

What’s more, customers should not feel entitled to price reductions based on the fall in oil prices — or any other single factor. Airlines may be federally licensed and regulated. But they are not utilities. They provide a service that is discretionary for the overwhelming majority of their customers. Very few people actually have to fly. Options for intercity travel in the U.S. include cars, trains, and buses. In general, of course, they’re not nearly as fast or efficient as airplanes. But people do have choices. And in some areas, consumers have been reacting to expensive airfares by exercising that choice. Intercity travel generally has been rising as the economy has rebounded. But on some routes, air travel is losing market share. Amtrak notes that in 2014, its trains “carried more than three times as many riders between Washington, DC, and New York City as the airline industry.” Meanwhile, the upstart bus companies whose vehicles ply routes between Midwestern hubs like St. Louis and Chicago have grabbed market share from airlines.

Yes, it’s frustrating whenever the price of anything rises. But I’m willing to cut the airlines some slack for their current bout of penny-pinching. When the shoe is on the other foot, when demand weakens, I, along with my fellow consumers, will be ruthless about demanding the lowest possible airfare. We will all fly on flights that lose money because they are only partially full. And we will all continue to complain about the miraculous technology that ferries you from breakfast in New York to lunch in San Francisco — all while enjoying very slow Internet access several miles above the earth.

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Leave the Airlines Alone