The Legacy Airlines' Problem: Staying in Business

A United Airlines Boeing 777-200 heads away from the gates of the B concourse at Denver International Airport on Aug. 24, 2006. United Airlines is one U.S. legacy airline that has cut service standards on domestic and some international flights, and labor relations between United's management and employees have become notoriously conflicted. Some industry observers think that, despite the legacy airlines' global-alliance connections, United and some of its peers may have to change their ways to survive as younger airlines increasingly attract high-fare business passengers with new aircraft, plush seating and high in-flight service standards, all at competitive prices. Credit: AP Photo/David Zalubowski

With a retail organization’s spokesperson announcing that its members will have to increase prices to reflect higher costs from suppliers and McDonald’s saying it can no longer absorb wholesale increases, it's worth asking if the airline industry should follow their example.

One might ask not only what took major retailers so long to see the wood for the trees, but also why airlines don’t automatically do the same and increase prices rather than levy surcharges.

After all, the airlines' best corporate customers are offered huge discounts in any case. They won’t be disproportionately affected by fare increases, as they are with taxes and surcharges.

Ryanair said its forecast of a possible loss for the year was based on fourth-quarter 2008 oil prices of $130 and a 5 percent decline in average fares. Seemingly determined to join a major U.S. carrier in increasing its likelihood of going bust soon, Ryanair refuses to impose any fuel surcharges.

Just last week, low-fare specialist Zoom Airlines of Canada and the UK found it couldn’t live with the extra $50 million in fuel costs it had incurred. Zoom’s in the tomb. However, Ryanair said it would still try to maintain "aggressive pricing" in order to continue its high usage of aircraft.

"We now believe that our average fares for the year may fall by as much as 5 percent if European airfares plunge this winter," said CEO Michael O'Leary. Earlier this year, he had stated that no airline business can deliver profits with oil priced at more than $125 per barrel.

If Ryanair reduces its prices any further, the depths to which its fares could plunge finally might equate to the lack of service and the uncomfortable and relatively unfriendly flying experience the airline provides.

Service and distribution innovation needed

The truth is that no airline will be able to make any profit whatsoever if it doesn’t attract new passengers with mass-sales-distribution innovations as well as cutting sales costs. But, at the same time, the airline must provide desired, competitive cabin seating and service, as well as sensible pricing and timetable regularity.

That said, what is wrong with putting up fares? It’s hard to understand why airlines feel they have to be so secretive about each increase, calling it a fuel surcharge, a security (or 9/11) surcharge or an "additional fee."

Airlines, especially so-called "legacy" carriers in the United States, must make a determined effort to improve their service experience and maintain or increase their pricing, if they are to avoid Chapter 7 liquidation.

Do or die

No longer will there be time for the warning period of Chapter 11 reorganization, followed by a choice between recovery and liquidation. The current economy will not allow respites or cooling-off periods. It’s now "do or die."

In an industry environment in which many youthful airlines are flying beautiful new aircraft and are providing fabulous new seating for the business passenger — in some cases even accompanied by Dom Perignon in the cabin behind First Class — the legacy carriers have got to try harder. They must price more sensibly and find better and more innovative means to reach more people in more places — especially business people.

Some legacy carriers sensibly have expended time and effort in retraining staff in all aspects of airline service. But, at a time when it’s tempting to remove food items (or whole meals, like United) or weaken route schedules, these airlines need to think again about the methods that will continue to attract the discerning business passenger.

This is the flier who sits in just about the only cabin in which the fare is profitable for the airline. Of course, some business passengers could be flying in the back, too; and they will not accept paying for a meal on top of the cost of a full-economy 'Y' fare.

The legacy airlines need to find a better way of attracting world business travellers and high-net-worth individuals. Discerning and demanding though they are, such fliers can become loyal to airlines that consistently provide a better-than-average experience: schedule reliability, a caring, personalized check-in service, the right amount of mileage points, and ease in redeeming them — all for a reasonable cost. Additional corporate points don’t excite these fliers. They just want savings — now.

Financial companies imposing travel bans

At the annual conference of the Institute of Travel Management earlier this year, the organization’s executive director Paul Tilstone said a number of firms — mainly US companies in the financial sector — had stopped all travel in a bid to cut their costs. None of these banks will talk about it publicly, worried about the effect that talk of a travel ban might have on their already deflated share prices, but in private they admit to near-total travel bans or, at least, a clampdown on who can and cannot fly business-class and on what types of journey.

As the airline industry continues to be dominated by high fuel prices and passengers face a multitude of fees and extra charges, US Airways' management recently decided the airline would start charging for non-alcoholic beverages in flight. From Aug. 1, US Airways has charged passengers $2 for soft drinks and $1 for coffee and hot tea. This charge includes water, so take an empty bottle through security and fill it at a fountain on the air side.

"Rather than charge the fare necessary to produce their product, management has chosen to resort to the tactics of ultra-low fare carriers such as Allegiant Airlines and Irish carrier Ryanair," said Mike Flores, president of the Association of Flight Attendants/Communications Workers of America union local at US Airways.

"This model resorts to a nickel and dime approach to the airlines’ most valuable asset — the passengers," he said.

Flight attendants are trained and certified safety professionals, not cashiers to be used in management's futile attempt to bolster US Airways bottom line, said Flores, adding: "I suspect they won’t be too thrilled at the smell of spicy carry-on food and having to clean up its debris either."

Passengers will look for alternatives

Flores is right. His staff should be able to concentrate on ensuring that the free services on board (civility, for example) are dispensed in a caring manner and with a smile. If they’re not, passengers who are used to paying higher fares will soon find an alternative.

The U.S. legacy airlines must find a new, higher level at which to trade. They must not settle for the lowest rung of the ladder, providing the minimum of food, drink and service. And as they define their new, high-level service, the legacy carriers must improve their sales distribution to attract the all important small- and medium-size enterprises (SMEs) which account for so many business travelers but which are so difficult to attract in any marketing campaign.

Some legacy airlines' current attitude to business passengers can be likened to the effect of securitization on mortgage risk. Securitization allows the party taking the end risk to become further removed from the risk being taken. Some of the big U.S. carriers seem as though they want to become ever more distanced from their passengers, particularly their business fliers.

In an increasingly difficult airline-industry climate, if those legacy carriers don't soon reflect the discerning, high-fare business traveler’s desire to fly in greater comfort and be extremely well fed, watered and treated at the same time, they're in big trouble — and they might not make it through till 2009.

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