“Wild times”: Southwest’s Gary Kelly announces service to MSP, discusses challenges in airline industry

Southwest Airlines chairman, president, and CEO Gary Kelly announces new Southwest service to Minneapolis-St. Paul.

DALLAS — Southwest is well-positioned in tricky times for the airline industry and will launch new service to Minneapolis-St. Paul in March 2009, Southwest Airlines chief Gary Kelly said today. The Twin Cities are the first new Southwest market since 2006, and the first planned service will be nonstop to Chicago’s Midway Airport.

The announcement of expansion comes at a time when the airline industry is contracting. Southwest has been on a cautious and slow expansion track, focusing more on filling in gaps between its current cities than opening new markets. The new service comes after one of the most difficult summers for the airline industry. “It is a wild time” for us, Kelly said. “We’ve got to get our revenues per departure up. . . . Our costs have gone up. I don’t see costs going back down.” Even so, he said, “if you take out fuel, our unit costs are way below the legacy carriers.”

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Thought leaders on aviation trends

From left: Tom Parsons, Randy Petersen, Terry Trippler, Peter Greenberg, and Rick Seaney

DALLAS — Our lunchtime entertainment here at Southwest headquarters was provided by a panel of five airline industry thought leaders who offered their thoughts on the future of the industry. Rick Seaney of FareCompare.com kicked off the discussion. Some of the trends he noted include a “decline in human interaction” through the increasing utility of technology. He also expected “advertising in aircraft like in a subway car” and “a la carte aviation pricing” (the latter I think is a good thing, as regular readers will know). Seaney also announced that he expects to see an airline passengers’ bill of rights soon (PBOR), a theme echoed by other panelists.

Peter Greenberg, the travel editor for the Today show, said that most airlines are adopting an attitude of “we’re not happy till you’re not happy,” and added that it will be hard for airlines to improve customer service with so many unhappy employees. With respect to delays, he said that there will be no meaningful delay reductions until local airport authorities cap operations on their runways to what those runways can actually handle. And he cautioned U.S. airlines to prepare for foreign ownership and even cabotage: “it’s going to happen. Get ready for it.”

On the merits of a PBOR, Terry Trippler of Trippler and Associates said, “Once the government gets involved, they will not stop.” He recounted experience working with the Civil Aeronautics Board in regulation days and said it was not consumer-friendly. The reason airlines offered such extraordinary service (compared to today) is that they could compete only on service — not on fares. Instead of a PBOR, he said, “I want the free-enterprise system to work it out . . . and I think it will. . . . I want the Southwests of the world to be free to go where they want to go, be what they want to be, and charge what they want to charge.”

Frequent-flier-mile guru Randy Petersen of Inside Flyer and Boarding Area contested Trippler’s faith in the private sector to work out the issue: “Free enterprise hasn’t proven to work.” He discussed trends in frequent flier miles, arguing that some of the more negative pronouncements going around today are exaggerated. Finally, BestFares.com’s Tom Parsons talked about how with fares rising, “best fares” will be thought of as “reasonable fares,” and he commented that Southwest is leadeing fare increases, much to the delight of the legacy carriers.

During the Q&A period, friend of this blog and Jetwhine editor Rob Mark called attention to the issue of people being kept on planes for hours on the ramp. Greenberg suggested a renewed appreciation for the virtues of airstairs. Then, he said to my amusement, “Let’s talk about the history of denied boarding. It starts with Ralph Nader being thrown off an Allegheny flight.” More seriously, he said that if airlines don’t embrace common-sense measures like deplaning passengers on long delays, they will get a PBOR. Parsons said that we need a PBOR “with meat on it,” because to date the private sector hasn’t been successful.

Photo by Evan Sparks

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“Stop Oil Speculation Now” won’t make oil cheaper

I’m going to resist the airline lobby’s link bait for their Stop Oil Speculation Now website (google it if you care), but the airline CEOs’ letter calling for passengers to lobby Congress for tighter regulation of oil futures “speculation” deserves some attention. The aviation blogosphere sees through this as the bad proposal it is (see Elliott, Snyder, PlaneBuzz, Upgrade, TJI). Indeed, economists from across the ideological spectrum — from Paul Krugman to WSJ op-ed writers — don’t blame “speculation” for the rapid run-up in oil prices. While some of the run-up looks bubblicious, for the most part, oil futures prices reflect estimates of existing and projected demand and existing and projected supply. As Craig Pirrong writes, “Futures and swap markets facilitate the efficient management of price risks, and speculators are an important part of that process. For instance, a producer of oil may want to lock in the price at which he sells his oil in the coming months in order to hedge against fluctuations in its price.” Another economist whose work I follow recently wrote, “Financial markets are driving today’s prices to match expectations of tomorrow’s values.” Speculators are doing the work of price discovery.

And for crying out loud, what is with the airlines’ complaint about “speculators who trade oil on paper with no intention of ever taking delivery”? Do they really want only those who will personally use oil to buy it? What if I’m a sharp, entrepreneurial guy who can make money buying and selling oil? (I’m not.) Why should the government limit my ability to “truck and barter” in a commodity that’s otherwise freely traded? Instead of making oil cheaper, it would restrict the full measure of price information a functioning market can provide.

The challenge of leadership is running a business in hard times as well as good. As Brookings Institution economist Clifford Winston told me recently, airline profitably depends more on the handling of “shocks” than on wringing out efficiencies. The airlines’ proposal is a Band-Aid, a substitute for actually handling the shock of rising costs.

The airline CEOs call the oil market “over-heated.” What’s really over-heated is the rhetoric and reasoning of their proposal.

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North by Southwest

Posts like this remind me of why I love the Southwest Airlines blog:

It’s official, WestJet will be our first international partner and we will be offering travel to some pretty cool destinations all the way to Canada! Okay, I know, it doesn’t feel that international because it is Canada and traveling to Canada is quite simple. But they do speak different languages, eh..and those accents…and the beer…the temperature…the metric system…work with me here…this is start of some really cool stuff.

This blog isn’t just a corporate organ. It speaks with real people’s voices.

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Of course IATA wants to have it both ways

The International Air Transport Association, the worldwide trade association for airlines, issued the following demands at its summit in Istanbul this week.

Governments must eliminate archaic rules that prevent airlines from restructuring across borders.

In view of existing fees and charges, governments must refrain from imposing multiple and additional punitive taxes and other measures that will only deepen the crisis.

State service providers must invest to modernise air transport infrastructure urgently, eliminating wasteful fuel consumption and emissions.

Business partners, in particular monopoly service providers, must become as efficient as airlines are now.  If not, regulators must restrain their appetite with tougher regulation.

Labour unions must refrain from making irresponsible claims and join the effort to secure jobs in aviation and indeed in other industries.

In the interest of the global economy and the flying public, we urge authorities to enforce the integrity of markets so that the cost of energy reflects its true value.

To which Brett Snyder responds:

Ok, so let me get this straight. In point 1 the argument is against regulation but points 4 and 6 want more regulation. Point 2 wants fewer fees charged, but point 3 wants more to be invested in infrastructure. It’s a bit confusing.

But points 5 and 6 have to be my favorites. I mean, come on. You’re going to wag your finger and tell labor unions that they should lighten up? Even more unlikely to have an impact, you think governments should step in and fix energy prices?!? Might as well just wish for world peace.

It’s important to keep in mind that IATA is a trade association — that is, a lobbying group. Every industry has one (except for the necktie industry, whose trade group closed down this week). And a lobbyist’s job is to promote his industry’s interests. Whether or not it’s sound policy –or even logical — it’s in airlines’ interests to have fewer limitations on foreign ownership, lower taxes, better airport and air traffic control facilities at lower cost, cheap labor, and cheap oil. For a lobbyist, policy coherence takes a back seat to getting your client’s way.

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That didn’t take too long

Skybus founder John Weikle’s plans to start an ultra-low-cost-no-frills airline based in Charleston, W.Va. — see here and here — are being dropped due to insufficient financing, persistently high fuel prices (the Energy Information Administration projects that $100+/barrel is here to stay in 2008), and the slowing economy. All investors are getting their money back.

Good thing the people of Charleston and West Virginia didn’t get bilked.

Skybus founder pulls plans for West Virginia airline [Today in the Sky]

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Skybus shuts down, proves commenter’s ignorance

I usually let negative comments slide off my back unless they point out an error, which I then correct. But some really get to me. When I wrote recently on the impending idiocy of starting a budget airline based in Charleston, W.Va., an idiot commented:

Also, the airlines will still be flying with oil at $100 a harrell (sic). The ones that survive however, will be the no frills airlines that have control over their controllable expenses. Perhaps you have heard of Ryan Air (sic).

When I responded with facts to the effect that he was clearly an idiot, he wrote back:

There have not been dozens and dozens of similar airlines that have failed. There are only two airlines like Skybus. First, there is Skybus and second there is Ryan Air and neither has failed. There are no others now or in the past like Ryan Air and Skybus. They are unique to the airline industry. Of course, Mr. Sparks has every right to state his opinion. That is the great thing about this country — we are free to say whatever we want. The trick is having some basic knowledge to form an educated opinion. The ball is in your court Mr. Sparks — name a single airline like Skybus or Ryan Air that failed. Before you answer, however, I suggest you obtain the full details of the Skybus and Ryan Air business models.

I’m happy to allow others to reply to my posts, but utter idiocy and insults don’t get to hang out here, which is why I deleted this one. That is, until I can point out with evidence how ignorant this commenter was. I’ll write soon on the policy repercussions of aviation’s hebdomas horribilis, but until then, forgive my gloating.

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Bad ideas dept., Rockford division

Benet Wilson writes that Chicago Rockford International Airport, an airport on Chicago’s far western fringe with limited commercial service, is going to partner with a charter airline (actually, a brand — Southern Skyways) to offer scheduled services to Denver and Detroit, the former to replace service United is withdrawing this summer. Rockford will control routes, destinations, and fares, and will eat the losses. As Benet points out, this is a bad idea.

Regular airlines are struggling, and low-performing routes are getting cut. If Rockford can’t supply enough traffic to Denver when the route is a regional jet and has interline connections, how will it generate sufficient traffic with a larger plane and no connecting opportunities? Well, it will operate less frequently — a few times a week. Says the airport’s director: “You’ll see as many flights as you can fill.” That’s just the problem — there will be so few flights that being unable to fill them will become a self-fulfilling prophecy.

Rockford says it’s doing this to prove what a good market it is to other airlines. Yes, it’s such a good market that United is leaving. The trouble with the fund-your-own-airline-service strategy is that Rockford is creating a different type of service than it’s trying to replace or recruit. It’s best to get connecting service to major hubs — the airport is already served to cheapo leisure markets by Allegiant. But the Southern Skyways service won’t resemble the connecting hub service the airport claims to need: the aircraft types and sizes, schedules, and traffic feeds will be completely different.

Rockford’s taken a bad idea too far. There are better ways of recruiting airline service.

Rockford Airport Gets into the Airline Business [Towers and Tarmacs]

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Airfares: you get what you pay for

Last week, Sean O’Neill addressed the tricky nature of measuring changes in airfares. Air fare indexes pick up or decreases in base fares over time, but they don’t pick up “nickel and diming” (the addition of lots of charges for luggage, food, over-the-phone booking) or declines in service (cranky flight attendants, less legroom).

I’m on record as being in favor of price transparency. The regulation-era model of aviation ticketing assumed a monolithic travel market, like a Soviet-style clothing factory — one size fits all. There were few limitations on the ticket, a meal and a drink onboard, and room in the hold for three suitcases. Pre-deregulation experiments like the loosening of the Florida market demonstrated that the market is diverse. Some people are flying somewhere for a year and need all the luggage they can tow; others are flying for a weekend and are fine with a carry-on. Some people get very hungry in-flight; others eat beforehand. Some people may need to make changes at the last minute; others plan their schedules around their flights. One of the reasons average airfares went down by almost 40 percent in real terms from 1980 to 2005 was exactly that the cheapest tickets offered during this time were less flexible and included fewer amenities. Unbundling ancillary services from the basic cost of travel, many airlines have made it possible for low- and middle-income people to enjoy unprecedented access to air travel. You get what you pay for.

Now, as far as incorporating levels of service into the Bureau of Labor Statistics’s Consumer Price Index goes, Sean has some links worth checking out. Another way of measuring airfares is the Bureau of Transportation Statistics’s Air Travel Price Index. (For more on methodology differences, click here and here.) The ATPI measures discount fares, frequent flier mile awards, and package deals, whereas the CPI does not. (According to the ATPI, average airfares continue to fall — by 19 percent in inflation-adjusted terms from 2000 to 2007.)

Sean neglects to mention service improvements over time, especially in routing. Deregulation freed airlines from their patchwork routes, and the carriers organized themselves around hubs, collecting feeder traffic to national and international networks. Today, almost every airport in the country is only one stop away from almost every other airport in the country and from many major markets in Europe, Asia, and Latin America. Compare that to the convoluted route maps in the Airchive.

Increased transparency in air travel pricing is nothing to mourn. Moreover, one would be hard-pressed to argue that in the past thirty years, ancillary fees have gone up enough to compete with the inflation-adjusted reduction in average fares.

Airfares: Price hikes that go underreported [This Just In]

Photo credit: Flickr user alex-s. Used through a Creative Commons license.

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The Music Man, airline edition

Yes, this sounds like a good idea: start a low-fare carrier in an era of $100+ oil. Compound that brilliance by making it point-to-point only, but based at an airport with less than 285,000 enplanements in 2006 and a metro area of 300,000 people. Throw in the fact that even scheduled charter services masquerading as airlines are having trouble in that market, and you have the recipe for a great airline!

. . . Well, OK. This might be a recipe for disaster, but at least you can get the city — Charleston, W.Va., in this case — to pony up $3 million to support the theoretical “hometown airline.” Behind this plan is the same guy who did this with Skybus in Columbus, Ohio, and he seems to have come up with a pretty good shtick.

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