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Travelers abhor higher air fares, but experts say they’re the only way airlines can stay solvent in this era of expensive oil and steep labor costs. With a possible American Airlines/US Airways merger on the table and Delta Air Lines’ decision to buy an oil refinery to combat high fuel costs, Kojo examines changes in the the airline industry and asks what they’ll mean for the summer travel season.
- Susan Carey Reporter, Wall Street Journal
- Charles Leocha Director, Consumer Travel Alliance
- Steven Lott Vice President for Communication, Airlines for America
MR. KOJO NNAMDIFrom WAMU 88.5 at American University in Washington, welcome to "The Kojo Nnamdi Show," connecting your neighborhood with the world. Anyone who's buying plane tickets for travel this summer will tell you it's a tough time to be flying. Airfares seem to be going up and it feels like you have to pay extra for everything from lunch to leg room. But the airline industry says it's only reacting to the high price of jet fuel and that, in fact, if you adjust for inflation, plane tickets are a bargain.
MR. KOJO NNAMDIStill some air carriers are struggling. American Airlines is in bankruptcy and U.S. Airways is making a bid to merge the two into what would be the nation's biggest airline. At the same time, Delta Airlines is taking the novel step of buying an oil refinery to get a handle on its fuel costs. In this atmosphere of consolidation and high oil prices, what should consumers expect as they map out vacation plans and shop for plane tickets that they can afford?
MR. KOJO NNAMDIJoining us to have this conversation is Charlie Leocha, director of the Consumer Travel Alliance. Charlie, good to see you again.
MR. CHARLES LEOCHAAnd great to be here.
NNAMDIAlso with us in studio is Steven Lott, director of communications with Airlines for America. Steve Lott, thank you for joining us.
MR. STEVEN LOTTGood to be with you, thanks.
NNAMDIAnd joining us by phone from Chicago is Susan Carey. She's a reporter for the Wall Street Journal. Susan Carey, thank you for joining us.
MS. SUSAN CAREYPleased to join you from afar.
NNAMDISusan, please, from afar, set the stage for us. The '90s were a boom time for the airlines, but 9/11 changed that. How has the airline industry, in general, fared over the past decade or so?
CAREYThe past decade has just been a nightmare. The U.S. industry's lost more than $55 billion. We've had many, many bankruptcies and many of them have turned to liquidations. Only in the last couple of years has the industry started to kind of get back on its feet. But at that point, oil just went through the roof in '08 and then again in '11.
CAREYAnd so the industry is coming around. They've learned how to charge passengers for things that the passengers, you know, might want to buy. They have quit chasing each other for market share foolishly. They are kind of being run by hardheaded businessmen now who want to make money and do the right thing. But it's still a terrible industry and they really are barely profitable.
NNAMDIThe industry overall, it's my understanding, made money in 2011, correct?
CAREYA very modest amount of money.
NNAMDICharlie, I'll start with you and then Steve. Anyone who's bought a plane ticket recently would probably complain that airfares have gone up. What's going on with ticket prices right now?
LEOCHAWell, I think the ticket prices themselves are -- they are going up. They're not going up exponentially. The biggest change that we've found has been -- that is going up exponentially is the additional ancillary fees, things like baggage charges, seat reservation fees. You used to have a seat reservation whenever you bought your ticket. Now you have to pay for it, in most cases. Extra legroom. Now you pay for pillows and blankets. You pay with some airlines just to check in at the airport.
LEOCHASo they're trying to find ways to squeeze more money out of the passengers and they're being very successful. The ancillary fees are now a real important part of the overall economics of the airline industry. My only problem and the problem that the Consumer Travel Alliance has with that is that the airlines are charging all of these fees, but we can't compare prices across airlines using something like an Expedia or a Priceline or even the corner travel agent because the airlines aren't releasing how much all of these fees are on specific flights.
NNAMDISteve, I am old enough to remember the go-go '90s when we were traveling for what seemed like much lower fares. And so people like me keep complaining all the time about ticket prices going up. But exactly what is going up with ticket prices right now?
LOTTSure, it's a good question. And I think what a lot of people assume is that, you know, fares have gone up quite a bit. But what we like to do is compare it to inflation. What is the CPI, the Consumer Price Index? What are you paying for, other goods and services, whether it's in the travel industry or whether it's for, you know, a new TV or a gallon of milk? And what we find is that when you look at airfares compared to inflation, inflation has gone up, in some cases, more than double of what the average fare has gone up.
LOTTSo we like to say, you know, that certainly inflation has more than doubled the price of air travel. And air travel really does remain a good deal. Certainly fares have gone up in real terms, but at the same time from an airline perspective, costs have gone up even more. That's why we have a hard time making money.
NNAMDIIf you'd like to join the conversation, you can call us at 800-433-8850. Do you think plane ticket prices fairly reflect the airlines' cost of doing business today? 800-433-8850. Susan, American Airlines is the latest of the big U.S. carriers to declare bankruptcy last fall and has until September to present a plan to pay off creditors and return to profitability. What's the history behind this bankruptcy?
CAREYWell, most of the large airlines filed for bankruptcy in the last decade and American was the only one who didn't. And, you know, their labor gave them concessions that kept them out of bankruptcy in 2003. But since that time, all the other majors who had already been through bankruptcy have, you know, slimmed down and have merged. And so you have American being unique in that it didn't ever file for bankruptcy and it sat out the merger game.
CAREYSo as a result, they have higher labor costs than their rivals and they are not as big as their rivals, particularly Delta and United, which have become much larger and more efficient airlines with more beautiful and extensive route networks. So American finally, you know, took the bitter pill and filed for bankruptcy and are trying to, you know, get their costs down.
CAREYBut interestingly enough, US Airways sees this as kind of the last opportunity, you know, the last chapter of consolidation and wants to play a role. So they are sort of doing an end run around American's management in trying to find a way to bring those two airlines together.
NNAMDII'm going to get to that in a second, but first, Steve Lott, how much of an airline's costs are tied to labor?
LOTTWell, that's a good question. The airline industry, their two largest costs are fuel and labor. And I know we're going to discuss fuel a little bit later on in the show, but fuel represents anywhere between 30 and 35 percent of total costs. So it's the largest and the most volatile expense. Labor follows close behind. As Susan alluded to, the industry went through a significant restructuring in the past decade and, in many cases, have been able to reduce their labor costs and reduce their total expenses or become more efficient. So I'd say, to answer your question, labor probably represents a good quarter of an airline's expenses.
NNAMDIIn case you're just joining us, we're talking about the airline industry with Steven Lott. He is director of communications for Airlines for America. Charlie Leocha is director of the Consumer Travel Alliance and Susan Carey is a reporter with the Wall Street Journal. And if you have questions or comments, call us at 800-433-8850. Send an email to email@example.com, a Tweet at kojoshow or simply go to our website kojoshow.org and join the conversation there.
NNAMDISusan, as you were pointing out, last month, US Airways proposed a merger with American that would join the two airlines under the American name and pulled off what some people consider a coup. Three key unions -- that's why I wanted to talk about labor first. Three key unions representing America's flight attendants, pilots, transport workers announce that they support the merger plan. How likely is it to go forward?
CAREYI see there's a lot of things that could jump in the way of US Airways before they could pull this off, but it was rather -- it was highly unusual because airline unions tend to not like mergers. And for them to endorse a merger with this smaller airline in Arizona, it shows the depths to which these unions are unhappy with their own management.
NNAMDIA merge the American Airlines would control almost a quarter of domestic airline seats and locally here in Washington would control almost 60 percent of the seats in and out of Reagan National Airport. Can you describe what this new merged airline would look like?
CAREYI think it would be much more -- it would have a lot bigger east coast presence than American as a standalone airline has today because US Airways has many dense routes, you know, just smaller cities on the east coast. It would give US Airways more flights to Latin America and Europe. It would give American a connecting hub in Charlotte, N.C. and one in Philadelphia and a bigger presence in Washington. It would be essentially the same size as Delta or United.
NNAMDIAnd, Charlie Leocha, what would be your concerns about this merger?
LEOCHAWell, my concerns are, I guess, fairly basic when it comes to mergers because whenever we have mergers, that means that there's less competition. We've already gone from seven major airlines in the United States down to four. And now we're going to be dropping down to only three. And so what ends up happening is that a lot of this control of the airline inventory takes place quietly and behind the scenes. And what we find is rather than airlines just cutting back service to certain cities by a small amount, they totally eliminate the routes in many cases because they don't want to compete against another airline.
LEOCHAAnd so we find the airlines, in a way, it's not open collusion, but they end up dividing up different routes within the United States. And that always comes at the detriment to the consumer.
NNAMDII want to get to the phones. Here is Ryan is Silver Spring, Md. Ryan, you're on the air. Go ahead, please.
RYANHi, Kojo. I was curious as to -- I've seen a Frontline episode about this very topic and they had dealt with a lot of these regional carriers that actually carry the name of these larger airlines. And I was wondering if that's actually a measure of them trying to increase their profit margin, because there was a lot of safety problems with these smaller airlines. And if that may have been one of the ways that they were able to keep the costs down because the longer flights are the ones that obviously generate more money for the airlines.
NNAMDISo you're thinking that regional airlines flying under the names of larger airlines are a way of larger airlines keeping the costs down?
RYANThat was what -- according to the Frontline (unintelligible) , yes.
NNAMDILet me ask Steve Lott. Do you know, Steve Lott?
LOTTSure. The -- exactly. I mean, this is common in the industry. It's been done for a long time. You have separate independent airlines. They actually, in many cases, are even publicly owned, publicly held companies. These are commonly referred to as regional airlines. And they work out agreements with the larger airlines often times called co-chair interline agreements. The aircraft themselves are painted in the delivery in the paint job of a larger plane so it looks like you're getting on a United, American, Delta aircraft, but it may be operated by another carrier.
LOTTAnd again, these are fully certified safe carriers that fly as United Express, as Delta Express, as, you know, US Airways Express. And what's the benefit of this is twofold. One is the airlines are able to serve more cities across the country more effectively because while it may not be profitable for them to serve it with their larger planes which are too big for many of the small cities and towns around the country, they can contract with these smaller carriers. And these smaller carriers can use 50-seat airplanes, for example, to serve many cities around the country.
LOTTSo through these arrangements the nice thing is is that these airlines are able to sell tickets and serve many of the small communities around the country that may not otherwise have air service.
NNAMDICare to comment on that, Charlie?
LEOCHAWell, I think that the regional airlines definitely extend the reach of the national airlines but that happens at a real cost in terms of credibility. Because when you buy an airline ticket and you're flying on let's say US Air and you're going from point A to point B, no matter how big the city is and no matter how many different airlines are actually flying, in your mind as a consumer you are on US Airways. They want you to believe that you're on US Airways. They paint the plane so it looks like a US Airways flight. They have a magazine which is US Airways magazine.
LEOCHAEven the ticket and the boarding pass that you get, it doesn't say Air Wisconsin Republic or something else. It says US flight such XXX. And so they go out of their way to make it appear that this is part of a larger network when indeed it's just -- it's a totally separate airline. And if you have a problem, you learn that real fast, that...
LEOCHA...you don't call US Airways for the problem. You have to call this small airline once you find out who they are and try to deal with it. And there have been some, you know, some real problems in terms of the airline industry which have really underscored this whole problem.
NNAMDIRyan, thank you very much for your call. Before I go to a break, Susan Carey, a lot of people would probably want to know how would a merger between American and US Airways affect frequent flyer miles on those two airlines.
CAREYWell, it would probably give the two mileage club -- all the members more choices because you would be suddenly an Advantage member who could fly to all the places and have all the benefits of the US Airways network. I think that frequent flyer programs tend to benefit from mergers, perhaps unlike, you know, competition.
CAREYOn the other hand, the Department of Justice is going to decide whether -- you know, if it comes to it, whether this is a good deal or not. And they have very sophisticated ways of, you know, analyzing what the effects would be on competition. And the DOJ did allow Delta and Northwest to get together and they did allow United and Continental to get together.
NNAMDISo we will see whether this proposed marriage will work. We're going to take a short break. When we come back we'll continue our conversation on the airline industry. But you can keep calling, 800-433-8850. Have you flown on a recently merged airline? What was your experience? 800-433-8850, or send us a Tweet at kojoshow. I'm Kojo Nnamdi.
NNAMDIWe're talking with Susan Carey. She's a reporter for the Wall Street Journal who covers the airline industry. She joins us by phone from Chicago. Charlie Leocha is director of the Consumer Travel Alliance and Steven Lott is director of communications for Airlines for America. We're taking your calls at 800-433-8850. What are your biggest concerns about the airline industry? You can also send email to firstname.lastname@example.org. Susan, Delta Airlines is buying an oil refinery near Philadelphia. That move will help Delta cut its fuel costs and ensure it will have jet fuel available. This is a first for a U.S. airline. Is this an investment that makes sense?
CAREYNo one can really agree on that. Obviously Delta thinks it makes extreme sense because this refinery has a book value of a billion dollars but they're only paying 150 million for it, which the company likes to say is only the cost of one wide bodied airplane. So they're getting it for a song, but all the analysts in the oil community are really divided about whether this is a good idea. You know, this is a sector of the petroleum industry that has been suffering over the course of the past few years and this is a company that really doesn't necessarily have this kind of expertise.
CAREYSo I think the jury's out but I think everybody gives Delta credit for thinking outside the box and trying something new to try to get some control over its number one expense.
NNAMDIWell, let's get into the weeds on this a little bit where Han in Silver Spring, Md. will take us. Han, you're on the air. Go ahead, please.
HANThanks, Kojo. Thanks for taking my call.
HANMy question is specifically about Delta's purchase of the refinery. Making the assumption that they bought it to -- as you say, to try and keep control of their fuel costs, you know, we're told -- the public's told many times when the argument comes up for the price that they pay for the gasoline at the pump that 70 or 80 percent of the price that people pay is actually caused by the world market price for crude oil.
HANMaking the assumption that applies for aviation fuel as well, I don't see how Delta's buying of a fuel refinery could really, you know, make that much impact on their fuel savings. I understand that aviation fuel probably costs more to refine than gasoline, but I didn't think it would cost that much more.
NNAMDISteve Lott, what can you tell us about that?
LOTTSure and I can't really comment specifically on the Delta deal but I can certainly give some background on how big a cost fuel is to the industry and what goes a little bit behind that. So as we talked about earlier, fuel is the largest expense for the airline industry last year about 35 percent of total expenses. So this is not only a huge cost for the industry, it's also one of the most volatile expenses, which for airline management makes it very difficult to budget at the beginning of the year 'cause you're budgeting on a certain amount. I'm going to spend X amount on fuel this year. Yet if fuel spikes or even drops it presents a challenge for budgeting.
LOTTSo airline management puts a lot of focus on becoming more efficient, which they have done and, you know, reducing their exposure hedging, if you will, their fuel costs. Looking to the caller's question specifically at fuel and where it comes from, obviously all fuels come from crude oil that comes out of the ground and then it's refined into different products. The jet fuel market relative to gasoline for your car is actually a very small market. Out of, I believe, every barrel of crude less than 10 percent is turned into jet. So it's a small market for the producers.
LOTTThe second thing is that the caller was quite right that jet is more expensive to refine than some of the other fuel products that are derived from crude. So there's actually a term in the industry, kind of makes some people laugh, it's called the crack spread. It's the difference between the price of crude and the price of jet. And I often get calls and questions, well crude went down. Well, that doesn't necessarily mean the price of jet went down. So there's a whole energy market that the airline industry pays close attention to, the difference between crude and jet and how much it costs.
LOTTNow at the end of the day the airline industry, just like you're filling up your car at the pump, the airlines fill up their planes with jet fuel, which can often be more expensive than what you see in the price of crude.
NNAMDIIt's my understanding Delta will still have to pay market price for oil, but Delta feels it will save on the cost of turning that oil into jet fuel and estimates that it could cut its fuel cost by $300 million a year. Delta reported that in 2011 its fuel tab ate up 36 percent of its operating expenses. How are airlines responding to the rising costs of fuel in your view, Charlie?
LEOCHAWell, in my view they're passing it along. And also in the view of the chief executives, I had a chance to go out and meet with the top executives out of US Air last month. And the biggest change for them is the ability to pass on fuel charges to passengers now. So that is a big change. They haven't been able to do that in the past but now everybody can pass it along.
LEOCHAAnd back to the whole question of Delta and the refinery, I think that we have to look at the logic of this whole thing. I mean, the caller touched on it by saying, gee you know you might be able to control jet fuel prices but you still have to deal with crude oil prices. And if we keep following the logic where they're going to have to buy their own oil wells, then maybe they'll get their -- Delta will want to buy its own supertanker so they can move the oil from point A to point B, maybe buy another company which is actually building the derricks and so on. It -- you know, where does it all stop?
LEOCHAAnd I think that from an economic point of view it makes more sense to let specialists deal with special areas that they understand and they know. And that's why I think that in the end consumers are going to end up paying for this test that Delta's running. I hope that they don't have to, but if what has happened in the past happens in the future, I think that we're going to run into that kind of a problem.
NNAMDIWell, Steve and Susan, some airlines are investing in new planes that are more fuel efficient. How big a difference can that make for an airline and how expensive is a new airplane today, Steve?
LOTTWell, based on published prices -- and, you know, like buying a car at home you negotiate with the manufacturer, but at least published prices, a large wide body that flies internationally can be upwards of $150 million. Less so for smaller aircraft but it's a big expense. And there's obviously different ways you can -- airlines pay, you know, pay cash for a plane, they lease it. There's all different types of ways that you can finance the purchase of aircraft. But it's obviously one of the most important and one of the most expensive capital expenditures for any airline.
NNAMDIIf they're more fuel efficient today, Charlie, they can save an airline a lot of money?
LEOCHAOh absolutely. And the airlines -- that's one area where you don't argue with the airlines. They figure out something will save them money on fuel and they're all over it like a cheap suit. I mean, they really want to make sure that they can save money. Look at the little winglets. If you just think back two or three years, airplanes didn't have little winglets. All of a sudden they learned that they put these winglets on it -- it costs a fair chunk of money to put these things on there but it saves them so much money in terms of fuel, a little thing like that just to change the -- you know, the flow of air over the wing saved them so much money on fuel that every single airline has it now.
NNAMDISusan Carey, let's look at another airline merger in recent years. The new and improved Delta Airline seems to get top marks from analysts. Why is that?
CAREYWell, I think that -- they're four years later from their merger. They've been through all the pain. They've been through the integration. They had a pretty successful integration process but they're beyond that now so they're sort of humming on all cylinders. And they are able to focus on, you know, sort of aggressive and new ideas like buying a refinery or like getting some good new partnerships in Latin America, buying some new airplanes, improving their onboard product. They have the luxury now of having the work behind them so they can actually be a grownup company and do grownup company-like behaviors.
NNAMDI800-433-8850 is our number. Here is Debbie in Hyattsville, Md. Debbie, you're on the air. Go ahead, please.
DEBBIEHi. Just one comment and then one question. I have no problem with the public having to pick up the cost of the airline fuel. If you have an SUV and it costs you $100 to fill it, you bite the bullet and you fill your tank. But my main concern, you were talking about the commuter airlines that are really not owned by the parent company that you think you're flying on. There is a real problem with -- if you're flying on a Delta -- if you're flying on a Northwest flight -- I don't know anymore. I used to be in aviation, but I don't anymore -- if you flew on Northwest, then their commuter airlines were owned by Northwest.
DEBBIEThere was an incident in the late '80s, there were two planes. I think they were going into Saginaw, Mich. The Northwest pilot -- they were on an embryo -- the Brazilian Embryo, which is a fine plane, but it has an ice ceiling of, like, 5,000 feet. The Northwest plane did not take off. The comm. airplane, and I can't remember who the parent company was, that pilot said, oh we can make it, and he didn't. And the entire -- and it went down and everyone was killed.
DEBBIEThe problem with commuter airlines is that the public is not aware of two things. One, the pilots are not trained like the parent company pilots are trained. And B, their maintenance records -- I also worked with AOG parts and maintenance -- maintenance records on these companies -- there should be transparency -- the maintenance records on these companies are horrible.
NNAMDICharlie Leocha, transparency is what you seem to be calling for also.
LEOCHAWell, I call for transparency at all sorts of different levels. Dealing with it in terms of commuter airlines or regional airlines is one side. And the other side of transparency is trying to get -- you know, learn how much the actual cost of travel is these days. Just showing the airfare on a computer screen really isn't that helpful when you've got airlines claiming that the airfare between point A to point B is only $9. You know, we all know that nobody can fly anywhere for $9. I mean, what are they doing? But that's the number that shows up.
LEOCHAAnd now with the latest DOT rulemaking, they have to add the taxes and fees, which makes their $9 airfare up to around $30. But even at that, I think that it would be really nice if the airlines would at least tell us how much and release to travel agencies information about baggage charges and seat reservation fees so that when we go on a site like Expedia or Priceline or Orbitz, that we can actually compare prices across airlines, including these basic fees such as baggage and seat reservation fees.
NNAMDIThank you very much for your call, Debbie. Steve Lott, hold your thought for a second because Tim has a question about those very fees that I'd like you to address. Tim in Fairfax, Va. you're on the air. Go ahead, please.
TIMThank you very much for taking my call. I appreciate the topics you raise every day. I think that it's a shame because you alluded to the fact that there are fewer major carriers now and it seems that they have a monopoly so they don't care what the flying public thinks about them. I think they're taking a huge black eye involving habits that the one respondent just talked about there. They're dinging you for fees from -- hidden costs for seat upgrades, for baggage charges, where now some of the airlines are even charging for a first bag going on the airline knowing that everyone has to take some bags onboard. So I think they're being very underhanded in their approach and I think they're taking a black eye as a result of it.
LOTTSure. Well, and it certainly raised a lot of the questions that we've been hearing in recent years about, you know, why do airlines have these fees and why has their model changed? And, you know, what are they doing? Why do they need this money? And I think we've talked about some of it so far is that, you know, the airline business model has changed. What we had previously frankly did not work. That's why we had over $55 billion in losses. Certainly the airlines have been able to increase revenue but as we also talked about the costs have gone up even higher. So the airlines still are breaking even at best.
LOTTSo, you know, the airlines are looking for additional sources of revenue and what's...
NNAMDIStarting in January, the airlines were required to include taxes and mandatory fees in their advertised fares.
LOTTYes and that's a very sensitive subject and it's actually being talked about in congress. There's actually many members of congress -- well, first off, the airline disagrees with that change that the Department of Transportation introduced. Essentially they are including taxes in the total price. They're forcing airlines to present the total price including taxes. And we don't see that in any other product or service that you buy. So first of all we don't think that's fair and there are many members of congress that agree with us. And there's actually a bill to try to overturn that that's making its way through congress.
LOTTSo this whole area of fees and services and ancillary products, you know, again the point we make is that it's important -- the fact is a lot of these are optional and we think that customers shouldn't have to pay for services that they're not using. So everybody's different but a lot of times I don't check a bag -- a lot of people don't check a bag. There's a lot of times where I don't want a meal on a flight so I shouldn't have to pay for it. So it's things about the value.
NNAMDIWhat do you say in response to that, Charlie Leocha? When I go to buy a widescreen flat TV, they don't tell me how many taxes I'm going to pay. If I'm buying it online and they have to ship it, they don't include the handling fees in the price of it. Why should airlines be any different?
LEOCHAWell, I think that that's not across the board. Let's say if you go to buy gasoline today, the price includes taxes and fees.
LEOCHALet's say you go to buy liquor in Washington D.C., the price includes taxes and fees. Let's -- you know, so this isn't across the board where we don't include taxes and fees.
LEOCHABut say you go to buy liquor in Washington D.C., the price includes taxes and fees. You know, so this isn't across the board where we don't include taxes and fees. Where we really get into a problem is, we start to look at something like if you look at domestic flights, the differences are relatively small, maybe $20 in terms of taxes and fees that get added on based up how many times your plane takes off and lands and airport charges and so on.
LEOCHABut if you started to look at international flights, you could see just the day before the law came into effect, the price to fly from Boston to London was $65. Well, you know, excuse me, but when you went to buy the ticket, the absolutely cheapest round-trip ticket you could get was $752. Somewhere there's a disconnect. No matter how much the airlines try to spin this, when they tell you that the round-trip ticket to London from Boston is $130, and when you plunk down your credit card it costs $752, there is a problem. And that's the problem that DOT is trying to approach, and I think they did a good job of it.
LEOCHAI don't think that the airlines are going to be hurt by it at all, and I think it really helps consumers understand how much the total cost of travel is. And now if we can just get the added baggage and seat reservation fees in there, I'd be a happy camper.
NNAMDISusan Carey, we have a caller, Joe, who's been waiting for a while to address this issues, do allow me to get to it. United and Continental merged more than a year ago, and there are still some bumps to work out. How is the new bigger United doing?
CAREYThey are in the midst of working out the bumps. They had a big conversion of their passenger reservation system and website a couple of months ago where they moved the old United into the new Continental website, and it didn't go without some problems. And some customers were upset, and wait times were long to get through to the company, but this seems to be abating. I think the bigger challenge for the new United is getting their labor contracts organized. That is going to be the real secret sauce to whether this merger, which looks great on paper, is actually successful. They need to get new contracts with all of those unionized employees, and that is a long and arduous process that they're in the midst of.
NNAMDIHere is Joe now in Rockville, Md. Joe, your turn. Go ahead, please.
JOEHi, good afternoon. Thank you for taking my call, Kojo. I've been flying United probably almost exclusively for the past seven years, approximately 25 to 30,000 miles a year, which put me in the first level of their frequent flyer tier. And actually, it had been really pretty good. I was pretty pleased with it. I felt they gave you a reasonable level of benefits that reward you for flying their airline. Since the merger, my view is they've effectively slid each category down one level. The 25,000-mile level is essentially, I won't say worthless, but significantly degraded, and when I speak to United employee's about this, they kind of agree that the common man, so to speak, has been, well, to use a reasonable word, has really been overlooked.
JOENow they're focusing on people that fly 50 to 100,000 miles, which is their prerogative, however, they presented this merger as how great it was going to be for all of their customers, and I feel now that they have focused on a few -- a small aspect of the flying public at the expense of the larger.
NNAMDIWell, you should know that Charlie Leocha testified against this merger, and I don't know if your experience validates in his view his testimony.
LEOCHAWell, in terms of the merger, my bottom line was, once again, that competition is being squeezed out of the system, and time will tell. However, we're already starting to see part of the reasons that the airlines can raise their prices or the fact that they don't have as much competition, routes are being changed here and there, and the other thing that I talked about on my testimony is that it's not only competition within the airline industry, competition is squeezed out when it comes to the catering operations, when it comes to maintenance facilities, when it comes to local airport operations and so on.
LEOCHASo it kind of goes across the board. It's more insidious than only, you know, the basic within the airline type of competition, and now, of course, they are having the problems with the hiccups in terms of trying to blend two giant IT systems, which is to be expected, and I hope they get it worked out soon because it's not making an awful lot of their passengers happy.
NNAMDIGot to take a short break. When we come back, we'll continue this conversation. Joe, thank you very much for your call. If you'd like to call us, the number is 800-433-8850. If you have any general concerns that you would like to express about the U.S. airline industry, or any specific issues, 800-433-8850. What's the most important factor you consider when booking a flight? You can also go to our website, kojoshow.org, make a comment or ask a question there. I'm Kojo Nnamdi.
NNAMDIWelcome back. We're discussing the airline industry with Steven Lott. He's director of communications for Airlines for America. Susan Carey covers the airline industry for the Wall Street Journal, and Charlie Leocha is director of the Consumer Travel Alliance. Some people worry that if we only have a few giant airlines, they could become too big to fail. I'd like each of you to weigh in on this starting with you, Susan Carey.
CAREYWell, I think we're forgetting the fact that there is -- there are the low-cost carriers in America, Sprit, Jet Blue, Southwest. They cover about three-quarters of the domestic landscape, meaning they are in competition with the bigger airlines on those routes, and they tend to act as the price policemen. Therefore, the largest airlines don't have a monopoly, and they can only raise their fares so much because there are these smaller scrappier carriers with lower costs giving them competition.
NNAMDIYour view, Steve Lott? Too big to fail.
LOTTWell, I think -- so the beauty of the airline industry, even though we may have fewer airlines today than we did 10 or 20 years ago, is that there is still a tremendous competition in the airline industry. Passengers and consumers have a lot of airlines to choose from. Even those listeners here in Washington, you have more airlines to choose from today than you ever have at the three airports. So you can go around the country and around the world nonstop to many destinations. So I think it's a bit of a myth to say that there is no more competition in the industry.
LOTTNot only is there in some cases more competition in many cities around the country and more service to many cities around the country, you also have many different types of business models. You know, the other beauty of this competition and expansion of new business models is that there's an airline -- I almost like to say there's an airline for everybody. There is airlines that provide, you know, obviously basic service to small, medium-size markets, and then there's airlines that offer full-service that can take you halfway around the world.
LOTTSo it's a really -- certainly there's been consolidation and merger at the -- as the market has changed, but I think again, especially for many markets, many large cities around the country, you have more choice than you ever have before.
LEOCHAWell, I think that, you know, the question of competition comes up again, even though we have competition by a lot of the low-cost carriers within the United States and I incidentally include Southwest and AirTran in that. That was a merger which I kind of liked, only because it allowed us to create a new national airline which could then compete against the former big boys of the Delta, Uniteds and American US Airs. So I saw that as a good thing because it actually added competition to the domestic system rather than taking it away.
LEOCHAWhere we're running into problems now, and we're going to run into more problems is dealing with international flights. Internationally we don't have the same competition, and you can see that the major airlines are focusing more and more of their flying on international routes because that's where the big bucks are. And until we get some of the smaller airlines to start to move into the international venues, we're going to be stuck with ever-increasing international airfares.
NNAMDIBack to the telephones. Here is Dave in Annandale, Va. Dave, you're on the air. Go ahead, please.
DAVEOkay. Thank you, Kojo. I'm a recently retired employee of US Airways, and just wanted to comment to the earlier discussion...
DAVE...of the possible merger with American. I don't know if anyone brought up the fact that in the merger of America West and the old US Airways East, that that merger is still sort of in limbo because America West crews fly America West planes, and the old US Airways East crews fly old US Airways planes. So there's still a hurdle to be gone over with that. I don't -- the station I worked at used to have mainline US Airways and America West service. Now it's all express. No big planes, so I had no contact with the mainline crew, so I don't know much about the current status of any negotiations.
DAVEAnd also you mentioned that American might have 60 percent of the flights at Reagan National Airport. I think it's actually US Airways that would have about 60 percent, and American might have 10 percent. I'll listen to your comments.
NNAMDICare to comment on that, Charlie?
LEOCHAYes. I think that first of all, he's absolutely right. It is US Airways that has the predominant coverage at Reagan National. But when you add in the American Airlines, one, it will come up to a -- the merged airline will have about 60 percent. I think that's what you -- that's what I understood you were originally trying to say.
LEOCHAOther than that, I think that we're seeing a new way in terms of moving through these airline mergers. The US Air/America West merger is one where we still have the union groups separated, and that's not really a factor or a function of the management of the company, that's a function of the internecine warfare between the unions. They don't want to give up their place on seniority lists, and we see a new merger, the one with Southwest and AirTran, everybody's been merged together, and everybody seems happy.
LEOCHAThey all have current contracts, but Southwest has decided it makes more sense for them to keep AirTran running as a separate airline for a little bit longer until they can bring everything down under the same umbrella. And I think that we'd find US Air doing something very similar with American Airlines. American Airlines is much, much bigger than US Airways as it is currently set up, and I wouldn't be surprised to see US Airways run American as a separate airline, but just be able to interchange routes and set of schedules more advantageously for them to help them make more money.
NNAMDISusan Carey, over the past four years, the 11 biggest U.S. airlines have reduced the number of passenger seats by some 12 percent. This means more crowded planes, will that continue?
CAREYYes. I can't see it not continuing. With oil prices at these levels, I do not see airlines putting out a single seat on a single airplane that is not going to make money because they really can't afford it. So yes, we're going to be cheek by jowl with the other people on the airplane, especially this summer.
NNAMDIOnto Andrea in Chantilly, Va. Andrea or Andrea, you're on the air. Go ahead, please.
ANDREAHi, thanks for taking my call. I have a question about how all these changes or just the changes in the industry in general are going to affect the premium classes. I think myself -- I travel a lot and there's a lot of other people out there who have status on airlines. When we shop for tickets, we usually go directly to our airline. We're not looking around for the best price, because we want perks like, you know, waived fees and upgrades and everything. So it's just something I haven't heard addressed yet today is how first class and business class will be affected.
LOTTSure. I think back to the point about there's still tremendous competition both in the U.S. and around the world, I think the good news for premium travelers is that competition has driven tremendous investment both in the U.S. airlines and airlines around the world, in new in-flight products. So pretty much across the board, most of the U.S. airlines that are flying internationally have invested in upgraded first business class products.
LOTTSo again, you know, despite the financial troubles that we've seen in the industry, the airlines realized that in order to win over premium passengers, in order to win over those international business travelers, they need to stay competitive and they need to invest in their product, so the bottom line is that competition has led to investment and now you're seeing lie flat seats in business class are almost common place now.
LOTTYou're seeing in-flight entertainment systems with hundreds of choices of TV and movies, and some of that is also being seen in economy class too. So it isn't just for the people in the front of the plane, you're seeing investments in in-flight entertainment systems across the board. So the bottom line is, the good news for international travelers and even domestically, you're seeing investments in in-flight products. The other thing I should mention too is that you're seeing an increasing number of U.S. airlines offer in-flight Internet service, Wi-Fi service on the airplanes.
LOTTYou're seeing more and more of that across the country, so if you want to now stay connected at every minute, every waking moment of every day, you can still get on the aircraft and stay connected.
NNAMDIAndrea, thank you very much for your call. On March 20th of this year, we did a show on the loss of air service to medium-sized cities like Cincinnati and Pittsburgh. You can go into our archives and find that. It was on March 20th. Charlie, are we likely to see any new startup airlines in the near future?
LEOCHAI'm not sure. I think that the entry into the airline industry is not particularly difficult, especially if you have a very limited network. They've got some new small airlines that are flying between places like Peas Air Force base or Peas Airport in New Hampshire. It used to be an Air Force Base, down to Sanford, Florida, outside of Orlando. There's a new JFK to St. Petersburg airline starting up.
LEOCHASo we're getting a lot of little niche airlines which are working to fill areas that they think people are looking for, but I don't think I'm seeing any -- I'm not seeing this as something where a lot of people are putting a lot of money into in the near future.
NNAMDIWe're running out of time, Susan Carey, but analysts seem to be optimistic about the fortunes of the airline industry as a whole. How does the future look and what do you think it will mean for consumers, in 30 seconds or less.
CAREYWell, I think airlines are kind of rethinking their consumer proposition and I think social media has really amplified passenger dissatisfaction and I think belatedly the airlines are hearing this, and this can only bode well for customers.
NNAMDISusan Carey, thank you for joining us.
CAREYThank you for having me.
NNAMDISusan Carey is a reporter for the Wall Street Journal, and she covers the airline industry. Steven Lott, thank you for joining us.
LOTTMy pleasure. Thanks Kojo.
NNAMDISteven Lott is director of communications for Airlines for America. And Charlie Leocha, thank you for joining us.
LEOCHAGlad to be here.
NNAMDICharlie Leocha is director of the Consumer Travel Alliance. Thank you all for listening. I'm Kojo Nnamdi.
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