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Airlines make billions in fees, yet still lose billions

By George Hobica

By now, you've seen the headlines: Airlines generate $5.7 billion in checked bag fees and reservation change fees last year.

And that doesn't even include all the other fees: meals, in flight entertainment, priority seating, priority boarding, and so on.

And yet: Despite the added fees (not to mention higher fares) the five “legacy” carriers (American, Delta, United, Continental, US Airways) lost billions in the first quarter of 2011. And that was with fuel prices lower than their peak of a couple of years ago.

Some thoughts. And feel free to disagree, it's a free country:

Without the added fees and charges, the airlines would have lost even more, and it's likely that we would have either seen more consolidation and mergers, more capacity cuts, and at least one carrier go belly up or file for bankruptcy protection—which definitely would have led to even higher fares and fees.

Bottom line: the airlines have cut costs dramatically, reduced capacity, merged, added fees, raised fares, and still they are delivering their product for less that it costs them to do so.

Part of this is the airlines' own fault, perhaps. They have taught consumers to wait for sales. Most travel is discretionary. When airlines raise fares too high, consumers drive, stay home, or wait for a sale. Airlines used to print fares on their schedules if you can believe that...and fares seldom changed. Only "expectant grandmothers" and mission-critical business travelers will fly at the drop of a hat for any fare they can get.

The only time in airline industry history that the airlines were consistently profitable was when they were regulated by the government, which told them where to fly and how much to charge. Deregulation was in part to blame for scores of airline Chapter 9 and Chapter 11 filings. Remember TWA, Pan Am, Eastern, Peoples Express, SkyBus, Independence Air, National, Aloha, Midway, ATA, and the rest?

Airline tickets cost way less than they used to. As the American Airlines schedule shown above shows, in 1961 AA charged $218 round-trip to fly between New York and San Francisco, about what it costs today when there's a sale. And that included a steak dinner and pilots wings for the kiddies. But that was in 1961, when you could buy a new car for under $1000.

There is still overcapacity in the worldwide airline industry. Airlines will not be profitable until there are fewer seats, and most of those seats are chasing the "must-fly" passenger (for example, someone relocating overseas—you cannot drive from New York to Paris).

Some industry observers believe that the only solution is world-wide consolidation. You know those airline alliances—OneWorld, SkyTeam, and Star Alliance? Imagine if they were airlines—the only three airlines. Then you'd see the airlines get pricing power. And perhaps we'd see better service.

And speaking of service, unfortunately, a lot of consumers hate flying at any price. The airlines are reviled for uncomfortable seats, poor service, grumpy staff, delays, unfair business practices and more. An industry that is losing money cannot afford to deliver a quality product.

The economy has also made it difficult for the airlines to raise fares to a profitable level. When consumers are spending $80 to fill their tanks each week, thats money they can't spend on airline tickets. But it looks like the economy won't spring back to life anytime soon.

Some people argue that the problem is with airline management. They're a bunch of overpaid incompetents. But airlines have cut costs everywhere they can—distribution (selling tickets on their own websites), more efficient planes, mergers, bankruptcy filings to eliminate expensive contracts and pensions, you name it. But nothing has worked, so far.

New U.S. D.O.T. regulations, while for the most part welcome and necessary, are adding to airlines' costs.

So whats the solution? The airlines could cut costs even further but that would impact service further, and more people would find another way to spend their travel dollars resulting in a vicous circle. As I see it, the only way for the airline industry to regain its health is either to re-regulate, which will probably never happen, or a combination of massive capacity cuts and global mega-mergers. Airlines should rethink their tendency to have panic sales when traffic slows down, and retrain consumers to pay what it actually costs to fly, plus a small profit margin. Otherwise, the global airline industry will continue to be a race to the bottom.

So perhaps we should learn to live with fees--paying for what we use when we fly—or suffer the consequences of ending up with a handful of world-wide airlines. Yes, fees should be spelled out more clearly at the time of ticket purchase if not before. The cruise lines industry thrives on a la carte pricing; so do restaurants, hotels, and rental car companies.

If you have a better solution to an airline industry in crisis, I'd love to hear your thoughts.

The opinions expressed above are the authors own and do not reflect the opinions of any other entity.

© Airfarewatchdog.com

©2024 GPlusMedia Inc.

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I don't believe the airlines have really cut as much as they could. What they need to do is get rid of the unions. Take them out totally. The behemoth flight attendants on the U.S. carriers are almost certainly in a union and I can guarantee make far more money than an ANA flight attendant. However, we all know that you are far more likely encounter better service on ANA by a lower paid, non union flight attendant. And I won't even go in to the cold reality of the terrible ticket agents that work for the U.S. carriers who are also presumably subject to the same unions.

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Have the flight attendants trained in Japan... And maybe get a couple of the new 787s ?

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Funny how most Asian Airlines (sans JAL) don't have this problem. Delta was recently ranked in the top 19 of "most hated' companies in the US. Ouch! Then throw in the TSA "security" and it all make air travel in the US a very unpleasant experience.

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Funny how most Asian Airlines (sans JAL) don't have this problem. Delta was recently ranked in the top 19 of "most hated' companies in the US. Ouch! Then throw in the TSA "security" and it all make air travel in the US a very unpleasant experience.

This! THIS! It's so unpleasant to fly in the US. It's not unpleasant to fly here in Asia. I get treated like a human, get a reasonable airfare and good service, and am just as safe if not safer than in the US.

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I love flying international. US Domestic flights are horrible.

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I have flown to Asia a couple of times now, both trips terminating in Singapore, with stops in Narita or Hong Kong. The only diference I have noticed between Japanese/Hong Kong security is that they don't check my ticket before I go through security (which makes sense given that I got into the international arrivals area somehow), other than that there isn't a noticeable difference. Customs in Singapore is a breeze, taking 3 minutes at most. In Australia it was well over an hour, but in SFO it was a couple minutes, and SEA and ORD took no longer than 10 minutes. The TSA gets a bad rap, most of which is either unfounded or based on one bad agent. I love flying internationally, but domestic flying isn't much worse.

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The TSA gets a bad rap, most of which is either unfounded or based on one bad agent. I love flying internationally, but domestic flying isn't much worse.

Eh? It's ALWAYS worse in the US. I've flown tons of time here (not just Japan but throughout Asia) and in the US and almost every time in the US there's some a-hole agent, a bad/useless/rude ticket clerk, slow security lines, stupid, expensive, useless, invasive backscatter scanners, intrusive pat downs, stupid 'take off your shoes and throw away all drinks' rules, etc etc etc. It's horrible to fly in the US anymore thanks to the foul service and bad, intrusive security.

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I don't fly a lot anymore, so I've had less opportunity to run into bad/surly/incompetent airline and TSA personnel. But when I do fly, they strike me as trying to make the best of a bad situation. Show them a little bit of courtesy and respect, and they'll respond in kind. They're just regular people trying to do an essentially thankless job.

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This is an ugly situation - agreed. However, I disagree that jacking up prices and going 'a la carte' is the best way to go. How many times don't certain flight segments supplement the costs others - not all segments are likely unprofitable. They need to cut the money-sucking segments that are never/rarely at capacity and just straight-up focus on a core set of segments. Maybe each airline could focus on different segments and then just streamline their services and do them WELL. Charge the customer the cost of flying and a minimal profit margin and be open about pricing. Not all airlines are unprofitable - there are lessons to be learned. This is all assumed in a perfect world, of course.

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Doesn't sound as if this guy is pro-consumer to me. Seems like he wants to solve the airlines's problems at the flyer's expense. No fare sales to attract customers sounds anti-competitive to me.

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The airlines are reviled for uncomfortable seats, poor service, grumpy staff, delays, unfair business practices and more. An industry that is losing money cannot afford to deliver a quality product.

According to this guy, two of the problems are related to personnel: Poor service - Grumpy staff - and two are related to management: Delays and Unfair business practices.

Plus, an industry that is losing money cannot afford NOT to deliver a quality product - especially when that product is a People service. Planes are not dropping out of the sky due to bad maintenance but airlines are losing money because of their people (management & labor).

As others have noted, certain Asian airlines don't have the same problems. Could it be that Asian airlines realize who pays for the tickets? Hint: not management bonuses.

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I fly a lot, and I almost exclusively fly ANA, JAL or Cathay. I'm a very considerate and polite person, and in return I'm usually treated very well by plane staff or immigration, and I expect to be treated so. I had bad experiences with Delta, so I'll never fly them again. For example, for a 12 hour flight, they only had a chicken meal left, and I hate chicken. While I was hungry and annoyed at the situation, the attendant was trying to be funny and convince me to start eating chicken, which only annoyed me even more. Due to bad weather we were late 7 hours, lost the connection flight and I arrived in Chicago after midnight. Of course, no compensation. Moreover, they lost my luggage, so I had to live for 3 days with the few clothes from the carry on bag. When finally my suitcase arrived, it had 2 big cracks. I called Delta, they told me to come to the airport, give them the suitcase, they will fix it in a few days, and then I would have to go again to O'Hare to get it. I threw the damn suitcase, and since then I never used Delta again. Oh, I remember a strange situation with Nothwest Airlines, for an international flight, I go to the airport and they tell they don't have seats anymore! (overbooking) They put me on a Chinese plane a few hours later (but they did compensate me).

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JAL struggles mostly because its the "national" carrier and its forced to fly to many unprofitable locations in Japan. Airports are the most stupid - their shopping mall/security etc. . With the tight security requirements , I think airports should become only for planes, cargo, maintenance, plane staffing and a tiny lounge for passenger just about to leave or arrive and have everything else on a remote terminal linked by high speed train (only access possible). Then security risks have nowhere to go at the remote terminal so the risk is massive reduced.

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Airlines struggle period.

They are a capital intensive business. That means it costs an awful lot of money just to run the business. Aircraft are extremely expensive machines. Jet fuel is also pricey. High running costs are inherent in the industry. I wouldn't invest a penny in an airline.

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