Over the past week, the airline industry has been hit with a triple whammy. Oil seems to have settled into a comfortable range of trading at over $105 a barrel, three U.S. airlines bit the dust, and the annual Wichita State Airline Quality Rating once again named the airline industry as a disaster.
What does this mean to you as a consumer? You will need to open up that wallet just a little bit wider. The airlines, already struggling financially, will be negatively impacted by all three events, resulting in cutbacks and the airlines needing to find creative new ways to generate revenue.
The recent loss of Aloha Airlines, ATA and Sky Bus shouldn't have much of an impact on the global traveler but certainly has and will continue to affect the regional traveler. Perhaps the hardest hit will be intra-island traffic in Hawaii. Fortunately, both Hawaiian Airlines and Go have been picking up the slack in this area. But when three airlines bite the dust at the same time, you can be sure that what is left is a large number of both unusable tickets and irate travelers.
Rebounding from increased fuel costs and competition, not to mention a distrustful public, is hard enough without the Wichita AQR Report adding to the burden. While the published results on the quality of the airlines shouldn't be big news to most travelers, I personally find the report dubious, as historically the AQR is decidedly pessimistic.
The real news is the behavioral shift taking place in the airline industry. This shift is giving consumers low fares, while dinging them on the back end in terms of ancillary fees or a la carte pricing.
Over the years the airline industry has done one thing very well--shifted the buying habits of consumers. Think of online ticket sales: Airlines have successfully oriented buyers in the direction of online travel. PhoCusWright estimates that for the first time, online U.S. travel bookings will surpass offline bookings, while eMarketer estimates that 41.3 million U.S. households will book travel online. According to eMarketer, online travel sales will climb from $79 billion in 2006 to over $146 billion in 2010.
Remember those bulky paper tickets you waited for in the mail? Well, no more waiting. The paper airline ticket will become extinct by May 31--less than two months from now. According to the Air Transport Association, three years ago worldwide electronic tickets accounted for only 16% of all airline tickets; today the number is over 84%, and rapidly increasing toward 100%. As a side note, it is estimated that consumers save an average of $21 per ticket when booking online.
All of this directly impacts the cost airlines incur to get you on the plane. In the past, airlines relied on travel agents to sell their wares. No more, as online is the norm. Likewise, in the early days (a mere few years ago), airlines relied on third-party Web sites to sell tickets. No more, as airlines' propriety sites have become better than most secondary sites.
The act of shifting buying patterns away from travel agents to airlines' Web sites is estimated to have saved airlines billions of dollars annually--sorely needed at a time of record-high oil prices. Likewise, electronic tickets have reduced the cost to generate a ticket from $10 to $1.
Cutting distribution costs is an action that has become the airline industry's best friend. This has been the one area where airlines can lower operating costs without rocking the boat. Labor costs are hard to attack, due to unions and the collateral damage of unhappy employees, and fuel costs are inviolate and difficult to gauge.
Logically, the next step in cutting distribution costs is making a full-frontal attack on credit cards. This topic has been on my mind recently as I prepare to present at the Airline Payment Summit in Toronto this week. It is estimated that for each ticket booked with a credit card, airlines are charged a merchant fee ranging from 2% to 3%, or around $10 to $15 per ticket, roughly $3 billion for the world's airlines.
What's the solution? Get ready for your airline to charge you next time you use a credit card. Will this result in a revolt among travelers? Probably not. This is just another example of how adept airlines have become at getting consumers to switch to behaviors that benefit the airlines. The newest entry in the unbundling of what used to be included in fares or a la carte pricing, are fees for checking in more than one bag. Many carriers now charge up to $25 to check in a second bag. Check in a third bag and expect to pay up to a whopping $100. This opens the doors for more fees down the road.
However, all is not lost, as imposing a surcharge for using credit cards is going to require some creative thinking. Although a Truth in Lending ban on surcharges expired in 1984, both Visa and MasterCard prohibit surcharges, while American Express discourages them. However, a small number of carriers do charge "handling fees" for credit card payments made on their Web sites. These airlines include Qantas, Singapore Airlines and the U.K. trio of British Airways, Virgin Atlantic and BMI British Midland. Singapore Airlines' site says "a small number of payment-card issuers may charge a transaction fee for booking on our Web site." My best bet is that airlines will find a way to structure some sort of surcharge to recoup costs associated with credit cards.
What can you do as a consumer? If past history is any precedent, then there will most likely be a few ways to avoid these fees. The key is to adhere to a mantra I've been crying about for years and detail in the new edition of the Penny Pincher's Passport to Luxury Travel, which is to build loyalty with one airline and strive for at least the minimum level of elite membership.
The formula is simple: Airlines reward those who are loyal and disproportionately penalize those who are not. Many of these unbundled fees do not apply to elite members or those flying in first class. While sitting up front takes a little work, achieving elite membership is fairly easy for most fliers. In fact, it's now possible to earn most of your qualifying miles on the ground, as is the case with Delta Air Lines' American Express SkyMiles card, which can yield 20,000 of the necessary 25,000 annual qualifying miles. Another possible route for avoiding credit card surcharges is to use an airline's co-branded credit card. In their quest to maintain vertical markets, I suspect that you'll find using your co-branded card a bigger benefit than imagined.
When it comes to air travel, consumers have certainly been in the driver's seat. Competition has bred low fares, allowing travelers to fly across the lower 48 states for less than $200 or across the Atlantic or Pacific for only $500. Recent changes in operating costs will force airlines to rethink and retool their revenue streams. Rather than increase fares, it is more likely they will increase the number of a la carte items that travelers pay for. Remember when you could get food aboard a flight for free?
A la carte pricing is bound to sting. Fortunately, immunity can be found with a little loyalty. The choice of paying now or later is up to you.