Air Fair?

Any way you juggle the numbers flying has never been cheaper when compared to average weekly earnings and it is amazing value even with all the add-ons and fees that are provoking debate.

Consumer groups are shrill in their relentless condemnation of airlines for the host of so called exorbitant charges that are supposedly ripping passengers off.

In December, last year Choice magazine took the criticism to a new level launching a super complaint with Australia’s Competition and Consumer Commission lashing airlines over what it claims are “unfair fees” and alleges that “travellers are ill-treated” with regard to these fees.
In the US, extreme airline consumer website FlyerRights.com has accused major US airlines of taking air travel to a new low suggesting the new basic economy is just “another money grab”.

The consumer group also expressed concerns that a U.S. Department of Justice probe into whether the major US carriers colluded in expansion plans was being scaled back for lack of evidence.

The group also claimed that flying in the US was “exorbitant compared to Europe’’ which seems a bizarre claim considering the US has airlines such as Spirit which has one-way fares from Chicago to Boston for US$49 and to LA for US$94.

Certainly, most legacy airlines have changed their pricing model – thanks to computerization – to both offer a tailored product and to compete with Ultra Low Cost Carriers who offer rock bottom fares.

The reality is they have no choice because surveys show that 70 per cent of travelers cite price as the main driver in their choice of airline.

Surveys show that 70 per cent of travellers cite price as the main driver in their choice of airline

With global travel websites ranking airlines by price legacy carriers must have a low-ball product to figure in the website ranking.

Long gone are the trusted travel agents as the main source for booking passengers. Their experience in advising passengers of the pitfalls of one airline over another has been replaced by websites with price the only factor.

Airlines also argue correctly that these days one size certainly does not fit all when it comes to product and fares.

Whereas once travelers had two choices of First and Tourist (Economy) class with the same fare levels year-round today passengers are faced with a mind-numbing array of product and fare options.

Are we really being squeezed?

Certainly, the space in economy is less but countering that, the options for economy passengers have never been greater.

An Australian Aviation investigation of the Sydney to London air route – which has been liberalized but never de-regulated – shows extraordinary declines in airfares since 1955. In a first the investigation also looks at the reduction or increase in space of each class.

In 1955 the First Class return fare to London was $1344 and Economy a little cheaper at $1074.30 while the average weekly earnings were $32.30.
Translated into today’s average weekly earnings of $1575 the equivalent pricing is a return fare of $65,536 and $52,385 respectively!

In 1964, when jets were first introduced to Australian domestic skies, the average yearly earnings would buy only nine return flights from Perth to Sydney — today the number is more than 250, based on the lowest discounted price.

On international routes the two cabin classes of 1955 have been replaced in most cases by four, with business class introduced by Qantas in 1979 and premium economy added by British Caledonian in the early 1980s.

The two most significant falls in fares occurred in the 1960s when jet travel became widespread and then in the 1970s with the introduction of the 747, DC-10, Tristar and A300.

The Sydney-to-London economy fare fell 45 per cent between 1959 and 1970 and plunged 64 per cent over the next 10 years as airlines took delivery of widebody equipment.

In the 1970s the late Sir Freddie Laker introduced mass travel on DC-10s, prompting traditional airlines, that were faced with competition, to add more seats to their aircraft to compete or ward off the threat.

All 747 operators increased the number of seats by reducing the distance between rows and adding a seat across the width.

Initially the 747 had a 3-4-2 configuration with seats set at about 34 inches apart in economy, today that has reduced to 31 or 32 inches. Likewise, the generous 2-4-2 configurations on DC-10s and Tristars gave way to 2-5-2 layouts.

Airlines protest that current seats are thinner thus the seat pitch has been maintained but a check of the seat plans reveal more rows that those of the early 70s.

The fact is that the economy space on a widebody aircraft has reduced by 13.7 per cent since the introduction of the 747 in 1970. However, the number of weeks required to earn the economy return fare over the same period has plummeted by a staggering 91 per cent.

The Business Class equation however, has a twist.

In the early 1980s the return fare from Sydney to London was around $1,600 or seven weeks’ salary whereas today the fare is around 5.50 weeks’ salary – a seemingly modest reduction.

However, what has changed is the space which has more than doubled from a basic seat (TAA DC-9 first class seat) to a lie flat bed or suite.

Expressed in a dollar per cubic foot measure over the same period the cost of business class has dropped 63 per cent.

Premium Economy has emerged as a real value leader.

Introduced by British Caledonian PY gained wider momentum in the last decade as airlines realised that seats would be filled not by downgrading business class passengers but upscaling economy passengers looking for some separation and extra legroom room.

Premium economy has also declined in price. In 2000 the return PY fare to London was $4000 or five weeks’ average earnings and today its $3,600 or just over two weeks’ salary.

During the same period the personal space has stayed virtually static, although Qantas is set to up the ante with what it calls a revolutionary new seat for its Boeing 787-9s.

PY passengers also get a dedicated cabin, typically business class food and wines and dedicated check-in.

Fascinating numbers and products

The Australian Aviation investigation has thrown up some fascinating numbers that put today’s fares in perspective.

The weeks of salary required to buy a return economy fare to London in 1970 – 15.7- would buy two first class tickets today.

The weeks to earn an economy tickets in 2000 is the same as premium economy in 2017 while the number of weeks’ salary for an economy ticket in 1990 is almost the same as business class today.

What well-meaning consumer groups also fail to mention are the host of options that are offered to economy passengers today for more legroom and even a spare seat.

Air New Zealand and Virgin Australia are excellent cases in point.

The kiwi airline introduce the Skycouch set of three seats that convert into a bed in 2010.

In January, for a May flight from Perth to Los Angeles return the fare (for the three seats) for one adult and two children was a total of $3473.68. Two adults return was $3635.12.

The airline also sells any vacant economy seats for about $100 a sector.

Its premium economy zone, which started with just 12 seats on a 747 in 2005 is now 44 seats on the 777-300ER.

Virgin Australia not only offers premium economy it has also added Economy Space + and added options to make it more enticing.

On domestic routes passengers need only part with as little as $10 one-way for the new product on and receive priority boarding, at least 25 per cent more legroom in exit or first row seats along with what the airline calls “preferred” overhead lockers.

On short-haul international flights passengers get access to dedicated check-in and the cost starts at $50 one-way.

For long-haul on the airline’s Boeing 777-300ERs there are five rows of Economy Space + seating in a secluded cabin area behind premium economy.
The package also includes premium noise cancelling headphones and a guaranteed first meal choice.

Prices vary by route, market, and fare type with the long-haul option topping out at $165 one way. The option appears as an extra during the booking process.

The product follows the trend launched by the US majors last decade.

US blues

Most of the criticism by consumer groups in focus in the USA where the big three – United, Delta and American – are rolling out what is called Basic Economy.

The airlines argue they are simply matching the fares of the Ultra-Low Cost airlines – Spirit, Frontier and Allegiant Air – which have set a new low in airfare bench marks and product in the US.

In a statement, American Airlines President Robert Isom said: “American Airlines now has something to offer every customer, from those who want simple, low-price travel to those who want an ultra-premium experience via First Class.” He added: “Importantly, this new fare product also gives American the ability to compete more effectively with the growing number of ultra-low-cost carriers.”

There is no new cabin – just unpopular centre seats at the back of the bus and a ban on anything except what will fit under the seat in front such as a purse, very small backpack or laptop bag. Any other bag must be checked as a cost of US$25 upwards.

However once on board passengers on the Basic Economy Fare will still get the same complimentary soda, water and snacks as well as inflight entertainment.

But again, consumer groups ignore the bigger picture of the dramatic reduction in fares for US citizens.

Since 1970 the average yearly salary in the US has risen 370 per cent to US$44,000 while the return transcontinental airfare with American Airlines (midweek April 2017) has risen only 33 per cent to US$400 return. And that fare is not a special nor the new Basic Economy.

Expressed in number of weeks to earn, in 1970 it took an American two weeks to buy a transcontinental return flight and today it’s just under half a week’s salary.

Expressed another way by the US airline association Airlines For America (A4A) the average return fare adjusted to 2015 dollars in 1980 was $650 and in 2015 it was $375.

Profit Squeeze

Consumer groups are also lashing US airlines in particular over the recent robust profits but on average airlines only retain $7.54 for every passenger carried according to IATA.

For 2016 IATA forecasts the industry will make US$35.6 Billion which is a record and a record margin of 5.1 per cent. While 2016 is the third consecutive year (and the third year in the industry’s history) in which airlines will make a return on invested capital (7.9 per cent) which is above the weighted average cost of capital (6.9 per cent) the future is softer.

For 2017 IATA suggests a net profit of US$29.8 billion.

Alexandre de Juniac, IATA’s Director General and CEO says we need to get these numbers into perspective.

“Record profits for airlines means earning more than our cost of capital. For most other businesses that would be considered a normal level of return to investors. But three years of sustainable profits is a first for the airline industry. And after many years of hard work in restructuring and re-engineering the business the industry is also more resilient.”

Certainly, the results have been more bullish in North America where the consumer groups have been most vocal but US airlines are well behind the rest of the world in fleet re-equipment.

According to IATA the net margin for the region’s carriers is expected to be the strongest in 2017 at 8.5 per cent with an average profit of US$19.58 per passenger.

However, the fleet age at Delta, and United are amongst the industry’s highest.

According to AirFleets.net Delta Air Lines has 838 with an average fleet age of 17.1 years and United has 725 aircraft with an average age of 14.1 years.

Delta has 245 aircraft on order but needs more to bring its fleet age down to an industry average of 10 years and that takes solid profits.

Airlines such as Delta and United are only now announcing the phasing out of their ageing 747 fleets in favour of Boeing 777-300ERs and the A350.
United has 193 aircraft on order and is deliberating on another major buy – only made possible by solid profits.

Another hot topic from consumer groups is ancillary revenue. In the US according to A4A in the three years from 2014 to 2016 average US domestic airfares have declined 7.37 per cent from $376.24 to $348.49 while ancillary revenue has crept up by only 0.13 per cent from US$ 22.87 per passenger to US$ 22.90.

The stark reality is that since de-regulation in 1979 US airlines up to the third quarter of 2016 have made a cumulative loss of US$5.6 billion.
And according to the American Customer Satisfaction Index consumer satisfaction with airlines in the US has climbed 10 points to 75, excluding ULCCs. Other surveys have satisfaction levels up in the 90s.

In Australia, the story is the same with Qantas achieving a domestic satisfaction rating of 87 per cent on mainline flights and Virgin Australia 79 per cent according to Roy Morgan Research.

Naturally airlines such as Jetstar scored lower at 68 per cent which is still high for a LCC.

The airline industry continues to be an easy target for consumer groups because the dynamics that drive it of high capital cost, cutting edge technology and rock bottom returns are so complex and difficult to understand by the wider public.

In any debate the airline industry’s extraordinary record of reducing airfares in relation to inflation and average weekly earnings must not only be taken into consideration but must be the major platform of the discussion for when it comes to things that fly nothing is what it appears.

Certainly some practices such as the add-ons are irritating but in a way it is different to going into a department store to buy some socks and coming away with a suit!

Consumers have choices and airfares are at their lowest level ever and the range of products and options has never been greater and thus the claims from many consumer groups are ill founded and in some US cases reckless.