Will I EVER Feel Sorry for Any U.S. Airline?

July 11, 2008

in Airlines, Online Media, Travel, USA, Web Tips

With as little respect as they seem to have for their customers today, I’m pretty certain I’ll never feel sorry for any U.S. airline — even when they petition me directly.

If you’re a smart reader and are subscribed to your favorite airlines’ e-news and deals mailing lists, you likely got the same plea I did, signed by the CEOs of AirTran, Alaska, American, Continental, Delta, Hawaiian, JetBlue, Midwest, Northwest, Southwest, and United Airlines and U.S. Airways. What could have brought these competitors together, moving them to address their most loyal customers in a united front? I’ll give you a hint — it’s NOT a Passengers’ Bill of Rights . . .

It is, of course, OIL PRICES. We all know airlines are feeling the pinch too; difference is, they’ve found a scapegoat on which to pin their concerns:

Our country is facing a possible sharp economic downturn because of skyrocketing oil and fuel prices, but by pulling together, we can all do something to help now. . . .

Since high oil prices are partly a response to normal market forces, the nation needs to focus on increased energy supplies and conservation. However, there is another side to this story because normal market forces are being dangerously amplified by poorly regulated market speculation.

Twenty years ago, 21 percent of oil contracts were purchased by speculators who trade oil on paper with no intention of ever taking delivery. Today, oil speculators purchase 66 percent of all oil futures contracts, and that reflects just the transactions that are known. Speculators buy up large amounts of oil and then sell it to each other again and again. A barrel of oil may trade 20-plus times before it is delivered and used; the price goes up with each trade and consumers pick up the final tab. Some market experts estimate that current prices reflect as much as $30 to $60 per barrel in unnecessary speculative costs.

Over seventy years ago, Congress established regulations to control excessive, largely unchecked market speculation and manipulation. However, over the past two decades, these regulatory limits have been weakened or removed. We believe that restoring and enforcing these limits, along with several other modest measures, will provide more disclosure, transparency and sound market oversight. Together, these reforms will help cool the over-heated oil market and permit the economy to prosper.

So we are to believe it’s not your flabby, outdated business models, your exorbitant executive benefits, your slow sacrifice of everything resembling service, your unmotivated, underpaid, overworked ground staff, crews and pilots, your failure to make capital investments, your mismanagement of resources, your lack of foresight, or your unwillingness to raise prices that has lead to this industry crisis in the face of higher fuel costs? Nor that crumbling flight-control infrastructure, overburdened hubs or even exorbitant airport charges are having a negative influence? Rather that your problems lie, in fact, in traders’ offices far away from the tarmac you’re jetting from every single day?

I don’t buy it. Every airline — with Southwest and Alaska as the leaders in this field — actively hedge a healthy percentage of their fuel prices in order to increase profits and stabilize their business with regard to future expenditures. Southwest has used its hedged-price advantage to pass savings on to customers: keeping ticket prices low, not adding or increasing fees, maintaining the modicum of service airline passengers expect. (RyanAir has followed the same model to keep its ticket prices extremely low; when its hedged advantage ran out in April, RyanAir froze executive pay and cut positions in telephone sales to decrease costs.) The hedged reserves of the other major airlines have kept them from going even further into the red. And what is hedging but a form of speculation on the future price of oil?

Neither do they. Paul Krugman (x2) and Joseph Nocera of the NY Times, Jon Birger at Fortune Magazine, James Surowiecki of the New Yorker, Tom Bergin for Reuters, The Economist Magazine, my economist friend Seth. Budget Travel’s This Just In outlined the issue before the email had even arrived in my inbox; Thursday evening (Berlin time), Upgrade: Travel Better and Cranky Flier had yet to weigh in (Mark at Upgrade has since given his opinion).

If you want to learn more, read some academic research on fuel hedging and the U.S. airline industry (1, 2) or listen to NPR’s recent reports on increasing oil prices and their effect on the airlines (1, 2, 3). But don’t send that uninformed chain letter on to your representatives simply because your airline tells you to.

Next time 12 airline CEOs come begging in your e-mailbox, what would YOU like to see in their letter? Leave your ideas in the comments below.

{ 2 trackbacks }

Greetings Budget Travel Readers! « Less Than a Shoestring
10.11.08 at 12:37 pm
No-Budget Travel Failures « Less Than a Shoestring
12.01.08 at 3:44 pm

{ 6 comments… read them below or add one }

1 margaret 07.11.08 at 9:58 pm

thanks for the article! i had similar suspicions when i heard this reported on the TV news, but wasn’t sure where to turn.

2 Nomadic Matt 07.11.08 at 10:44 pm

I have 0 sympathy for them or there problems. They brought it on themselves.

3 Marya Mejia 07.12.08 at 9:53 pm

This isn’t only about the airlines but about the working people who are having to pay higher prices for food, gas and heat. Lets be thankful that although they stand to gain, so is the American public. Please inform yourself and look into the facts before arriving at a conclusion that may be detrimental to your own pocketbook.

4 Alex Robertson Textor 07.18.08 at 7:14 pm

Very nice, punchy take. Also how funny—and by funny I mean not at all funny in any way—that the airlines in question have come together to rely on the classic soft political strategy of the chain letter to Congress, a route more commonly followed by nonprofit and advocacy groups. That such a massive industry would take this approach boggles the mind. (Or is it just me revealing something about my world here? Do other industries draft chain letters to be sent to members of Congress for their customers?)

Good point also about Ryanair’s moves earlier this year. I do appreciate Ryanair very much. I think it’s also clear, though, that they’re engaged in an ongoing strategy to generate as much revenue as possible from fees that most people think of as hidden or at the very least don’t expect to have to pay—airport checking-in fees, penalties for not using a Ryanair credit card, checked luggage fees, etc., all of which you’ve devoted lots of time to discussing over the last many months.

It occurs to me that there should be an all-purpose site that helps people navigate their way through obtaining low fares on Ryanair and other LCCs, a Before You Book primer.

5 poetloverrebelspy 07.18.08 at 8:00 pm

Alex, thanks for your comment.

I think you are right that this kind of “grassroots” strategy is employed largely by interest groups — I have never been addressed in such a way by banks, oil barons or other multinationals. It worked for the airlines because of permissions marketing: you, me and every other frequent flier are sitting on their mailing lists. You are right that in addition to their faulty logic, I object to the method chosen.

I know that any time I compliment RyanAir, I’m bound to take some flak :) I see little difference between the fees that RyanAir charges and the ones that the major U.S. airlines are charging and increasing. There is, however, one noticeable difference between RyanAir and the U.S. airlines, and that is the bottom line — the ticket price. If United, American, Delta and Co. are going to ACT like RyanAir, then I expect that fare prices start approaching the level of RyanAir! It is absolutely outrageous to extract services left and right, then expect consumers to continue paying the same inflated fares.

There are plenty of things to dislike about RyanAir, but they seem to do a lot more “right” these days than our legacy airlines do. Flights are comfortable, on-time (early even!) and safe. The fleet and flight attendants are young. They are thinking ahead of the curve, not two steps behind it.

If there is one silver lining (just like yours, not a silver lining at all) in all the fees now charged by U.S. carriers, it is that your navigation site will no longer be needed as American consumers become savvy to the fees game. Anyone wanting to keep up on just how bad it’s gotten can look at this regularly updated chart, hosted at Smarter Travel.

6 Alex Robertson Textor 07.20.08 at 5:49 pm

Just to clarify, there was no flak coming your way from me regarding Ryanair. My point was to suggest that the thicket of mounting charges at Ryanair also figures as a strategy to increase revenue in a difficult financial time.

As an aside, it’s also interesting to contemplate just how big these charges are. Were they attached at the last minute to a much more expensive airfare, they’d be far less noticeable. But when that £6.40 non-Ryanair credit card use hits at the last minute, and that charge comprises over one-fourth of the overall charge, there’s a strange psychological way in which it feels like a bigger deal.

I too have received flak on occasion for defending Ryanair. Secretly (well, not so much now I suppose) I have fantasized about being hired by Ryanair to work on route development.

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