Spiraling airfares put squeeze on both passengers and airlines

Have a look at some of these bargains being advertised by travel agents in magazines this summer. Los Angeles for 29,000 yen, New York for 69,000 yen, Sydney 34,000 yen, Singapore 24,000 yen, Seoul 19,000 yen, London and Paris both for 59,800 yen. Fantastic. What are you waiting for? However, once you book your ticket, either at the travel agent or online, a nasty fact hits you. The fuel tax hasn’t been included in the advertised price, and in most cases, that can mean an extra surcharge of anywhere from 25,000 to 50,000 yen.

The situation is not going to get better anytime soon. Airlines are struggling to keep costs down, but as fuel prices continue to skyrocket, the carriers are forced to use any and all means to save money -- ranging from adding the fuel costs to tickets, cutting back routes, and replacing aircraft on some routes. There was even a rumor in the U.S. that some airlines were planning to reduce flying speed to save on fuel.

Passengers in Japan, being so far from Europe and the U.S., are particularly feeling the pinch. Travel agents on the front line, such as H.I.S., JTB and No. 1, have to face fire-breathing passengers who suddenly find out that a 34,000 yen fare to Sydney is really 84,000 yen. Although the fine print in most ads (but not all) does say that prices exclude taxes, that is of no consolation to consumers. In many other countries, it is a legal requirement for the advertised airfare to include all taxes and surcharges, but not yet in Japan. So the result is that many consumers take their anger out on the travel agent staff.

"The spiraling fuel prices have been in the news a lot recently, but many of our customers are still surprised when they hear how much they’ll have to pay for an airfare,” said Motohisa Tachikawa, senior manager at the public relations department of JTB. “Some customers change their destination right there and then, since a closer destination won’t have as high a fuel surcharge.”

The fuel surcharge is determined by the length of flight, said Wesley Stockstill, director, marketing & strategy, for American Airlines in Tokyo. “At American, what we spend on fuel as a company increases by approximately $80 million for every one dollar increase in price per barrel of WTI (West Texas Intermediate). Using the transpacific routes as the example, flights to and from Japan are among the longest in our operations requiring more fuel. We calculate distance using a metric called Available Seat Miles (ASM) in part to determine surcharges, but in reality it does not cover the entire amount of increased costs and we continue to bear much of this burden instead of simply passing them on to the customer. To give some perspective of the dramatic price increases, in January, 2004, oil was selling at $34.31 per barrel; in September, 2005 it was $66.91, and in mid-June, it closed above $135.”

Goldman Sachs forecast recently that crude oil could top $140 a barrel sometime this summer and hit $200 next year. Since fuel costs typically account for up to 40% of total operating expenses, that spells disaster for the industry. The likely impact is that it will result in a major shakeup within the industry with weak airlines being downsized or restructured, while those in better shape financially opt to concentrate on their premium routes.

"American Airlines will reduce domestic mainline capacity in the fourth quarter of 2008 by 11% to 12% compared to the fourth quarter of 2007 (versus 4.6% reduction previously announced),” said Stockstill. “In addition, regional capacity, which includes flying by American Eagle, is expected to decline by 10% to 11% compared to 2007 levels.”

Airlines cutting back on routes

Among Japanese carriers, All Nippon Airways is already cutting back on unprofitable domestic routes, said PR spokesman Rob Henderson. “We are making our point-to-point local network into a hub-and-spoke operation through major airports where routes have been cut. To reduce the inconvenience to our passengers, ANA is making connecting times as short as possible and creating special connecting fares comparable to the cost of the suspended direct flights.”

Australian carrier Qantas is taking even more drastic action. In a statement to media in June, Qantas said it would discontinue or reduce a number of international services, mainly to Japan and Southeast Asian destinations, to cut costs. Beginning Sept 1, the airline will cancel its thrice-weekly service between Tokyo and Melbourne reduce the number of weekly return flights between Sydney and Tokyo to seven from nine; and end the Jetstar service from Cairns to Osaka and Nagoya starting in December. It will also replace 14 weekly Cairns to Tokyo flights with daily flights on Jetstar, its discount carrier. “At current fuel prices, the group would lose more than A$100 million (U.S.$95 million) operating to Japan under our existing schedule,” Qantas CEO Geoff Dixon said in the statement. He added there would be a small number of jobs lost in Australia and Japan as a result of the changes.

ANA is trying other measures to cut costs, said Henderson. “We are investing in the latest, most efficient and environmentally friendly aircraft. ANA is the launch customer of Boeing’s 787 and Mitsubishi’s regional jet,” he said. “We regularly wash our engines with water to remove carbon deposits that reduce operational efficiency; we are altering our landing approach where possible and flight speed to save fuel, and we have introduced lighter, carbon fiber seating, lighter crockery and serving carts, and taken weight out of the cabin wherever possible. Pilots also taxi with one engine as opposed to two. In short, we are exploring as many ways as possible to make savings wherever we can, without compromising safety.”

Charge for extra checked bag

One move which has gotten a lot of unfavorable publicity in the U.S. is the decision by American, United, Continental Airlines, US Airways and Northwest Airlines to charge passengers an extra fee – ranging from $15 to $20 – for the first checked bag. Most U.S. carriers already have instituted a $25 charge for checking a second bag. Some airlines even charge extra for seat reservations – $5 for middle seats, $10 for window and aisle seats and $15 for exit-row seats. United’s baggage fee, which goes into effect Aug 18, does not apply to customers flying in first or business class or those who have premier status with United or Star Alliance. It said first and second bags will still be free for itineraries that include international flights, aside from Canada. The airline said in a statement that it expects to earn $275 million a year through baggage handling fees.

At American Airlines, Stockstill said the checked bag fee does not apply to customers traveling to/from Japan. “The $15 fee for the first checked is applied to passengers traveling on U.S. domestic flights in economy class. This fee does not apply to: American’s AAdvantage program members who have achieved AAdvantage Gold, AAdvantage Platinum and AAdvantage Executive Platinum level; those who have purchased full-fare tickets in the Economy, Business and First Class cabins; and those with international itineraries (except to and from Canada and US territories, such as Puerto Rico and the US Virgin Islands).”

Meanwhile, Virgin Atlantic is trying something – its fuel surcharge will differ, depending on what cabin you are sitting. Economy class will receive the smallest increase, while premium economy and upper class seats will be charged a higher fee. “Our upper class and premium economy passengers benefit from considerably more space on our aircraft and larger baggage allowances than our economy passengers, so our aircraft burn more fuel to carry them. We believe that economy passengers should pay lower fuel charges than passengers in our two premium cabins,” Chief Executive Steve Ridgway told media.

In Japan, many airlines still pay ticketing fees to travel agents, but airlines are starting to buck this custom. From Oct 1, Northwest Airlines said it will abolish fees paid to travel agencies for air tickets issued in Japan, making it the first airline to scrap such fees in Japan. It currently pays 5 percent of airfares as ticketing fees to travel agencies. Japan Airlines (JAL) and ANA set their fee rates at 5%. American, United and Continental plan to lower their fee rates. “American announced in May that its agency commission will be reduced from the current 5% to 3% for tickets issued within Japan on and after July 1,” said Stockstill. However, he added that American would wait before deciding whether to abolish the feel altogether, as Northwest did. “As it is important for American to maintain excellent business relationships with our travel agency partners, it is important that we thoroughly review the impact before making further decisions about commission changes in response to the recent announcement made by NW to abolish agency commissions completely this fall.”

So what does all this mean for consumers? Are there bargains out there? Should one shop online or still go to travel agents? The industry is still considerably regulated by the government.

JTB’s Tachikawa said ticket prices are decided every half-year-term (April-September and October-March). “The basic airfares cannot be changed once they are set, but surcharges can,” he said. “Right now, the travel agencies’ industrial association wants the advertised airfare to include the fuel surcharge because that’s what customers want. The transport ministry is leaning toward that point of view and I think that by Oct 1, a new pricing system will be in effect. There will still be risks for travel agents. We have to be careful how we advertise it because the ‘sudden’ rise in airfares may dissuade a lot of people from traveling. There may be a drop at first, but we are positive because customers will know well in advance what the final fares will be.”

Online ticketing is expected to grow in Japan, though it is way behind the U.S. The Japanese government has been slow to liberalize airfares, which means that up until recently, it has been cheaper to buy a ticket through a travel agent than directly from the airline. United, for example, sells about 90 percent of its tickets through travel agents. This however, is beginning to change as the transport ministry implemented its first step toward price deregulation by abolishing minimum restrictions for economy fares effective last April 1. Prior to the change, it set minimum fares airline companies could charge for departures from Japan at 70% of fares as decided by the International Air Transport Association (IATA). Henderson of ANA said: “Our cheapest fares are on offer on our website, and bookings made on it are subject to a discount, and generally they are the best value for consumers. That said, H.I.S., No 1, etc, admittedly do sometimes offer deals of their own – completely independently of the fares we put in the market – that may match or improve on our own.”

Some bright news for the industry, in Asia at least, is that people are still flying. Despite rising airfares, passenger traffic is up 5.9% so far this year, according to IATA. Nevertheless, most carriers have announced cutbacks on long-haul routes. Cathay Pacific, Korean Air, Taiwan’s China Airlines, EVA Airways and Malaysian Airlines have all scaled back on their international routes, and are depending on premium short-haul runs within Asia.

In a bid to woo more passengers, airlines are enhancing their services. On Aug 1, JAL launched its JAL Suite in first class ( it looks like a mini-office) and the JAL Shell Flat Neo Seat. Customers flying on Air New Zealand’s Boeing 777 and 747 aircraft can now enjoy their personal seat-back entertainment system from the moment they sit down until the moment the aircraft lands. The enhancement provides on average an extra hour of viewing time per flight, which helps passengers enjoy more of the 250+ movies and TV programs and extensive CD library available on the system. United Airlines is adding iPod and iPhone connectivity to its list of in-flight entertainment. iPods can be connected to the personal television and each persons individual content can be watched during the flight while the iPod charges. The entire international fleet will be configured with the iPod connectivity over the next two years.

The best advice that travel agents give to prospective travelers is to search hard on the Internet, rethink your destination, act fast, avoid peak seasons and be flexible. Oh, and don’t forget the good old-fashioned trains and buses.

© Japan Today