• by Eric Butterman , July 22, 2008

Airlines move their Web sites and policies toward clarity

With a hike in fares and baggage charges that consumers consider unfair, will airlines find themselves financially grounded? Anyone who didn't see the gas price increase coming years ago wasn't living on planet Earth. Still, those who banked on $130-plus a barrel for oil in 2008 were clearly in the minority.

As for the airlines, now faced with rising costs, most are scrambling to find revenue to make up the difference. Unfortunately for consumers, they've found much of it in day-of-trip baggage surcharges and higher fares on routes normally known for lower rates. The hope is that consolidation, such as the Northwest-Delta deal and a possible Continental-United move, will reduce financial strain on airlines, strengthen customer loyalty and give investors reason to trust the industry's future. For an industry already under heavy criticism, this is clearly a crucial time.


Paying For It

Henry Harteveldt, travel analyst for Forrester Research, says the biggest problem with the recent airline moves is confusion. "I see people going to curbside unsure whether they need to pay a fee at a counter kiosk for that extra bag or whether there's maybe even an online solution," he says. "It's bad enough the airlines want to institute negative changes. They need to at least not add chaos to the consumer's experience." Harteveldt believes the airlines need to be more careful than ever about creating that experience since only 37 percent of fliers are loyal to an airline - and the number is even lower (29 percent) among leisure travelers, according to his company's research. Many consumers are more willing to pay a higher fare than an extra fee for baggage, says Harteveldt, but Diane Clarkson, travel analyst for JupiterResearch, believes it may be too much to risk.

"The airlines have always struggled with this because they want the lowest price point in their advertising," she says. "It's a contentious decision because if their competitors don't follow suit, they risk being the victim of sticker shock."

Alison Eshelman, manager of corporate communications for New York-based JetBlue, says the carrier hasn't seen a sharp decline in the purchasing of flights because it's attempted to offer other services to generate the revenue needed. "We've gone to upgraded products like four inches of extra leg room for $10 to $30," she says. "We do charge $20 for a second checked bag, but we found that only 25 percent of our customers check multiple bags, so it made us feel more comfortable to do it." But part of the problem, Harteveldt says, comes from passengers having to go to a baggage check-in to pay these extra fees. "Because of automation, many of the people who worked behind the counter for baggage were phased out," he says. "Now all of a sudden they're needed, but the airlines don't want to incur the cost of bringing them back. That means you have customers paying extra and spending endless time waiting because there's only so many people to serve them." Eshelman, whose company serves 53 cities and has roughly 140 planes, says some of the baggage blow was cushioned by making the information more readily available on its Web site and in e-itineraries. Still, she knows this might not be the last of the added charges. "We will have to consider making changes if fuel costs continue to rise," she says. "[JetBlue CEO] Dave Barger said everything is on the table at this point."

For low-cost carrier Southwest Airlines, this uncertain time may actually be a boon to profits. Choosing to buy oil at a hedge, they've paid for 70 percent of theirs this year at $51 per barrel, approximately 40 percent of the market cost at press time. "For each penny increase to the cost of jet fuel, it adds $15 million to our cost structure annually," says Chris Mainz, spokesman for the Dallas-based carrier. With a 55 percent hedge at the same oil price next year, Southwest may very well be gaining significant market share in cities they already serve and be in a position to expand to other locations. Says Harteveldt, "Southwest ran ads in Minneapolis about how they are the fee-less airline, and I have to believe they are sizing up several markets that they previously avoided. It comes down to the fact they had the money from previous profitability to buy the hedge. In some ways, other airlines are paying for the decisions they made financially several years ago." Southwest spokesman Mainz is also quick to add that "while some airlines are cutting domestic capacity 11 to 12 percent, we are slated to grow this year by 4 percent in capacity."


Merge or Purge

For several airlines that have witnessed multiple bankruptcies from rival carriers, the favorite strategies seem to be to merge or to purge themselves from the market completely. The Northwest-Delta deal was seen by some as desperate; others found it a move of expediency. Clarkson saw it as part of an industry-wide necessity to reduce capacity. "The airlines need to get capacity down any way they can," she asserts, "but there are few examples of mergers that happened and in the early stages resulted in happy unions and happy travelers. For the union, they'll question which company's employees will have seniority. For travelers, they're afraid their loyalty programs won't be honored properly."

There's a decent chance that Continental and United will follow Northwest and Delta's lead. "The pact so far between them takes it from the usual shotgun wedding to 'We're gonna date for a while and see what happens,'" Harteveldt offers. "The deal would make sense, with the acquiring company likely being Continental. They don't overlap that much, and United is sparse in transatlantic flying, so they could use the help. Continental is also more creative in planes, having everything from 757s to 777s. They'd also both be covered in the two most important centers, with Continental in New York and United in Chicago."

And while Harteveldt doesn't see the government stopping mergers such as these, he does think it will make note of whether airlines are honest and clear in disclosing any new fees to customers. "If they get too cute," Harteveldt warns, "there could be trouble."

But maybe the government needs to watch itself, he adds. "Many people don't realize how much the government taxes airlines," Harteveldt says. "Airports need to look at their costs as well, because many airlines won't use them if it's too expensive. There are many parts in flying that are standing in the way of offering the consumer low prices - the airlines are just one of them and, let's face it, sometimes the easiest to blame."