A century ago, the world’s first scheduled commercial airline—the St. Petersburg–Tampa Airboat Line—began flying adventurous early adopters across Tampa Bay, one by one, in a single-engine wooden “flying boat” with stretched linen wings. There were no ergonomic lie-flat seats or in-flight entertainment or frequent-flier points. The passenger paid five bucks to sit on a wooden bench for the eighteen-mile, twenty-three-minute jaunt. Air travel back then was all about just getting there.
In a sense, it still is, at least for those at the back of the bus. Today’s cram-’em-in, you-get-what-you-pay-for air-travel experience harkens back to that less-than-golden era of commercial flight—before the marketed “romance” of flying and amazing leaps of aviation technology had recalibrated our expectations.
For the long-struggling US airlines, though, it looks more and more like a new day, at least financially. They’re starting to make real money—not yet a windfall by any means, but not just the measly 0.1 percent average profit they netted in 2012, either. It’s almost enough to interest long-term investors and make Wall Street forget the huge losses of the decade after 9/11. For 2013, industry net profits approached 8 percent (a still-respectable 4.9 percent excluding one-time items), not far from the average for all 500 major firms tracked by the Standard and Poor’s index. By the end of 2013, the Amex index of US airline stocks had soared over 50 percent, some carriers’ shares more than doubled, and the financial future looks brighter still. For 2014, the global airline association, IATA, projects profits to jump another 25–30 percent in North America, well past $8 billion.
It’s been a dramatic turnaround for an industry that lost well over $50 billion in the dismal years after 2001 and still carries more than $70 billion in debt. Only five years ago, major US airlines worried about sheer financial survival, their basic liquidity. Now they’re starting to pay dividends to shareholders and repurchase shares; some even foresee eventually winning “investment grade” corporate credit ratings enjoyed since 9/11 only by Southwest. Five years ago, every big US airline but Southwest lost money; by late 2013, none were operating in the red.
The airlines’ accelerating good fortunes are making it clearer that recent profits were more than just another periodic respite from the downbeat of perennially lame financial performance—that instead they reflect a basic evolution of the business of commercial flying into something economically sustainable over a full business cycle. Call it, maybe, an endpoint to the thirty-five-year wild ride of hypercompetition and mass bankruptcy that followed the upheaval of deregulation.
Credit some of the new stability to economic fortuity. A strengthening overall economy means people fly more, and pay more when they do. And critical jet fuel prices have stabilized considerably. Jet A prices are still high historically, and still account for more than a third of what it takes to run an airline, but they’re no longer going crazy. Jet fuel prices that nearly doubled to well over $3 per gallon between mid-2007 and mid-2008 actually dropped marginally in 2013—ending below the $3 mark.
The real game changer, though, is the near total consolidation of the business—consummated at the very end of 2013 by the “final shoe” merger of American Airlines and US Airways—that laid the groundwork for the new, more profitable operating dynamic. Put simply, just four big airlines controlling 80 to 90 percent of domestic flying is good for business. Not that airline mergers lack any consumer benefits—like smoother connections, wider frequent-flier recognition, and broader network reach—but for other reasons the last mega-merger understandably drew nary a word of opposition from the merging airline’s biggest competitors, either. Each surviving mega-carrier gained some pricing power, but also something more important: confidence that none of the other large network survivors would try to expand aggressively to grab market share. As long as everyone kept a lid on its supply of seats, the law of supply and demand could work its magic, keeping fares and fees up, and airplanes full. So far, so good from the airline perspective. As of late 2013, US airlines were flying fewer flights than in any of the ten prior years, and near-term expansion is predicted to keep lagging the US economy’s growth.
Do these happier times for airlines—and their shareholders, suppliers, creditors, and executives (even bankrupt American could afford to give its CEO a sendoff worth about $17 million)—bode better days for passengers, too? A senior United executive waxed lyrical, proclaiming in a September 2013 New York Times report that the industry had reached “a customer-experience and consumer-loyalty renaissance.” Don’t count on it.
Sure, carriers have been talking a better game. United even revived its forty-nine-year-old “Fly the Friendly Skies” slogan, declaring itself “legroom-friendly,” “Wi-Fi-friendly,” and “nonstop-friendly”—forget that it tied rival American at the bottom of the Wall Street Journal’s “scorecard for best and worst airlines” of 2013. Air Canada’s new low-cost Rouge subsidiary sends its “team of Rouge crew” flight attendants to Disney for “customer service excellence” training. Even Ireland’s Ryanair vowed to reform its “macho or abrupt culture” in dealing with passengers, no doubt shocked that past practices like penalizing fliers $100 for forgetting to check in online or $80 for having to check an oversized carry-on had so alienated the public that one Catholic bishop, accused of personal extravagance by the Vatican, let it be known that he had flown that airline, seemingly as a form of penance.
Beyond the “we-care” rhetoric and corporate charm offensives, though, you have to ask about the newly profitable airline business: what’s really in it for the everyday passengers who make it so? From a purely financial standpoint, not so much. No matter how you cut it, profits come from reducing costs and taking in more dollars—whether from higher fares or nickel-and-diming (sorry, “ancillary”) fees. As airlines continue to get healthier, so do fares—well outstripping inflation since their 2009 lowest point, although inflation-adjusted fares are still considerably lower than their peak in 2000. (Whether airfares remain a screaming bargain depends on which year’s prices you compare.) Ancillary fees continue to grow too. The two old reliables that DOT requires airlines to report separately—fees for checked bags and reservation changes—may be maxing out, while the grab bag of “miscellaneous” fees—whatever else carriers can dream up to “unbundle”—keeps growing fast. In the airline industry lexicon, these “enhancements”—like clean blankets or line-cutting privileges at boarding or Wi-Fi or leg-crossing room or simply a pre-assigned seat—“personalize the experience.” Not to mention that they powerfully augment the industry’s new profits.
“Preferred seat selection” fees alone must be a financial mother lode, judging from my own recent experience trying to book coach seats to fly with my wife to New Orleans. Though the flight was a month away and in the lowest post–New Year winter season, the online seat map showed exactly zero open “complimentary” seats. (The return flight showed a few single seats near the lavatory.) But there were still several unoccupied seat pairs for sale—with no more legroom or better service—that the airline deemed to be “choice” seats. So my “choice” was either to shell out an extra $74 per seat per person roundtrip ($148 total) to be sure of sitting with my wife, or to take my chances on a kindly gate agent or a session of onboard negotiating/begging with fellow travelers. The fee I eventually coughed up had nothing to do with buying a “better” seat—they were all the same on this smallish regional jet anyway; I was paying for the peace of mind that there were seat numbers next to our names in the airline’s computer. A little less travel stress can be worth paying for—and don’t think airlines don’t know it.
The newest twist isn’t just to conjure up new fees but potentially to vary the level of existing fees with “dynamic pricing.” The idea is to charge just what the airline thinks you’ll be willing to cough up on that particular flight to check a bag or sit in an exit row or stuff your bag in the crowded overhead bin. Revenue management systems already adjust airfares according to anticipated passenger demand for seats; why not apply the same money-extraction tools to raise the early boarding fee on a chock-full transcontinental flight where early boarding means snagging overhead luggage space instead of shoving your bulging “carry-on” somehow “under the seat in front of you” for five hours?
Putting aside precisely what passengers pay, though, sustained industry profitability may ultimately prove just plain incompatible with coach passenger comfort. That’s true at least when it comes to crowding, the source of so much onboard angst—from crunched knees to stressed cabin staff to overstuffed luggage bins. Airlines aren’t trying to make flying miserable, but crowding—technically, high “load factor”—is, after all, a hallmark of airline business success, a key measure of profit-generating productivity. Even with today’s record cabin-occupancy rates, nearly every large US airline aims to cram more paying bodies into their airborne tubes or, more elegantly, to “densify” some cabins by slicing an inch or two of legroom from each seat row to add more seats. (Carriers are also casting a longing eye at narrowing seat width; pity the unfortunate in the middle of a prospective eleven-seat-across jumbo Airbus 380—originally meant for ten across—who has to climb over two other people to get to an aisle.) Airlines say our legs will never notice the tighter spacing, since seats themselves are getting “slimmer”—less cushioning and less (or no) seatback recline. We’ll see.
Still, there’s a silver lining for passengers in the airlines’ newly focused profit hunt. Even if carriers couldn’t care less about comforting the marginally profitable masses in the back of the plane, those folks still benefit from the billion dollars that US airlines are investing every month in capital improvements to boost efficiency. Those long-deferred improvements (Delta didn’t retire its last DC-9, aged thirty-five years, until 2014) include lots of new-generation airplanes now coming on line. The key objective is to rein in operating costs—middle-aged planes can cost over 20 percent more to fuel and maintain than younger ones—but new aircraft, with their advanced composite fuselages and super-sophisticated electronic systems, offer fliers a better ride, too. Improved cabin humidification and pressurization, bigger windows and more attractive lighting, more power outlets and USB ports, quieter cabins, and creative spatial design can’t help but make flying more comfortable for all aboard.
Of course, a big chunk of the airlines’ recent investment drive is focused where it makes the most economic sense—at the front of the cabin, with the big spenders who disproportionately contribute to airline earnings. Don’t those transcontinental business travelers who pay ten times the coach fare for a newly installed lie-flat seat, a multicourse meal, and “premium amenities” deserve an onboard cappuccino machine and “hot towel service”? On the über-business New York JFK–Los Angeles nonstop route, close to half of airline revenues come from just over 10 percent of passengers, according to one 2013 analysis. No wonder even egalitarian low-cost airlines are getting in the game—reconfiguring planes to offer front-end private “suites” and, on JetBlue, “an artisanal sweet treat as a parting gift.”
For the rest of us, though, even the industry’s accelerating drive to monetize the entire coach cabin—from pillows to legroom to Wi-Fi connection—has an upside of sorts. In today’s pay-as-you-go flying, entrepreneurial airlines will try to provide whatever we’ll pay extra for—coach seats with a few more precious inches of legroom, a halfway-decent meal (for $21.99, you can buy a four-course “premium” meal with a half bottle of wine on one carrier), a movie you haven’t already seen, a plastic-wrapped blanket that’s likely a lot cleaner than the one that used to be “free.” Climbing the list of such “enhancements” is onboard Internet connectivity. Airlines are investing millions installing the hardware needed to get passengers online from 40,000 feet, competing to offer the fastest broadband in the air. If they can get $10 or $20 to web surf and even stream videos to while away a tedious flight, why not?
So far, onboard Wi-Fi has taken time to catch on, at least beyond the hardcore techies (Virgin America calls them its “tech-forward guest base”) willing to pay for it, but not so when it comes to other onboard electronics like sophisticated seatback displays and, of course, ubiquitous personal electronic devices. Airlines well understand their importance to cramped and bored fliers, if only as diversion. Carriers practically fell all over one another to be the first to implement FAA’s decision to let passengers leave their personal electronic devices switched on throughout the flight. Literally within hours of the FAA ruling, they rushed to file the paperwork needed to relieve their fliers of the dreadful burden of having to suspend staring at their Kindles and Game Boys for the ten or twenty minutes it might take their flights to climb to 10,000 feet. Until then, we were left to stare at seatback video screens (no doubt another lucrative revenue opportunity) cycling rental-car ads, hotel promos, and airline marketing a foot in front of our captive faces.
As onboard electronics start to envelop the passenger experience, an emerging question is just where to draw the line. Some carriers try to block nasty websites for onboard viewing, but what about Virgin America’s touch-screen flirtation system that—no kidding—invites us to send an unsolicited “in-flight cocktail to that friendly stranger in seat 4A?” Then there’s the battle over cell-phone voice calling. (“Guess where I’m calling from? Yeah, on a plane! Yeah, up in the air!” Ugh.)
Using smartphones silently to text and e-mail and send data onboard is one thing, but the prospect of airborne yakking seems to have triggered a consensus that cuts across class, race, age, and political lines in a way rarely seen in today’s America. Polls typically show fliers opposed to onboard voice calling by roughly two to one. Remarkably, a Quinnipiac University poll found that margins of opposition hardly vary across Democrats and Republicans, self-described liberals, conservatives and independents, rich and not-rich, whites and blacks and Hispanics; even most millennials age eighteen to twenty-nine are opposed. But that didn’t stop the FCC in late 2013, in a sudden burst of abstract scientific curiosity, from deciding to reexamine its “outdated and restrictive” twenty-two-year ban on the practice, just to see if airborne cell phoning had become technically feasible, the agency said. Of some 412 letters that reportedly poured into the FCC even before it officially asked for public reaction, only five supported onboard cell phoning, according to a Wall Street Journal count. Meanwhile, the Department of Transportation or Congress could intervene to keep the airborne peace if it came to that, and Delta bravely pledged flatly to resist onboard voice calls even if regulators allowed them. Most other airlines sounded deeply skeptical too, but hesitated to get between fliers and their electronics, preferring to wait and see where the chips fell.
What to make of the emerging new world of US air travel? For all the relief in the boardrooms and on Wall Street that the industry is no longer always just one step from the financial grave, airline execs aren’t exactly pounding their chests. To the contrary, airlines continue to portray themselves as underappreciated, overtaxed, and overregulated, devoid of US “industrial policy” support. Industry poor-mouthing has not infrequently proven to be its best defense against the unwanted attention of Capitol Hill tax seekers, fine-imposing regulators, “over-entitled” frequent fliers (a term one airline CFO wished he hadn’t uttered during a 2012 investor conference), and those who see airlines as convenient tax collectors. Nascent prosperity makes it a bit awkward, though, for industry economic reports forced to concede that profit margins have improved from “razor-thin” (November 2012) to “paper-thin” (August 2013) to “modest” (March 2014).
However tactical, the industry’s reluctance to admit even limited success is understandable, maybe even a little superstitious. After all, is there another consumer sector that remains so vulnerable to sudden and unpredictable reversals of fortune—from airline-specific terrorism to a freak air crash, from fuel prices spiking at uncontrollable geopolitical events to exotic plagues to nothing more than unusually inclement weather? (All it took was a stretch of ultra-nasty winter weather to set the industry back an estimated nearly half billion dollars at the start of 2014 according to airline consultant masFlight.) And that’s not even counting run-of-the-mill economic slowdowns, major new foreign competition from the Persian Gulf, and normal market cycles.
The glass-half-full way to think about commercial flying today is to step back a hundred years to when it started—to when it was just a way to “get there” quickly and, one hoped, in one piece. From that perspective, it’s been a roaring success. US commercial air travel remains very, very safe. Ironically, the July 2013 crash-landing of a two-hundred-ton Asiana Boeing 777 into the seawall at SFO’s Runway 28-Left at a speed of 122 miles per hour showed how safe it’s been made. More than 99 percent of those on board survived; not a few walked away (foolishly) tugging their carry-ons. New measures to fight pilot fatigue, more precise air traffic control, and better airplanes are only likely to make flying even safer. It’s also pretty reliable when you consider the scope and sophistication of the national airspace system and the thousands of planes flying through it at any given moment of the day. The vast majority of them still arrive on time, or close to it; the incidence of lost bags (now typically with bar-coded tracking tags) is roughly half what it used to be only six years ago; and very few of us get “bumped,” at least not without getting paid for it. Meanwhile, regulation helps deal with consumer failures like deceptive fare advertising and multi-hour tarmac “strandings.”
All good, but flying today is still far from a pleasant adventure; maybe it can’t be and stay profitable over the long term. Still, who knows if there’s a limit to passengers’ tolerance, a point of resistance to the sometimes gratuitous indignities of air travel, an opening for a more generous, leave-a-little-on-the-table approach to the flying public. Even as mass commercial aviation seems again all about just getting there, ordinary fliers are surely entitled to ask if their experience really can’t be better than what it has too often become.