Should Government Re-Regulate the Airline Industry?

As fares rise, safety concerns mount, and service deteriorates, some critics wonder whether the government should re-regulate the airline industry, placing additional government controls on the airlines in terms of the routes carriers are able to fly, at what fares, as well as which carriers can fly at all. Though such a system would be difficult to implement, certain restrictions could be put into place which would dramatically change the air transportation system in the US and around the world. But the question is: Does this make sense?

If airlines were re-regulated, fares would certainly increase. The question is merely: How much? Since deregulation, consumers are paying 50% less for airline tickets. Depending on what sort of leeway carriers receive in operating, fares could increase even more than 50%. The decrease since deregulation doesn't include some of the additional costs government has had to shoulder, additional air traffic control infrastructure to handle more flights for instance. With regulation, airlines frequently flew 1/3 or 1/2 full aircraft to small cities because government ensured that fares were high enough to support this. But those same aircraft could have instead flew busier routes, served more passengers, and potentially made the carrier more money, if that carrier was allowed to shift that capacity to a busier route. Currently, government has had to help some very small airports fill the service void through extensive subsidies to lure regional service. This is nice for those airports, but it can be a huge drain on taxpayer dollars that are better spent elsewhere. Essentially, this is a hidden fare increase for all citizens as a result of deregulation.

Also, a regulated system will need to raise airfares, not only to help make airlines more profitable, but to demonstrate the full benefits of regulation. Regulation will reduce the congestion in the skies by reducing the number of flights, particularly at busier airports such as JFK, O'Hare, Washington National, and others. Right now, our air transport infrastructure is overloaded, and reducing the number of flights and passengers traveling will reduce the frequency, severity, and painfulness of delays, since airlines with fewer delays are likely to better accommodate passengers than those with more delays. But the number of flights can't easily be reduced without reducing demand, which is where higher fares come in. Investment bankers traveling to a business meeting can afford to pay sky-high prices for tickets, but families headed to Florida on vacation could get shut out. This is problematic, but it may be a reality of the system if government decides to reduce demand. Deregulation has helped make air travel available for even lower echelons of the middle class. But a regulated system could easily restrict a substantial portion of the population if fares are too high.

A regulated system could have an impact on aviation abroad. For instance, a regulated air transportation system could jeopardize the Open Skies agreement with the EU. As a condition to their agreement, EU carriers want access to US domestic markets by 2010, and a government-regulated system of routes and fares would impede European carriers from competing on a level playing field with their US counterparts, since US regulators might be hesitant or unwilling to regulate foreign carriers. Foreign carriers would likely resist any attempt by the US government to regulate their choices of routes, and airline protectionism could ensue (a great thing for US carriers, but a bad thing for customers looking forward to higher-quality European service).

A regulated system would have significant impacts on airline start-ups, since it would be much harder for a new airline to start and grow in an environment when they have to convince regulators to let them compete. Established carriers would have a significant advantage, and as has been seen in many industries (including very recently in the airline industry) the largest companies and their respective regulators have a very cozy relationship. This could potentially stifle innovation in the industry, since many of the pressures most recently in the industry to improve service and amenities have come from startups (such as JetBlue and Virgin America). But it could also limit consumer choice. Some customers want to pay only for a bare-bones experience, and our current air travel system facilitates this. Travelers who want a choice in their air travel could be left on the ground.

But, with regulation comes increased expectations. Airlines will be expected to offer more employees and better service/amenities to customers. After all, if all the airlines on a given route have equivalent fares, then the way they'd be most frequently differentiated by customers is through service and amenities. Airlines will need to improve the customer experience substantially. But, all airlines will still face pressures from investors to cut costs. And because of this, airlines in a regulated system could not offer the same standards of service they used to in the glory days of air travel. Instead, they could offer the same minimal service offered today, and if their competitors can't offer anything better, because of their own pressures to trim costs, then they could get away with it. However, even if airlines don't offer the level of service they did in the 70s, there will likely be definite improvements under a regulated system, just not as many as consumers desire.

While the analysis above is rudimentary, it raises some important questions as to whether a regulated system is viable. It would certainly be difficult to implement, and it may not be better, especially for those who can barely afford current ticket prices. Leisure travel would diminish substantially under a regulated system, but for those who can afford it, a regulated system could offer greater convenience and comfort to travelers. Finally, established players would see increased stability in the industry, while new competitors would face increased hurdles to operation.

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Getting International Tickets on the Cheap: The cFares Approach

Airlines are finding that they have more leverage when it comes to setting fares on international routes. This often means that it can be tougher to find cheaper tickets on international routes. But, by visiting a few sites, you have the potential to save hundreds of dollars on your ticket. Today, I'm going to highlight one of the best sites for finding discount international airline tickets, cFares.

cFares is a booking site different from any other you've been to. Offering two levels of membership, one free (Gold membership), one paid (Platinum membership, which offers deeper discounts on tickets), the service operates like a warehouse club for airline tickets. While cFares' free service offers fares that can be found for the same price or less at the airline's Web site, cFares' paid Platinum Membership service offers the opportunity for tremendous savings. By paying an annual membership fee of $50, Platinum members are eligible for discount fares from consolidators and other below-market fares. These are tickets you can't find directly from the airline or on other third-party sites like Expedia and Orbitz. Moreover, unlike the deeply-discounted tickets found at Priceline and Hotwire, you know your flight times and airlines ahead of time, so there's no guessing or anxiety when you book. As long as you book a few international tickets a year, the membership easily pays for itself.

But wait, there's more!
Okay, a bit corny, but nevertheless appropriate. In addition to offering Platinum users below-market airfares, cFares offers a wonderful service called cAgent. cAgent will allow you to place a bid for a ticket, much like Priceline. But, unlike Priceline, cAgent doesn't offer instant gratification. Instead, the computer searches for fares that matches your bid, and a specific airline may lower its fare in order to match your bid. If the computer finds a fare within your bid parameters, it will hold a reservation under your name and send you an email asking you to accept or reject the flight the computer found. Once again, unlike Priceline, you'll know the airline and flight ahead of time, so you aren't having to worry about receiving a flight time or airline you're not satisfied with. Provided you accept cAgent's offer within 24 hours of receiving your email, then the ticket is yours.

Okay, but there must be a catch, right?
Of course there is. The caveats with the cAgent service are important to keep in mind, but they shouldn't stop you from trying the service.
1. You may not succeed. Placing a bid via cAgent is no guarantee that you'll receive a ticket at your desired price. While you wait for a match, fares could increase, and if your cAgent search ultimately fails, then you could wind up paying a higher ticket price. Therefore, when using cAgent, be careful not to wait too long (no more than a week is a good, but very approximate, rule of thumb) before buying your ticket.
2. The flights found may not be the most ideal. If you're traveling on a tight schedule, it's probably best to stay away from cAgent. The flights found will likely be those the airlines have difficulty selling seats on (typically those at inconvenient times or with inconvenient connections). But, if you're a price-sensitive traveler, cAgent offers fares that can't be beat.
3. cAgent reservations are available only on international flights. If you're flying domestically, tough luck.

What about domestic tickets? Does cFares offer good deals on these as well?
Yes, cFares offers good deals for domestic tickets as well, but unfortunately, since domestic carriers offer fewer consolidator and below-market fares on domestic routes, cFares offers a better bargain on international tickets.

Is cFares really the best?
cFares isn't guaranteed to have the lowest fares, and you should certainly consider travel agents and contacting the airline directly for tickets, especially if you're traveling on a specialized itinerary with a lot of connections. However, cFares is a site that should be searched before booking any international ticket because their prices are typically very competitive.

Sounds great, how do I sign up?
By going to www.cFares.com and registering for an account.

How to Reduce Travel Costs, Even with Higher Fares

With higher fares and airlines offering fewer discounted seats for sale, consumers are starting to wonder how they can fly inexpensively, given these circumstances. Unfortunately, it's getting increasingly difficult to find cheaper airline tickets. But, discounts still abound for hotels and rental cars, and there are ways of reducing these costs so that your total travel costs are still low, even if you wind up paying more for your airline ticket.

Use Hotwire or Priceline : One of the best ways to find discounted hotel rooms are Hotwire and Priceline. Hotwire is a bit easier for consumers to understand, as it doesn't require the bidding component that Priceline does. At Hotwire, you can purchase hotel rooms without knowing the name of the hotel you will stay at. After entering in your travel dates, Hotwire will give you a price, neighborhood, and star rating of the hotel. If you like what you see, then you can make the purchase. After you pay, you will find out the hotel's name and location. Priceline can offer lower prices than Hotwire but requires you to enter in a price below the lowest retail rate available on Priceline's Web site. Once you enter in your preferences for star rating and neighborhood, you can make your bid. Priceline will then accept and reject your offer. If your bid is accepted, your credit card will be charged immediately. So how do you know what to bid? That's a more complicated question that I'll have to save for another post.

In addition to hotels, Hotwire and Priceline offer a similar services for airline tickets and rental cars. The disadvantage about purchasing airline tickets at Hotwire is that their Clearance Fares (Hotwire's name for tickets that are paid for before buyers find out their flight times or airline) can be inconvenient for many travelers, since one must have a great deal of flexibility in order to take advantage of them. Moreover, they have been increasingly difficult to find as airlines have less inventory to sell at these very discounted rates. However, for rental cars, Hotwire deals are superb. Since most consumers don't have a strong preference for which rental car company they rent from, the advantages of extra-low rates outweigh the minor disadvantage of not knowing which company you'll rent from until after you pay.

Use a Fare Aggregator: Fare Aggregators, sites such as Kayak or Farecast, allow you to search most airlines (Southwest excluded) with one click. These sites make your search for the lowest fare much easier, and should be used when conducting any initial search for airline tickets.

Take Public Transit to the Airport: In many cities, public transit options to major airports are underutilized and substantially cheaper than a taxi. While shuttles or cabs can cost $20 or $30, public transit costs only a few dollars and in most cases, doesn't take significantly longer than cabs or shuttles. While the savings may not seem significant, on two trips to the airport, $5 spent on public transit versus $50 for two cab rides can add up very quickly over multiple journeys. To find the best public transit routes from the airports you're interested in, consult the airport's Web site for more information.

Avoid the Fees: As airlines start to add more and more fees for services that were previously free, it helps to think ahead and plan to reduce your exposure to these fees. Follow the steps below to ensure you don't get snared by airline fees.

1. Pick accurate flight dates. Flight change fees can be upwards of $100 in addition to the difference in fare, so by ensuring that your flights are on the correct day and time, you'll avoid this nasty fee.
2. Pack food ahead of time. Since few airlines offer free meals, especially on domestic flights, bringing your own food is a must. Even substantial snacks are becoming rarer, so bring food along, especially if you're traveling with kids. However, the caveat in this concerns liquids. Since you are still prohibited from carrying large amounts of liquids through security checkpoints, you should consider brining a water bottle and filling it at an airport drinking fountain if you plan to eat in the terminal. Otherwise, since all legacy carriers still offer complementary beverages, plan on getting refreshments once you're onboard.
3. Try to pack goods into one checked bag, if possible. This will save your party hassles at baggage claim, but also a potential $25 fee for checking a second bag, which most legacy carriers now charge non-elite coach customers for this privilege. If you're thinking about avoiding carrying on your bags instead of checking them, check your airline's Web site for information about restrictions, since carriers differ on the size of bags permitted inside the cabin.
4. Check-in online, unless you are checking bags. All major airlines offer some form of online check-in, and it's easy to print your boarding pass from your home computer and skip the ticket counter altogether. If you are checking bags, make sure to get to the airport with plenty of time to spare. Go inside the airport to check-in, using a curbside check-in service could cost extra. Many airlines now charge per bag when checking in at the curb, and gratuities are customary.
5. Look for carriers that offer complementary entertainment. JetBlue offers free television at every seat, and Delta also offers television and games on specially-equipped aircraft. Entertainment options can vary from aircraft to aircraft on a given carrier, so check the aircraft type you're planning to fly when you book your flight, then go to a site such as SeatGuru, find your aircraft, and check entertainment options.
6. Book your flight online. If you have a question about a ticket, go ahead and email or call the airline, that won't cost you anything. But when it comes time to actually book, go to the airline's Web site or to a deep-discounter such as Hotwire or Priceline. Third-party sites such as Orbitz can tack on extra fees, much like airline call centers, adding to the cost of your already-expensive ticket.

In the coming weeks look for additional posts about lowering your travel costs, even as fares rise. Moreover, Airline Bulletin will be sure to stay on top of the latest merger developments and offer commentary and analysis as appropriate.

What a United/Continental Merger Would Look Like...

With the recent Delta/Northwest merger proposal being made official, it appears that United and Continental may announce a deal within the coming days in order to help the two carriers compete in the changed marketplace. Both United and Continental released statements this morning expressing their desire to be proactive about consolidation opportunities. In other words, they're hard at work coming up with a deal. Like a Delta/Northwest deal, a United/Continental deal would have to target capacity and service, but in different ways than a Delta/Northwest deal.

For instance, looking at capacity, Continental has very been successful in filling planes to Newark and Houston, its two largest hubs. Flights to these cities from many large US markets could be increased in order to increase the number of passengers transferring onto profitable international flights. One beneficial attribute of this merger would be that Continental, which has struggled at times to get the right aircraft for its service requirements, would have access to additional larger, more cost-effective planes to use on services from hubs. For Continental, regional capacity isn't as much of a problem as it has been for other carriers, in that Continental has been able to divest itself of some capacity over the past few years. Continental has had leverage over ExpressJet, its main regional jet provider, to help that company reduce its costs and its capacity. Continental has already trimmed a number of ExpressJet routes and if fuel prices increase further, additional routes could be cut.

But the problem for Continental is that almost all of its regional capacity is on 50-seat or fewer regional jets, which are very expensive to operate in a high-fuel cost environment. While Continental is starting to integrate more fuel efficient turboprops into its regional network, they will make up a very small component of the company's regional services at a time when Continental really needs more cost effective planes. Contrast this to United, which granted, contracts for a lot of 50-seat regional jets. But in addition to this, United has a rapidly-growing fleet of 76-seat regional jets, which United has decided to configure in a 66-seat configuration, allowing United to increase yields on these flights by offering First Class and Economy Plus seating. This has given United a marketing advantage with high-yield travelers on key regional routes, as well as a degree of pricing power. If a merger goes through, expect to see a reshuffling of some regional routes, with a greater emphasis on turboprops, especially in California and Denver. United operates a wealth of short-haul routes from its California and Denver hubs, and many of these could be operated with newer, more fuel efficient turboprops.

Moreover, while domestic flights may not see dramatic additions or reductions, Continental's ability to access United planes may allow the combined carrier to launch key routes from its Newark hub, a long-term strategic asset for the company. Additional routes from Newark to Asia and Africa could be launched with the procurement of additional planes. Continental has struggled to get enough long-haul aircraft, especially 777s for very long routes. However, United has several dozen 777s that will permit the combined carrier to assert itself in the Asia-Pacific, as well as in Europe and the Middle East. If Delta and Northwest get the go-ahead to merge, United and Continental's combined presence will keep pressure on prices on key routes to Japan, China, and other Asian destinations where United and Northwest currently have the only presence by US carriers.

If there's a market in this deal that will be the loser, it's going to be Cleveland. Continental may say, just like Delta did in its press release yesterday, that all hubs will be saved. This is a fallacy that's being perpetuated in order to keep Senators and Congressmen happy until the merger is approved. These secondary hubs are filled with high-cost regional jets, and don't have the origin and destination traffic to keep operating at current flight levels. The economics of these secondary hubs don't work in this market, and Continental will be forced to make tough choices. Regional services will be the first to go, though some regional service is likely to remain for the foreseeable future. Some cities will eventually be axed altogether, and for others, service could just shift to Houston or Newark. Any international service Continental has from Cleveland will also likely be cut. Some domestic routes may be kept, a focus city arrangement that allows Continental to continue serving key business markets from Cleveland. But the bottom line is that Cleveland is going to see fewer destinations. Though the upside of this is that while more passengers may have to make connections, a downsizing by Continental could allow Southwest or other low-cost carriers to start additional flights, lowering fares for area consumers.

Servicewise, this merger is going to be tricky. Both United and Continental have good customer service, though both carriers have been faltering of late to deliver the same quality of service that many customers have come to expect, due in part to increasing pressures on overworked and undercompensated employees. Both United and Continental will have to recommit themselves to delivering high-quality service from all employees if they are to retain the large share of the business travel market that they currently possess.

But, other issues relating to service will have to be resolved. First, United has an Economy Plus section on all of its mainline planes and many of its regional aircraft. Continental does not have such a section, and depending on the structure of a combination, Continental may need to reconfigure much of its fleet. The Economy Plus section has helped United retain higher-yielding customers who often expect a higher level of comfort with a higher ticket price, and it is a concept that should be adopted throughout the combined company's fleet as a way to resurrect the service culture that airlines should be delivering and to retain key customer groups.

The second major service-related issue that the combined carrier will have to deal with concerns onboard food and beverages. On many longer domestic flights, Continental offers complementary meals to customers, something not matched by any legacy carrier. This is something that the combined carrier will need to think carefully about. Providing meals is a good selling point, but it's also expensive. If the company is focused on cutting costs, then for consistency of operations, meals should be cut on domestic flights. But, if the company is serious about attracting business travelers, then it will offer improved food service on additional flights, offering all travelers food service at a standard similar to what most airlines offer for buy-on-board meals. This won't be inexpensive, but it's a cost worth having if customers value the meals. Airlines can serve decent onboard food (many of the buy-on-board selections carriers offer are of a much higher quality than the "free" meals they gave out several years ago), and while it's a cost, with the hassles travelers are facing at the airport, having food available onboard the aircraft may be a selling point to a lot of travelers.

If this merger is completed, the combined carrier will have a larger base of business customers than Delta/Northwest, and a critical advantage over that carrier in key business markets including Washington DC, Chicago, Houston, Denver, San Francisco, Seattle, Los Angeles, and others. It won't be a perfect match, no combination between two legacy carriers will be, but they do have compatibility, more so than Delta and Northwest, and while it will take time, I have more hope for this deal being a long-term success than the Delta/Northwest agreement.

For more details about the United/Continental deal, check out this earlier (speculative) post, or this post for information about the Delta/Northwest deal. If you haven't subscribed to our free feed, please do so by going to the Airline Bulletin home page and entering your email on the right side of the page, under Get Posts By Email. And if you haven't had a chance to support the sponsors on the site, please do so next time you book a trip. By doing so, you're helping to ensure that Airline Bulletin can keep operating.

What Delta and Northwest Need to Change in Order to Thrive

Recently, Delta and Northwest got back to merger negotiations, after having broken off talks due to difficulties concerning the combination of seniority lists if a merger were to take place. The Wall Street Journal reported today that a deal could be announced within a couple days. With airlines suffering from record fuel costs, as well as ongoing maintenance issues, a merger is appearing more attractive to airline executives. Unfortunately, the savings they desire may be elusive. The easiest way to combine carriers would be a holding company combination, where management activities, as well as some airport operations, would be combined, but pilots and flight attendants would operate under separate contracts and probably on separate fleets, at least in the near term. A combination is fine because it allows Delta and Northwest to resolve the two issues that are most important, controlling and adjusting capacity to the realities of $100 a barrel oil, as well as improving the company's customer service.

One of the reasons many managers were looking to merge legacy carriers was in order to consolidate domestic capacity. But a merger wouldn't necessarily allow Delta and Northwest to consolidate a significant amount of capacity in terms of seats. Both Delta and Northwest are in the process of removing capacity from their fleets and there isn't a tremendous amount of overlap on their domestic routes. Internationally, both carriers are expanding, and capacity would increase. However, a combination would allow the carriers to better manage their existing capacity, consolidate some flights, as well as reevaluate service to small markets, that with $100+ oil, may not be profitable. With a combination and a restructuring of the combined carrier's route network, the company could have the opportunity to rearrange its agreements with regional jet contractors, such as Mesa or SkyWest, in order to help the companies reduce costs and capacity to unprofitable markets. Even though the number of seats reduced in the carrier's overall system would be small by the trimming of some regional routes, it could save the carrier a great deal of money.

As the US Airways/America West merger has demonstrated, forcing two sides to a labor agreement that neither particularly likes is a bad recipe for employee morale and customer service. The pilots have still not satisfactorily resolved their longstanding disagreements over seniority agreements. Therefore, instead of a complete merger, a combination of the operations side of the business while keeping Delta and Northwest as essentially separate carriers under one parent company might be a preferable arrangement. Unfortunately, this wouldn't lead to as many cost savings as managers would desire, since larger labor groups, such as pilots, would be covered under separate contracts. But what is critical in this deal, even more than cost savings, is that management cannot force the pilots unions to accept an agreement that one side sees as unfair. Airlines will have to deal with large groups of employees for the indefinite future, and they need to do their best to keep them happy. What legacy carriers especially cannot forget is that with the flying experience becoming increasingly unbearable for travelers in the US, airlines need to ensure that their employees deliver top-notch service. And one of the best ways they can do that is by making them feel valued and treating them with the respect they deserve. This is partly why Southwest is known for its service. Even though the company has more leeway than other carriers in its hiring, because it can select from a broader range of candidates, the airline successfully retains and motivates their employees by keeping them in a work environment that lets their voices be heard. If Delta and Northwest cannot improve their customer service, they will seriously threaten their future viability as businesses.

A carrier modeled under the Air France/KLM combo where the carriers operate separately under a holding company that controls scheduling and pricing for both carriers, would allow Delta and Northwest to adjust their route network to make it more efficient as well as adjust pricing to make the carrier more profitable. Unfortunately, restructuring flights will not do enough for the combined carrier. What airlines in the United States are suffering from is a media deluge of negative publicity. Customers are growing more antagonistic towards the airlines. The recent airline quality survey that came out last week was a typical example of this. Nationwide coverage of increased delays, increased rates of lost bags, and so forth, didn't do much to help the airlines. And Congress has caught onto the act, with front-page hearings criticizing airline executives about safety. To put it bluntly, consumers in this country hate airlines. And with rising prices, customers are getting increasingly irritated with putting up with substandard service that they feel they don't deserve given the exorbitant cost of their ticket.

As a result, the merged carrier needs to re-brand itself, with the Delta name, as a carrier that genuinely cares about service. What we don't know in this market with rising prices is whether there will be sustained demand for leisure travel. Business travel (specifically unmanaged business travel), while perhaps decreasing slightly in demand, is going to be a more important target market for the carrier in the coming years. Moreover, Delta has a very strong presence in large business markets, including Boston, New York, and Washington DC, and by making sure that it offers industry-leading service, comparable with carriers abroad, will help the carrier maintain yields and market share in this turbulent market. Business travelers will otherwise look to LCCs such as Southwest and JetBlue, which are pulling out all the stops by offering business travelers more amenities, better service, higher punctuality, and lower fares. With air travel becoming increasingly burdensome for business travelers, airlines that make the experience as pleasant as possible will be those that will see growth in market share and profits.

This company, if it is positioning itself for a future of more competition, especially from overseas, as well as from LCCs on key domestic routes, and a future of high oil prices, needs to discipline itself on capacity and service. The carrier will likely get Delta and Northwest's route networks integrated into a larger whole, and the company will find way to combine operational redundancies to reduce some costs. But, this carrier will not make money if it has too much excess capacity in the market, as well as too little capacity in growing markets. Moreover, it will not make money if it has poor service, because as has been shown in Europe and Asia, customers, and especially business travelers, are willing to pay more for good service if airlines actually deliver it. Now to get good service, management needs to, for lack of a better term, "be nice" to its employees, especially its pilots and flight attendants. That means these labor issues need to get resolved, or at least get to a point where they won't boil over after a combination. If the combined company can focus on these two areas, capacity and service, not only will it be the largest carrier in the world, it will be one of the best positioned for an uncertain future.

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What to do About this Oil Mess...

High oil prices are a major problem for carriers. That's obvious. But what's the solution? Unfortunately, airlines are doing all they can to reduce the impact of high fuel costs. Hedging is undesirable, because it ties up large amounts of cash, and carriers don't want to bet that oil prices in the future will remain nearly this high. Many legacy carriers are parking older aircraft in an attempt to reduce capacity and fuel costs. And with the ones they're still operating, carriers are stripping anything unnecessary in order to reduce excess weight. The only thing left is to start making heavier passengers pay more. Other than these, there are simply few options for carriers in the short term, short of watching others fail. Moreover, there is little Congress can do to ease the pressures on carriers, without a large subsidy package or a release of emergency oil stockpiles (which even then, wouldn't tremendously help carriers). The industry is in a bind once again, and what many fail to recognize is that this isn't going to be a 6-12 month blip. These high oil prices are going to be with us indefinitely. After leaving bankruptcy, several carriers created business plans based around $50-$60 a barrel oil. $80 and above will be the new norm. As much as market analysts and airline executives would like to believe otherwise, worldwide demand for petroleum is simply too great, and production increases are not keeping up.

The two things that will cushion the airline industry in the future from high energy costs are a redesign of aircraft and a revamped national energy policy. Over the long term carriers need to demand to aircraft manufacturers that they make more fuel efficient aircraft. For instance, many carriers are holding off purchasing new aircraft until Boeing releases the next generation of the 737 series. The next 737 variant cannot have a marginal 10% or 15% improvement in fuel efficiency, which is what Boeing is working towards. It needs to deliver much more sizable improvements given this operating environment. Aircraft designs may have to be modified, such that the tube with wings that we have come accustomed to may have to be changed. The experience of flying will likely be different for passengers. But, these new designs could deliver the fuel efficiency improvements that airlines need. What airlines should really be pushing for now is a faster development of airship technology, which would be slower than traditional jet-powered aircraft, but which would burn few if any fossil fuels. This technology is currently in the distant horizons, but airlines need to make sure that it gets to market as soon as possible. It will change our air transport infrastructure by forcing airports and air traffic control systems to change, but it will help airlines not only reduce fuel costs, but also the potential villainization that they might receive due to their increasing contribution to climate change. And if the cabins are designed with passengers in mind, airships might even make the flying experience more pleasant.

Moreover, a more comprehensive national energy policy will help correct this mess that we've gotten ourselves into. The United States needs to dramatically reduce its fuel usage. The biggest consumer of petroleum in the US are personal cars, and the government needs to invest in a program to significantly increase fuel efficiency standards as well as reducing the need for automobiles by investing in rail transport. While this reduction may not significantly reduce world oil prices, since China, the Middle East, and other fast-growing regions will likely continue to increase their oil usage, it will increase US energy security and preserve the long-term viability of carriers. The viability of the US's system of oil imports is in doubt, given the interests of other nations around the globe and the decreasing ability of nations around the world to expand oil production. (For a good read about Saudi Arabia's failures in this area, see Matthew Simmons's Twilight in the Desert. For a PowerPoint about the book, click here). Expensive oil is problematic for airlines. No oil is fatal. A new national energy policy is not about the environment so much as it is about cost. In the long-term, it will be much cheaper for our nation to make a serious transition to renewables now than wait 20 or 30 years. And it will ensure the long-term viability of our industry if we find the most promising renewable technologies in each sector and adapt them. In the airline business, hydrogen powered-planes aren't an immediate option, but by making sure that the sectors of society that do have viable alternatives switch to them, airlines and their passengers will have a much easier time making the transition to different aircraft and fuel technologies when they do arrive.

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Skybus Shutters...

Skybus has become the third LCC this week to fail. The carrier's Board of Directors announced late Friday that due to high fuel costs and a slowing economic environment, the carrier will cease operations effective April 5. The company expects to file for Chapter 11 bankruptcy protection on Monday. While this author isn't surprised at the ultimate fate of Skybus, given that the carrier was predicated on a faulty business model which simply couldn't bring the necessary yields in this type of environment, he is surprised that its collapse happened so soon. Skybus had $160 million in startup capital and burned through much of it rather quickly. However, the carrier still had a fair amount of cash on hand and likely could have continued operating for many months, but its investors probably realized that the company simply couldn't succeed given these market conditions and decided to pull the plug before the losses mounted.

The fact that Skybus decided to stop flying now is a bad sign. The carrier was going to fail, but for it to go under so soon makes me concerned especially about Virgin America, and how willing its investors are to endure the same kinds of initial losses that Skybus, or any new airline for that matter, faced. In this high fuel cost environment, the initial losses any new airline faces will be much greater than under more typical circumstances, and it simply may not be worth it to investors to try and ride out the storm. Virgin America has a much better business plan than Skybus, and is taking the right steps for success, but it's unclear whether the company's yields are sufficient to cover its increasing costs.

What will this mean for customers? Aside from the end of $10 one-way flights, it will mean fewer options to most consumers. The most significant effects may be felt in Skybus's focus city markets, Columbus and Greensboro. These markets will see a reduction in service, and in Greensboro, there is little hope of immediately filling the void. Raleigh and Charlotte have sufficient low-cost service, and the demand simply isn't there for another LCC to step in and replicate Skybus's level of service in Greensboro. It's possible that JetBlue or AirTran could eventually enter the airport, but the service those carriers would offer would be rather limited (service to JFK, Atlanta, and Florida). Columbus, on the other hand, is well-served by Delta and Southwest. While customers may not be able to find the very discounted fares Skybus offered, they will still find cheap fares, relative to other airports in the region, in particular Cincinnati.

But in some cases, fewer flight options may mean no flight options. Skybus's departure will be devastating to airports where the carrier was the only commercial airline serving the airport. Punta Gorda, St. Augustine, Gary, and others are unlikely to see any immediate replacement for Skybus's flights. This isn't a huge problem for most consumers, since low-cost carriers serve larger airports near the minor airports listed above, such as Jacksonville, Fort Myers, or Chicago Midway. But for the airports, some of which offered hundreds of thousands of dollars in incentives to Skybus in order to lure the carrier to their facilities, it will be a major blow.

Customers seeking information on how to obtain refunds or about flight cancellations should consult the Skybus Web site.

In a post tomorrow, I'll discuss some of the potential solutions to this oil mess. These airline failures can't keep happening, because while small carriers may get destroyed, over the long-term, even the legacies with large cash cushions could get in trouble. And the last thing Congress wants to do is offer another giant bailout to the airlines...

ATA Files For Bankruptcy, Shuts Down

ATA, which has in recent years downsized its scheduled service operations to focus more on its charter business, filed for bankruptcy and ended scheduled service flights today. ATA had in recent weeks announced the closing of its Chicago-based scheduled flights, mainly because high fuel prices were making them unprofitable. However, what did ATA in was the loss of a very significant military charter contract, without which, the company was unable to survive. ATA, once the 10th largest airline in the US, was a much smaller player immediately before its demise, and so its loss isn't tremendously significant to the overall market. However, given that the carrier served a number of routes to/from Hawaii, it will deliver another blow to that state, which has been reeling from the loss of Aloha. Fortunately, other carriers will likely fill in the gaps left by ATA, though passengers from Oakland may be forced to trek across the bridge and fly from SFO in order to get to Hawaii. Passengers on Hawaii routes could also wind up paying higher fares, though competition is still plentiful on these routes, and fares won't increase dramatically.

Perhaps the biggest victim of this collapse is Southwest Airlines. Southwest, which had a codeshare agreement with ATA, will be unable to immediately fill many of the gaps that the agreement brought. Southwest funneled passengers from its flights onto ATA flights to Hawaii or Mexico. Since Southwest averages lower load factors than most other US carriers, the codeshare agreement helped the company fill seats on flights that otherwise would not be full, generating critical revenue at a time when the airline was facing higher costs. Southwest is looking to start flights to Mexico with its own aircraft and ATA could have provided additional capacity and travel options for Southwest customers traveling from Mexico or other international destinations. Moreover, at these international destinations, ATA and Southwest could have shared ground crews and gates, reducing costs and making their service more competitive.

With two small LCCs collapsing in the past week, will we see more? Probably not, at least not in the near-term. That being said, there are a couple smaller carriers that are vulnerable. USA3000 may be in trouble, as that carrier is in a similar position as Aloha, facing heavy competition on its routes with low yields. While it still operates a strong charter and vacation package business, that could be threatened due to a potential decrease in consumer spending on air travel, especially leisure travel, as a result of the impending economic slowdown. Sun Country is also trying to figure out a solid business model in this climate, and that carrier may reduce some of its scheduled service operations and focus more on its charter business. However, larger LCCs are unlikely to fail anytime soon, because they have much more substantial cash positions. That being said, in this environment, successful airlines will need to be able to have more control over their capacity, and legacy carriers, with larger fleets and a higher percentage of owned versus leased aircraft than some LCCs, will be better able to make adjustments. The carriers who could be vulnerable are those that don't have many aircraft that can easily be parked (due to high lease costs), and which are facing heavy competition and low yields. Frontier is in this category, and it has the added disadvantage of having a weaker cash position than many of its larger rivals, making it more vulnerable in a time of uncertainty. While the airline is making the smart decision to diversify its operations through regional service, it may not be enough to offset increasing competition on its mainline Denver routes. Unless Frontier finds some way of redeploying its capacity, that company could face trouble, as neither Southwest nor United are going away anytime soon in Denver.

If fuel costs continue to rise, there could be other carrier fatalities, as well as increased capacity reduction in some markets. Airlines will have to pass higher fuel costs on to customers, and not everyone can pay them. Therefore, demand on many routes, especially leisure-oriented routes, could decrease, potentially delivering another blow to LCCs, which tend to have more leisure-centered networks. In the immediate future, the little cuts that most airlines will need to make will add up, though they may not attract the media attention that ATA's collapse did, and customers will begin to notice just how problematic high fuel costs are to our air transportation system.

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