Economy class in EVA’s new 777 is still nine abreast – Photo: EVA Airline
You’ve really got to hand it to our friends over at Runway Girl Network. Earlier in the week, I read an article by Gavin Werbeloff that made me shout gleefully (something a lot more impolite than “YES! This man is correct! Give him cookies and accolades!”) I actually shouted it out loud and confused my wife.
Regardless, it sparked my creativity. I’m leading up to a point here- so do bear with me.
It seems to me that the industry gets obsessed with fads. I’m so old that the fad I was beginning to notice was going 10Y on 777s. The thing is, I never saw it as a move purely designed to increase unit revenue while decreasing unit cost. I always saw it as a way of psychological warfare directed at frequent flyers. As a professor drilled into my skull, it’s an airline’s duty to extract as much money from each customer as possible.
Frequent flyers often fly on someone else’s money – part of me honestly believes that making economy into an insufferable torture space was designed to increase premium revenues by inciting revolts within corporate middle-management to force the purchase of premium economy or higher fares. It never happened, but the results are the same. Economy cabins are denser and more miserable than ever.
Would airlines change their economy configurations to be 11 abreast? Photo: David Parker Brown
When I was in University, I had a very intelligent professor with years of airline experience. I respected what he had to say, but we would disagree from time to time. Because of this I commented to said professor, “There will be 11Y A380s within five years.”
Four years later; Airbus announced that by lowering some panels, you could, indeed, go 3-5-3 on the A380. Now, no one has taken this – but they will.
Thing is, there is a huge fetishization over unit cost to the point where analysts with a focus on unit cost often lose all sight of every other metric or possibility for an airline to operate profitably. This can also explain the cult-like following right now of ineffective and clunky streaming IFE systems. In-seat IFE weighs more, weight increases fuel burn, which increases – you guessed it – UNIT COST!
So, thanks to the DOJ having the ferocity of a taxidermied chinchilla, all the legacy carriers have merged. Words like synergy have been shouted loudly, and Wall Street analysts are happy. Capacity discipline has been the name of the game. Capacity discipline, of course, lowers available seat miles. Thing is, even with the available seat miles being down, unit revenue goes up because there’s less competition. Happy times, indeed. Happy times, they were. Since then the merger-mania airlines, like Delta, have been earning billion dollar profits. Margins are also up. Heck, Delta’s is about 3.2%. Okay, so not exactly a great margin compared to a pharmaceutical company – but fantastic for an industry that had a decade of unpleasantry.
There is no missing Spirit’s new bold yellow livery – Photo: Spirit Airlines
“Hang on a second”, says Wall Street analyst droid 1725.6, “Spirit’s margin is 12.89% – that’s fast food restaurant territory! Delta, United, American- you are all terrible! Look what Spirit does! If you don’t change your evil ways, we’ll say your stock has a ‘sell’ rating!”
Poor Jetblue, they got hit even harder. “You are a ‘low cost carrier,” said the droid, “while I am not sure what that means other than it sounds good on paper, Spirit also professes to be one – but look at their margins compared to yours. You are literally the worst! Hang your head in shame!”
I’ll get back to JetBlue in a minute.
Now, a smart airline trader will make money on both the up and down trade of an airline stock, so the complaining about growth usually comes from large institutional investors that are less interested in volatility and base all their projections on assuming x% growth every n period of time – thing is they also own a lot of stock.
So, in fear of their options, or in fear of their market caps taking a dive, what have airlines done? Started helplessly fixating on unit cost. After all, full-service airlines can’t change to an ancillary revenue-based model like Spirit overnight. The only way they can be more like the darling airline Spirit is to really pack in the pax. What does that do. Say it with me now. Lowers unit cost!
From the L1011 Sales Brochure, this shows a spacious, but very expensive 2-4-3 layout for economy. Image from Chris Sloan / AirwaysNews
As the article that sparked me into rant mode pointed out, airlines are spending a non-trivial amount of capital on “densifying” aircraft. This is often after having reduced density only a few years prior (also at non-trivial expense). This almost made sense when fuel was an obscene expense, but right now we are living in a period of ridiculously low oil prices. That, too, is a fad. These prices are unsustainable long-term. Thing is, “long-term” to a modern Wall Street trader is about three hours… I digress. Where was I?
Ah yes: airlines, facing an extreme increase in costs had to both lower their unit cost for their own benefit while finding a way to continue to offer “competitive” fares. Densification of economy is a miserable thing for passengers, yes, but what’s worse? No service, reduced service, or fits of bankruptcy!
With oil prices as low as they are, our capacity-disciplined airline friends are reaping the benefits hugely. Expect great quarters for everyone.
“CONTINUE TO DENSIFY!” says a chorus of computer programs in the New York area.
“Okay sir, we will, please don’t hurt us… Mummy made me a ham sandwich today – would you like that as well?” says the airline industry writ large.
“JETBLUE! STOP HITTING YOURSELF!” Says a seemingly disembodied voice as it continues to move Jetblue’s fist into its head.
Poor JetBlue.
JetBlue flight from Nassau, The Bahamas to Boston on an E-190 – Photo: David Parker Brown | AirlineReporter
JetBlue had a really great idea. Earn profit and attract customers by, gasp, being different. Free bags, more seat pitch, good IFE, trademark snacks. They illustrated that you could be an airline that operated on the gospel of low-cost without sacrificing too much in comfort. Customers love them. After the usual start up drain every airline faces, this model proved profitable. Unfortunately for them, their key-performance indicators were wrong when compared to almighty Spirit. Their institutional investors demanded growth “or else.” So what was an airline to do? Change everything about themselves to appease short-term focused investors, of course. JetBlue decided to add 10% more capacity to some of their A320s while adding fare classes that eliminated one piece of free checked luggage.
JetBlue’s faithful were more disposed with these changes than the frequent flyers of the big three who also went down this path.
Wall Street doesn’t care.
To them, loyalty programs, indeed any sort of customer loyalty, is a liability.
Maybe people would be less irate if prices came down. That’s never going to happen!
Wall Street has rather missed the point about the business by fixating on their darling Spirit. There can only be one Spirit. Spirit is all about ancillary revenue. Their unit cost this past quarter was actually higher than Delta’s! Spirit is not about customer retention, or comfort, or anything. They know they are “not for everyone.” Their entire business model is predicated on being different. If everyone was like Spirit, how could Spirit continue to present itself as the “un-airline”? They couldn’t.
The nose of the Boeing 787-9 Dreamliner. Photo: Bernie Leighton | AirlineReporter.com
The other side of the coin is that by dragging every other airline down to their level, in a period of extremely low oil prices and generally improved margins and revenue, is that customers have feelings, preferences, and emotions. Indeed, the most loyal frequent flyers are actually part of the complex revenue management systems of the big three. Annoy them and you might have a problem. I understand that, to a point, domestic air travel is a bit of a captive audience situation – but Wall Street does not care. Wall Street is now about making money, not off the potential of a business, but by the microsecond fluctuation in stock value based off of rumors and innuendo or finding new and unpleasant ways to make life worse for actual paying customers. They also hate diversified business models in any industry. Harder to analyze and project if people are competing on things other than rock solid price.
Some say that the margins just aren’t there in increasing passenger comfort. They cite the abortive American attempt at More Room Throughout Coach. They may be right – but there’s also no point in decreasing the benefits of the paying customers when things were already growing.
Make travel so unbearable and expensive at the same time and people will seek options that are not flying. Workers can telecommute. Leisure travelers can drive (especially with the price of petrol as it is). Yes, there will be a period where hugely-dense cabins and low oil prices result in massive profits, but when fuel prices go back up and people have realized that flying has become so unpleasant and cut back on travel even more… especially when factoring in the costs of densifying aircrafts, airlines will realize they have spent dollars to earn cents, all to appease firms that cashed out quarters ago.
The best part is if any C-level executive came out and said, “we want to focus on consistent profits, reasonable growth, and stick to our business model,” they’d be hauled in front of the board, consisting of representatives of these institutional investors – and shot! The snake shall continue to eat itself.
I love this business so much sometimes.
Quite possibly the best rant I have read in years. Well written with substantial support to back your opinion. As I share your opinions, I have to say that I suppose. Thanks for putting it in writing – if only C level folks would pay attention to reality.
Cannot BUT heartily, and sadly, agree with this “rant”. But, it will take regular (loyal) travellers coming to the frightening realization that “low cost” is NOT a product benefit for airline boards, and then management to come to terms with the fact that most Y-clas airline seats likely violate the Geneva Conventions, and happy customers will send more…
Nice rant Bernie.
For me, I’d like JetBlue. But they’re not Alaska and they fly, er, European aircraft.
If I owned an airline, we’d have narrow body aircraft with leather seats that FACED the window, WiFi embedded in the ticket price, occasional scenic flights for the heckofit, you can pack your own meal or pay extra, and for an additional $5 tip a post-flight cockpit photo op. Oh and hopefully Alaska-sized ticket prices… or lower (think RyanAir price structure). I think there’s ways of making airlines sexy, keeping air travel affordable and not cramping people in.
I agree with what your saying, but I think it’s an exaggeration to say Economy is as miserable than ever. For that, we’d have to go back to the days when smoking was allowed on flights. I’d take 10-abreast non-smoking on a 777 to First Class smoking on a DC-10, thanks.
Fantastic piece…my sentiments exactly! I was ruminating the other day about how far United has fallen since its glory days, whenever that was. Their vehement defense of themselves after firing the SFO flight attendants who were spooked by weird graffiti just makes me wonder how much “soul” or “heart” or other intangible, non-Wall Street-friendly qualities still exists in the corporate office.
You said it perfectly. Jet Blue may be headed for a slippery slope. They had a great thing going, but I am afraid there might be a backlash. But will there be?
You brought up an interesting point. Continue to make coach miserable and the frequent business flyers will continue to upgrade to what they just lost, and pay for it. They complain, but they will pay. I see it every day at my legacy carrier and am continually astounded. Maybe Jet Blue has the right idea. People get the “that’s the way it is and I can’t do anything about it” attitude and just seem to accept it.
Well, I still like Flying the well known Carriers, like Pan Am, Braniff, TWA, PSA, BOAC, their seating is spacious nowdays – plenty of Leg Room, and their Jetliners and Propliners are the Quietest in the Business, unsurpassed by any of todays Airliners & Airlines ~ !
Matter of Fact I Fly regularly on those Airlines to this day still !
Thank You : The Jetranger / Sim Hanger on You Tube
I agree with everything you say. The airlines do seem to be doing this all over the world Jetstar having doing this for years and Air NZ just seem to be just putting up there prices all the time. If I want to fly to the US which I do about once a year Virgin Australia is my choice good fares and good service. But I have to travel via Australia to do it there is no choice really we do need more competition down here in New Zealand. I must give Jet Blue a try next I fly in the US Virgin America is another great airline which seems to bucking the trend.
NUTS-what a bunch of garbage. First, Wall Street does not make money, it is the people like you and me that put our money in the company (called stock) that would expect to get some return for the risk. I have flown on business and pleasure since 1955. Those long ago times it was very expensive to fly and very few people could afford it. The price of a ticket was set by the government (more or less) and once you bought a ticket it would be honored by every airline. I could take my paper ticket bought through United and go to the American counter and catch a flight home. Along came deregulation and the game changed to a free for all. Southwest expanded the market and more and more people could afford the price of a ticket. These people that want lower and lower airfares force the airlines to add more seats to compete in the marketplace.
This post with some romance of past airlines really bothers me. I think it’s some kind of naivety to think that things were so great in the past.
Let me walk you through a flight in the early 1990″s.
This flight is a 747-200 from Minneapolis to Narita (Tokyo Japan).
You board the aircraft through the first class seats. You think wow nice. Then you turn right walk through first class past the stair case going upstairs and view endless rows of seats, going on forever. It is the most depressing sight imaginable. Dark Grey seats, I think the seats were 3-4-3 going on endlessly. These aren”t seats that a company has spent millions of dollars to conform to your body, these seats are a L and it feels like you are sitting on a bag of cement with the thickest polyester fabric imaginable covering it. Your stomach drops at the sight. Finally you find your seat, 47D and settle in for a 12 hour flight. Over the next 12 hours you get amenities such as one 12″ color TV (CRT no Flat Screen HD) bracketed in the wall per 100 customers or a projection tv that may or may not work with completely bled out colors which is about as advanced as the overhead projector teachers used to use. You can put away your over —the-ear sound cancelling headphones, because on this flight you will get some stethoscope type of device. Your headphones are a hollow plastic tube that squishes into the ”headphone jack”. The sound is awful, does nothing to reduce the aircraft noise and the endless creaks from the overhead bin. For whatever reason the carpet is always damp. You get no choice on movie selection and the screen is washed out anyways. There is no way to increase the volume of the sound.
Then when you get to Tokyo the plane has to circle for another hour which seems like a day. Finally you land and the pilot guides the plane to the middle of the tarmac and stops. No gates for you! Finally a stairs gets pushed up the plane and you disembark in the middle of the tarmac and it is 90 degrees with 95% humidity. Shortly one coach type bus pulls up, for whatever reason the Japanese always seem surprised that a 747 has more than one bus load of people on it. Finally you get on the 3rd or 4th bus and this drives about 200 feet to bring you to a gate where you have to climb up stairs and go through customs and immigration.
By this point the only thing going through your mind is that in a few days you have to get on that plane again.
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