LaHood Protecting Consumers? Pretending To Protect Consumers?

Some time ago, I asked this question to an audience of airport executives:  If the airline industry is consolidating, shouldn’t the infrastructure supporting the industry consolidate as well?  The converse action of consolidation is fragmentation.  Fragmentation of markets has long been a practice of the US airline industry that has attempted to be everything to everybody.  Fragmented industries earn poor returns.

For example, the LA Basin is served by five airports:  Los Angeles (LAX), Ontario (ONT), Orange County (SNA), Burbank (BUR) and Long Beach (LGB).  Not every airline serves all five of the Basin’s airports.  But in every case the core traffic is Los Angeles traffic and by serving different airports the industry is fragmenting the Basin’s traffic.  Now Los Angeles may not be the best example given its huge population base and underlying wealth.  Nevertheless, the concept is as prevalent in Indianapolis as it is in Atlanta as it is in Washington, DC.

Between 1980 and 2010, LAX has accounted for increasingly less of the region’s domestic traffic.  To compound the problem of intra-regional competition, nominal domestic air fares at each of the five Los Angeles airports were lower in 2010 than they were in 1980.  This is but one reason why the infrastructure needs to consolidate.  Fragmentation produces unsatisfactory and unsustainable financial results.  As individual carriers increasingly realize, airlines cannot be everything to everyone.  Just last week, the following news story hit the wires:  Delta to Adjust Service to Smaller, Underperforming Markets.

As Jad Mouawad wrote in his recent New York Times article Air Service Cutbacks Hit Hardest Where Recession Did:  “. . . the [air service] cutbacks are redrawing the nation’s air service map to reflect the industry’s new priorities and changed economics. As recently as a decade ago, the airlines put a premium on growth, competed on every possible route and sought to connect to even the farthest outposts. Now, they are emphasizing fiscal discipline, which means paring back service to many cities and forgoing unprofitable destinations altogether as higher fuel prices weigh on their bottom line.”

I’ve weighed on this topic before:  Regional Airline and Small Community Air Service: It’s Time to Regionalize, Not Marginalize, the System.  As has analyst Mike Boyd of Boyd Group International whose thoughts in his weekly Hot Flash make clear the topic also will be discussed in depth at The Boyd Group International’s 16th Annual International Aviation Forecast Summit, August 28-30, in Albuquerque, NM.  As with many things Mike, the conference is a no-holds-barred discussion of third rail issues that affect the entire industry, whether airports, airlines, vendors, media, manufacturers and government, to name a few.

Under structural consolidation, a number of airports will ultimately lose direct air service, and more Americans will have to drive farther to get to an airport.  No doubt that for many communities this will come as a shock.  But as is the case with even urban areas, travelers already often bypass the local airport to take advantage of lower fares at another airport a bit farther away.

Unfortunately, the Obama Administration isn’t doing much to help an industry already burdened by regulations, battered by the economy, squeezed by oil prices and constantly beset by competition. Consider the response of U.S. Transportation Secretary Ray LaHood who, in the classic tradition of “I’m from the government and I’m here to help” last week unveiled a new proposed federal rule to force airlines to report more data on fees, baggage and mishandled wheelchairs..

This is an industry that earned a scant two cents on every dollar in 2010 and yet the government wants to dig further into the file cabinets of every airline in the country in a misguided attempt to account for the money those fees are bringing in. In case you have been living under a rock, the genesis of ancillary fees has been among the most covered and scrutinized stories since 2008.  In 2010, US airlines generated $3.4 billion in baggage fees and another $2.3 billion in reservation change fees for a total of $5.7 billion.  What about the fact that the industry’s fuel bill in 2010 was $6.5 billion higher than in 2009?  The Air Transport Association forecasts that the industry’s fuel bill in 2011 will be $14 billion more in 2011 than it was in 2010.  Remember, it was the rising cost of fuel in 2008 that served as the catalyst to unbundle the airline product.

This latest proposed rulemaking coming out of LaHood’s agency under the guise of consumer protection is anything but.  Today fees are not taxed.  The government wants to get its paws on any new revenue it can find and of course the airline industry is targeted.  LaHood’s proposed rule would require airlines to report 16 additional categories of fee revenue in addition to the baggage and reservation change fees.  Outrageous.

Let’s turn the tables.  As a consumer and a taxpayer, I’d like to see a complete breakout of the special aviation fees and taxes collected by the government.  All I get on my ticket is a total: an amount that includes what the ATA counts as 10 categories of special aviation fees and taxes. 

I want to know how much the passenger facility charge is on my ticket.  I want to know how much is going to the Department of Homeland Security for the September 11 fee, immigration fee, the customs fee, the Aviation Security Infrastructure Fee (ASIF) and APHIS Passenger and Aircraft fees.  I want to know how much is going to the FAA in the form of domestic and international passenger taxes, jet fuel tax and the cargo waybill tax.  If the airlines are to report out on 16 incremental items in the name of consumer protection then I want to know where each dollar of taxes and special aviation fees goes.

So as the industry struggles to earn a meaningful profit, LaHood grandstands.  As he states in the DoT press release: “Our goal is to improve the quality of data we collect from airlines and make airline pricing more transparent. In an era of rising fees, passengers deserve better information about how airlines are performing, particularly when it comes to fees, baggage and accommodating passengers in wheelchairs.” 

Meanwhile communities are losing air service.  Maybe if some or all of the tax and fee revenue were returned to the airlines, then fewer markets would be underperforming and thus avoid service cuts.

The conversation about regionalizing air service should begin with a sober assessment of the market and clarity from the Secretary of Transportation on this administration’s vision of what constitutes the right air transportation market. 

This difficult discussion already is underway in some markets, including in Kansas where Dodge City and Garden City are discussing whether or not to form a regional airport. 

The article notes new urgency on the issue in Kansas because Congress may decide to eliminate the Essential Air Service program.

"The EAS program has come under attack in the past, but never really did we feel that the program was in jeopardy," Dodge City Manager Ken Strobel is quoted. "This year, however, there's more concern that the program may be phased out or funding cut substantially.”

The EAS program is but one reason for communities with marginal air service to consider “regionalizing.”  A stark example of another market is Pittsburgh and its catchment area.   There is one strong airport in that catchment area that includes Akron/Canton.  Latrobe, Morgantown, Franklin, Johnstown, Clarksburg, DuBois, Altoona, Parkersburg, Cleveland, Youngstown and Erie.  All have realized decreases in traffic or a total loss of service since 2000.  But demand within this area is the same as it was in 1990, signaling that fact that some areas have far weaker economies than others.

As the industry’s route map is redrawn maybe the Department of Transportation should be thinking about bigger picture things than wheelchairs, data reporting and fee transparency.  Rather than threatening the existing Essential Air Service Program, begin to define what is tomorrow’s essential.  Work with industry to identify the airports of tomorrow (airports serving a region that can fill either a large regional jet or turboprop or mainline with sufficient local traffic) and ensure that money is being spent wisely (as opposed, for example, to building air traffic control towers in Johnstown, PA.)  If it is determined that certain airports are closed to commercial air traffic, then each of those airports should remain closed to that traffic to ensure that regionalization produces positive results for an industry that desperately needs to be run like a business as opposed to a make work project.

Maybe the Department of Transportation turns out to be the agency that behaves the way former Congressman Oberstar behaved toward the industry – standing in the way of progress in building a sustainable system.  But I certainly hope not.

Two Years Ago Today: No Swelblog.com

I cannot believe two years has passed.  Thank you to all that read this blog.  The numbers speak for themselves as I know there are many, many more of you today than there were one year ago by a multiple.  With that said, I do not want to celebrate the blog’s second birthday by getting in the way of the traffic and discussion taking place on my most recent post:  Airline Industry Eyes on the National Mediation Board.

Off to give a lecture.  If you are attending Mike Boyd's Annual Aviation Forecast Summit in Lexington, KY next week, I hope that we will get a chance to meet.  I know I am looking forward to an event that prides itself on free thought.  Thanks again for the support.

Propagating Harm: Senators Boxer and Snowe; and Kate Hanni

The festering issue of whether to enact a Passenger Bill of Rights is on its most aggressive track, both publicly and in Congress. Last week the Senate Commerce Committee approved its version of the FAA Reauthorization Bill. Tucked inside was the Boxer-Snowe amendment, which resurrects the Airline Passenger Bill of Rights nearly two years after it first reared its ugly head on Capitol Hill.

Among other things, the Boxer-Snowe version requires airlines to let passengers off of an aircraft that is delayed on the tarmac for three hours or more.

I ask, is this really a cause for Congress? Is this “issue” worthy of all the angst we see in articles like in the USA Today, which is to my eye drafted to drum up controversy replete with anecdotes and devoid of the relationship to the sheer number of flights consumers enjoy.

It is anecdotal and emotion driven by a populist appeal that seems to be driving this debate. With the airline industry already in fierce competition for customers and revenue, my bet is that the industry is more than capable of addressing this issue on its own as evidenced in the recent focus on operational results. But Congress too often seeks a legislative solution where the private sector should prevail, as we’ve seen before and will unfortunately see again. And in these cases, it is clear that the law of unintended consequences is alive and well.

At MIT, I am fortunate to work with learned academics and industry experts who produce a volume of impressive research on airline operations and performance and schedule recovery. Among it is some interesting data that shows airline schedule planning may actually propagate the kind of air travel delays that has some in Congress pushing bills that very likely will add to, and not ameliorate the problem.

Professor Amy Cohn of the University of Michigan is a Sloan Industry Studies Fellow researching the passenger airline industry. Her research illustrates that plans that look good on paper often do not perform well in practice. Cohn argues that, with the complex nature of airline networks, a little “slack” built into the schedule actually improves performance – but offsets the benefits of system optimization. Much good work has been done to make this capital and labor intensive industry as efficient as it can be, particularly given the many variables that affect performance – from a crew member calling in sick, to a mechanical problem, to a geopolitical event, or to the weather.

Consumer Benefits of Airline Schedules Have Been Significant

Schedule planning has provided a wide range of benefits – primarily for consumers. Over the past 20 years, passengers have seen connecting times fall significantly – which is particularly important to those who do not live in hub cities and face a combination of flights to get to their desired destinations. This opaque airline practice has resulted in more productive time for the airline passenger. It has helped to make airlines significantly more efficient because time saved on the ground translates into money saved for the airline. These cost savings have also been passed along to consumers in the form of lower fares

In addition, schedule optimization has permitted added frequencies to non-stop destinations, providing consumers a wider array of departure times and, in some instances, a wider choice in carriers and hubs.

All Anecdotes, Few Facts and Little Analysis

Federal legislation like the Passenger Bill of Rights proposal could significantly undo the progress the airline industry has made. And the real shame is that the legislation borne of one unfortunate delay and an angry but media darling passenger activist named Kate Hanni is the product of anecdotal, and often unsubstantiated evidence rather than serious analysis. Anecdotes produce sensationalist stories like the one in the USA Today. But real research tells a different story. According to the Air Transport Association and the US Bureau of Transportation Statistics, all but one of the airline efficiency metrics are at their best levels since 2000, including flight cancellations as a percent of domestic departures, on- time arrival rates, mishandled bags, customer complaints, and taxi-out times in excess of three hours.

So why the focus on an arbitrary three hour time limit? Why not two hours? Why not three hours and 17 minutes? As it is, the legislation now in Congress is designed to affect no more than .014 (1q’09 according to ATA) percent of domestic passengers. Of that small subset of passengers, who, if anyone will actually benefit from the legislation? Well that depends on how many of those passengers would rather wait a little while more in hopes of getting clearance to take off, and how many would prefer to return to the gate and call it a night and risk the ultimate arrival. Now I will add that in order to wait out a delay, there is a rightful expectation of a fully functioning aircraft and onboard amenities that allow a bearable experience.

Who Wins?

The truth is, you can’t legislate smooth travel conditions. Weather is a reality and weather causes delays. And yes, delays add to the angst of travel and wets the appetites of those in the media that thrive on the travails of travel. In those cases of severe weather and flight irregularities, some fliers may be happy just to wait out the delay if it means getting to their destination. A return to the terminal, after all, just adds to the chaos for later flights as the airline struggles to get crews on planes and passengers on their way. And the issues propagate. Imagine the mood on a plane queued to take off following a weather delay if the pilot suddenly announces that they are headed back to the terminal because Congress says they have to. Whose “rights” does that protect?

What Does This Have to Do With Reauthorization?

Of the .014 percent, or the .01 percent of domestic departures during the first quarter of 2009, of domestic passengers impacted by tarmac delays greater than three hours, shouldn’t we also be asking how many of those delays could possibly be laid at the feet of Congress and the government because they did not keep their promise of upgrading the air traffic control system? That’s a legislative solution that would benefit all airline passengers, every community and the industry itself. Whereas the USA Today article was largely sensationalistic with its statistical story and included vignettes about crying babies and the like, at least the reporter talked to an airline and a knowledgeable consultant about the old and inefficient air traffic control system.

The USA Today article rightly makes this case. "Because of the antiquated air-traffic-control system in which we — and every airline — operate, we're restricted as to the operational improvements we can make," Bryan Baldwin, spokesman for JetBlue Airways, told the newspaper

Aviation consultant Michael Boyd said airline CEOs "should form a conga line" to the FAA and demand the country's air-traffic system be modernized. That could increase airspace capacity and reduce the number of waiting planes.

That alone would do far more to reduce congestion and delay than would a phony and likely counterproductive passenger “bill of rights.”

Don’t get me wrong. The airlines deserve some blame here. We would not be facing the prospect of such a ludicrous proposal if the airlines did not fail their passengers and fail them more than once. But remember, they do operate nearly seven million flights per year - significantly more than when competition was born. Their failures pale in comparison. Passengers could, and have, experience serious repercussions from a prolonged wait on the tarmac – whether from lack of food, water, medicine or simply the need to get off the plane and attend to personal matters. But that is an issue that can be solved with a directive, a renewed focus on customer service and basic human comforts, not a piece of legislation that certainly will result in unintended consequences. Airlines and airports are making progress on that front and addressing delays that they can control. But last I checked, weather was not among them.

This issue needs study – a very detailed study – and it sure as hell is not the 2008 ARC study - on the issues . There is a solid foundation of scholarly work to build on and adapt that work to this particular issue. Those that perform the study need to understand how airline operations work and then determine how an airline can best address the anecdotes (outlier events) given the unique constraints placed on airlines, airports and the air traffic system each and every day as there is no one size fits all solution that seems to be called for in the ill advised Boxer-Snowe legislation.

The real issue is in the root cause of airline delays, and the answer will be found to incubate in the air traffic control system. The FAA reauthorization bill comes around only once every so many years. Is Congress going to use this opportunity to pass a meaningless “protection” for a few passengers, or take a bold step and do what it takes to build a better air traffic control system for the good of all?

I thought the administration was going to take parochial interests out of legislation. This legislation should be about funding the FAA in order to modernize the air traffic system and increase its safety – not tarmac delays; not propping up a non-essential Essential Air Service program; and certainly not about anti-trust immunity.

More to come on these issues.

The next post will examine the baseline of pay and productivity issues the airlines face as labor seeks to return compensation lost from past negotiations.