Thursday, October 11, 2012

Nomadic Matt's Travel Site: Airline Industry Interview With Scott Mayerowitz

Nomadic Matt's Travel Site: Airline Industry Interview With Scott Mayerowitz

Airline Industry Interview With Scott Mayerowitz

Posted: 11 Oct 2012 01:22 PM PDT

Scott MayerowitzI love flying. Well, not taking off and landing, because any bump and I think we’re going down, but I love sitting in the plane, watching a movie, and relaxing. I love being in airports. I love the overall experience and since I talk a lot about the consumer side of airline travel, today I interview Scott Mayerowitz, an airline reporter for the Associated Press, about the business side of the airline industry.

Nomadic Matt: Tell us about what you do for AP.
Scott Mayerowitz: I write long-form enterprise and investigative stories about the airline and travel industries. Some are fun features – such as where your lost luggage ends up – and others are much more serious, such as an in-depth look at how airlines are combating rising fuel prices. I once got to spend three days flying around the country with some frequent fliers who chartered a jet. That was an unforgettable experience.

I talk a lot about the consumer side of travel. As an airline reporter, what are three things people might not know about airlines from a business perspective?
1: How hard it is to figure out the cost of a flight. Many people are now booking tickets for Thanksgiving and Christmas. The airlines have no clue what oil prices will be then but they must make a guess and set prices accordingly. Fuel is about 40 percent of the airlines' operating budget. If they guess wrong, they lose a lot of money.

2: A $5 hike in ticket prices really does stop people from flying. Hence all the fees and add-ons we are seeing today. If fares are too high, people won't fly. If they're too low, airlines won't make any money. By adding on all the fees, airlines can make fares look low and still make money.

3: Baggage fees don't get taxed by the U.S. government. Airlines pay a 7.5 percent excise tax on your base ticket price. This is in addition to the $3.80 per domestic segment tax – the tax covers one takeoff and one landing – and the $2.50 Sept. 11th security fee for each time you board a plane. However, the government doesn't tax airlines on the $25 they collect each way for your suitcase. The airlines get to keep every dime of that, giving them an incentive to raise fees over airfare.

Where do you see the industry going over the next few years?
I think we are starting to see a divide between airlines that cater to business travelers and those who cater toward vacationers. That gap will probably grow in the future as many families get priced out of flying on the older, legacy airlines. The cost of flying during peak summer vacations is going to force some families to drive to other destinations. Airlines have become profitable by reducing the number of domestic flights they offer. I don't see that reversing anytime soon.

Why are costs rising so much? You said oil represents 40% of the cost of their budget, but why is it that airlines just can't seem to make any money? As Warren Buffet said, "If a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down."

Let's start with fuel. Airlines were paying 80 cents a gallon in 2000 for fuel ($1.07 when adjusted for inflation). Today, they are averaging $2.96 a gallon. U.S. carriers burn through about 16.4 billion gallons of fuel a year, so any change has a dramatic impact. Airfares haven't climbed as fast – in part because passengers got used to deeply-discounted prices after 9/11 and then the economic downturn. The average roundtrip flight cost $339 in 2000 (adjusted for inflation). Today, it's $373. That's a 10 percent increase, but fuel prices have shot up 177 percent during that same period. U.S. airlines burn an average of 22 gallons of fuel for every 1,000 miles each passenger flies. At $2.96 a gallon, airlines are currently spending $322 per passenger just on fuel for a 4,950-mile transcontinental round-trip. Add in the salaries for flight attendants and pilots, plus the cost of buying a new airplane and you quickly see how the airlines lose money. That's why we are seeing all these baggage fees. That and the airlines have cut unprofitable flights. They no longer need the biggest route network; just the most-profitable one.

Scott MayerowitzAmerican Airlines: Will it merge with US Airways?
If I knew the answer to this, I would be working on Wall Street. Or maybe winning big at the casino. But my sources generally think a deal will come together at some point. They just aren't certain if it will happen before or after American emerges from bankruptcy protection and what shape such a combination would take. But that doesn't mean one will happen. Both airlines' CEOs have said they could survive as a stand-alone carrier.

The reason for the merger would be necessity. The combinations of Delta with Northwest and United with Continental created such large airlines. The only way that American or US Airways can offer a large enough route network to compete and secure business travelers is by merging. American brings some lucrative international routes to the deal. US Airways has a strong domestic feeder network, especially along the East Coast, that would feed into those flights. Why not? Well, each airline has its own unresolved issues. Merging might just add to those headaches. Additionally, I don't see the CEOs of American or US Airways necessarily giving up their jobs and one of them would probably have to go in a merger.

How do you think the 787 will change the passenger experience on flying?
I was on the first commercial flight on the 787 on Oct. 26, 2011 and I must say, it's an impressive plane. The windows are bigger. So are the overhead bins. There is more humidity and the cabin is pressurized to a more comfortable level. A higher ceiling – at least the perception of one – reduces claustrophobia. That said, each airline controls how much legroom passengers get. Some are more generous than others. The real change with this plane is the fuel savings and that will open up new non-stop routes that can really benefit passengers.

Let's face it: people really hate flying. I read recently that while consumers complain about the experience, they shop solely on price and thus airlines have no incentive to change.  What do you think about that statement?
The industry has trained us to search for the lowest fare and has done a miserable job of differentiating its product to the public. This has happened through the growth of internet searches where the only variable is price and through decades of nasty fare wars that have trained us that price is what matters most. Even when you look at advertisements today, airlines for the most part focus on airfare. It's only in the front of the cabin where they try to differentiate service and product. I don't see that changing anytime soon.

On the flip side of that, Virgin America has done really well, so customers are clearly willing to pay for an enjoyable flying experience.  Does that mean there is hope for the future?
Virgin America has pumped a lot of money into their planes to offer a different experience. They have yet to make a profit. If they were making money, I would say there is hope for passengers. But until that happens, I don't see many airlines following.

Scott MayerowitzIs there really anything consumers can do to "win"? It seems flying, unless you are in the front of the plane, has become a glorified bus.
Passengers need to remember that they are speeding across the globe at 500 mph. Let's not lose perspective of that. However, yeah, flying has become pretty uncomfortable for many. Getting airline credit cards can help with the fees and ensure that you aren't the last person to board a plane. Paying a few extra bucks for more legroom might be worth it for long flights. Otherwise, wear comfortable clothing, bring some water and a snack, smile and be kind to your fellow passengers. We're all in this together.

What would you say are the biggest mistakes consumers make when dealing with airlines?
Passengers often feel like the airlines are lying to them. In fact, the airline workers probably lack the right information. You would be surprised at how hard it is for one person at an airline to know what is happening outside their little sliver of the operation. If I have a delay, I always look for alternatives and offer them to the airline agent helping me. I never assume that they know of all routing options or alternative airports that I am willing to fly into.

What are three tips you would give someone in regards to flying?
1: Have your paperwork in order. That means knowing your confirmation number, sometimes called a passenger name record. This is how the airline tracks your ticket. Make sure the number you have is the one for the airline, not for the travel agent, which often have their own tracking numbers. It also helps to have your ticket number, usually a 10-digit number found on a receipt when purchasing a flight. You may never need this, but if there is a problem, these numbers will help speed you to a resolution.

2: Print out your itinerary and put it inside your luggage. Bag tags get ripped off all the time. If your suitcase is lost, having your personal information inside the bag will help speed its return. By including your itinerary, the airline knows exactly what flights you are on and how to find you.

3: Place a smaller bag in your carry-on to hold valuable items. More and more passengers are being forced to check carry-on bags at the last second. If this happens to you, the smaller bag allows you to still take medicine, valuables and other must-have items onto the plane with you.

Okay, last question. Let's break out your crystal ball. Where do you see the US domestic market going in five to ten years? No-kid airplanes? Pay fees for everything? Mergers? Fewer options? Higher ticket prices? Take an educated guess!
We're already seeing fewer options for travelers thanks to mergers. More small cities will lose air service – or it will become prohibitively expensive for anybody but those on corporate expense accounts. That means people in remote areas will have to drive 150-200 miles to get on a plane. For everybody else: higher airfares. That's a given. The only question is how high. At a certain point people will stop flying. There will be fewer vacations and more business travelers will adopt video conferencing. We might see low-cost carriers fight for leisure travelers and the legacy airlines fight for business travelers and international traffic. Oh, and there might be cell phones on planes. But that's a whole can of worms that I don't want to open.

To read Scott’s articles on the airline industry, read his page on the Associated Press and you can also find him on Twitter.

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