Even as costs soar, Southwest, other airlines score record profits

A year ago, U.S. airlines were beaten down and losing billions of dollars. This year, most are posting record profits. The reason for the turnaround, in a nutshell: revenue.

Ancillary fees such as bag charges and change fees, higher fares and more passengers have combined to boost the industry’s results, even with higher costs.

The latest record-setters Thursday included Southwest Airlines Co., Alaska Air Group Inc . and JetBlue Airways Corp., all of which said their third-quarter earnings establish new highs for them, excluding special items.

United Airlines Inc. and Continental Airlines Inc ., which merged Oct. 1 into United Continental Holdings Inc., combined for net income of $741 million in the third quarter, or $840 million excluding items.

As a group, the eight large carriers that have reported so far boasted net income of $1.87 billion in the three months ending Sept. 30. A year earlier, they lost $588 million.

Through nine months, the same carriers have earned $2.3 billion. Last year? A loss of $3.1 billion. That’s a $5.4 billion turnaround from 2009.

“Oh, my,” Southwest Airlines chairman and chief executive Gary Kelly told analysts Thursday, “what a difference a year makes.”

Normally, such a boost in an industry’s earnings is driven by a combination of cost cuts and revenue increases. That’s not the case in 2010.

Airlines aggressively reduced their expenses and slashed their capacity and head counts beginning in 2008 as they struggled first with high fuel prices and then with a worsening economy.

With little more to cut in 2010, most airlines have seen their expenses creep upward.

 

Even as costs soar, Southwest, other airlines score record profits | News for Dallas, Texas | Dallas Morning News | Dallas Business News.

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Low-cost carriers don’t mean cheapest fares – Travel – Business Travel – msnbc.com

I looked first at JetBlue’s rates, hoping it would be price-competitive,” said Winship, who publishes FrequentFlier.com. “But its prices were significantly higher than what I found on other airlines.”

Winship ended up flying American Airlines instead on trips from Los Angeles to New York and Boston, purchasing nonrefundable fares with advance purchase requirements that were at least $50 cheaper roundtrip than what JetBlue offered, he said. United also had lower rates than JetBlue to New York, as did Delta to Boston.

Despite their name and reputation, so-called low-cost airlines do not always offer the cheapest fares.

Low-cost carriers, including Frontier, JetBlue and Southwest — which last month announced it was acquiring rival AirTran for $1.42 billion — carry 30 percent of domestic passengers today, said Peter Belobaba, manager of the Global Airline Industry Program at the Massachusetts Institute of Technology.

Airlines such as American, Delta and United — which recently combined with Continental — have responded to low-cost carriers moving into their territory by matching and even undercutting fares to protect market share and “to prevent them from growing any larger,” Belobaba said.

In some cases, low-cost carriers have even needed to raise fares and put in more restrictions, Belobaba said, citing a spike in jet fuel prices between 2006 and 2008.

Competitive fares
At the same time, low-cost airlines have been adopting increasingly sophisticated yield management and reservations systems to manage their fare inventory, according to Michael Derchin, airline analyst of CRT Capital Group in Stamford, Conn. Among these are JetBlue, which recently began using Sabre, and Southwest, which has announced plans to upgrade its reservations system.

Low-cost airlines currently offer five to seven fares on one domestic flight, compared to some 30 fares with varying restrictions offered on a legacy airline’s domestic flight, said Ike Anand, Expedia’s director of airline strategy. When setting rates, legacy airlines must also factor in whether passengers will connect to other domestic or international flights, which tends to make some fares higher.

“The perception that low-cost airlines have the lowest fares is no longer correct. Everyone who competes has the same fares,” he said.

Carriers today “are often competing more on their service reputation rather than price,” said George Hobica, founder of Airfarewatchdog.com, a website that tracks fares. “People like JetBlue’s newer planes, extra leg-room, television, friendly service and new terminal at JFK, and are willing to pay more for that,” he said.

If price is your only consideration, airfare experts suggest comparison shopping between the website of the airline you’re considering, on online travel agencies like Expedia, Travelocity and Orbitz and Vayama.com, which specializes in international air travel, and on “meta-search” sites like Kayak.com, Mobissimo.com, Fly.com and Bing Travel. These will search fares being sold online and show you the cheapest ones available.

If you’re considering flying on Southwest, bear in mind that it does not cooperate with any on-line travel agency or meta-search engines, and only sells fares through its own site and off-line agencies.

“Southwest wants to drive customers to its own site, which generates 80 percent of its ticket sales. This makes it more difficult to compare Southwest’s fares with those of other airlines. It’s great camouflage when Southwest’s fares aren’t the cheapest,” said Henry Harteveldt, San Francisco-based travel analyst for Forrester Research.

Factor in fees
There are many other factors that should be considered before making a fare purchase.

First, make sure you fully understand what the total cost of your flying will be: Even if Southwest’s fare is higher than its competitors’, Southwest doesn’t charge to check up to two bags. And if you study deeply discounted fares offered by Spirit Airlines through its $9 Fare Club, you will see the penny fare the airline promises doesn’t include taxes and other mandatory air travel fees, or fees Spirit charges for baggage-checking and pre-reserving seats.

When choosing fares, business travelers often have a different set of considerations than leisure travelers. Isabel Torres, senior vice president of Ovation Corporate Travel in New York, said her company might steer clear of low-cost carriers like Southwest that don’t offer pre-reserved seat assignments. She said they also would probably avoid booking rock-bottom, nonrefundable fares sold by any airline if there were a chance their travel plans might change, or they unexpectedly had to extend their stay.

Business travelers’ fare choices are often “guided by their companies’ travel polices,” Harteveldt said. If they are frequent fliers, he said, they might find legacy carriers’ loyalty programs more attractive than those of low-cost carriers. Legacy carriers’ participation in global airline alliances creates more opportunities to earn and redeem points than low-cost airlines’ programs.

Other services business travelers might prefer — like dedicated check-in and security lines at airports and airport lounges — generally are available only on legacy airlines, said Darin Lee, a Cambridge, Mass.-based principal of LECG, a consulting firm.

If you can shop around long in advance of your departure — something more likely to be the case for leisure than business travelers — experts advise being flexible. Low-fare availability can be influenced by the time you choose to fly and the airport you choose to fly from. Thus, flights that leave during non-peak travel hours are often cheaper, as are those that leave from secondary airports, like Midway in downtown Chicago. Also consider taking one airline on your outbound trip and another on your return trip, pricing that is available on sites like Expedia.com and that can sometimes be cheaper.

However low fares might be today, jet fuel prices are always a wild card. “A spike in jet fuel prices will put pressure on airlines to raise their fares to cover their costs,” said Dan Kasper, managing director at LECG.

In other words, where fuel prices go, fares will follow.

Low-cost carriers don’t mean cheapest fares – Travel – Business Travel – msnbc.com.

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No more first class? Some airlines mull changes

For corporate road warriors and luxury-focused leisure travelers, it’s often comfort, not cost, that rules.

But in the current economic downturn and flurry of mergers, first-class and business-class airline seats may be an endangered species.

Southwest Airlines recently announced that after its planned merger with AirTran Airways, it will not continue premium service on AirTran routes now offering it.

Rahsaan Johnson, a spokesman for United Airlines, said the company has not decided whether it will keep first class on international fights, like United now has, or shed it, like Continental Airlines, which offers a combined business/first class, when the two carriers merge. Both currently offer first class on domestic flights.

“It is a very important differentiator,” Johnson said, and upgrades “drive significant loyalty.”

The future of premium seating

“It’s the key to profitability for many airlines,” said Steve Lott, a spokesman for the International Air Transport Association, a trade group. In the first half of this year, passengers traveling on premium seats represented less than 8 percent of the total traffic but contributed up to 27 percent of passenger ticket revenues, according to the association’s most recent monthly report that tracks international traffic in first and business class.

“Airlines need to pay close attention to passengers who are prepared to pay a premium,” he said, by upgrading products and services like meal and wine service and entertainment offerings that include amenities like Bose noise-canceling headphones. The bar is always being raised higher and higher. Today, it’s the race to install lie-flat beds, he said. “One of the few places where airlines can highlight their differences is in the premium cabin.”

Scott D. Nason, a former American Airlines executive, now an aviation consultant, said many carriers are improving business class but have eliminated first. “Business class sells and first class by and large does not,” he said.

Some carries keep first class to sell business-class seats by offering upgrades or as leverage. If two airlines vie for a corporate account, the carrier with first class may win the account. And business class upgrades drive sales in economy, too, Nason said.

Jim Strong, co-owner of Strong Travel Services in Dallas, said that kind of philosophy has backfired.

via No more first class? Some airlines mull changes – Travel – Business Travel – msnbc.com.

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Some airline fees up by more than 50% – USATODAY.com

Airline fees are steadily increasing — some by more than 50% since a year ago, a USA TODAY analysis shows.

The analysis, which compared 13 U.S. airlines’ fees today with those in effect in June 2009, also reveals that passengers are encountering new types of fees.

Six big U.S. carriers now have priority boarding fees, and Spirit Airlines has begun charging for carry-on bags.

The numerous fees are a sore subject for many fliers, but their dissatisfaction hasn’t deterred airlines from bringing in record revenue from additional fees.

U.S. airlines brought in $2.1 billion in ancillary revenue during this year’s second quarter, including nearly $893 million from checked-bag fees and about $600 million from changed reservations, government statistics released Sept. 20 show.

That’s up 15.8% from the same period the year before.

USA TODAY’s analysis shows that:

•Most U.S. airlines charge $23 or $25 for a first checked bag. Only Southwest and JetBlue do not charge. Most airlines charged $15 — and four airlines charged nothing — in June 2009.

•The most expensive change fee for a coach ticket has jumped from $250 to $300, which American charges for some international flights. The most expensive change fee for Continental, Delta, United and US Airways is $250.

•Booking a reservation by telephone — even for a free frequent-flier ticket — can be costly. US Airways charges an extra $35 for a phone reservation for an international flight. Allegiant Air charges a $29.98 round-trip booking fee and a $14.99 convenience fee.

•The most expensive fee to cut the line and board before fellow passengers is $39 charged by United. The airline also has less expensive priority-boarding fees.

•The maximum charge for a preferred seat on some United Airlines flights has jumped from $119 in June 2009 to $159. Such a seat offers 5 more inches of leg room than other coach seats.

•Continental says it’s not new, but the airline and at least three other carriers — American, Hawaiian and US Airways — charge a little-known fee for passengers who request receipts after they have flown. Continental charges $20 if a passenger requests a receipt more than seven days after a flight. US Airways charges the same amount if a receipt is requested more than 30 days after a flight.

via Some airline fees up by more than 50% – USATODAY.com.

Southwest Airlines’ Big Deal: It Had Little Choice – BusinessWeek

Chances are good this autumn Monday morning that many are questioning the wisdom of Southwest- an example of a “successful” airline, i.e., one its customers do not despise – buying AirTran Airways.

In many ways, there was little choice. The world’s two biggest airlines, United and Delta, now have their merger approved. They are aimed squarely at reclaiming the profitability and passengers that Southwest (and other discounters) so deftly stole over the past 20 years. They are not the same competitors Southwest faced when it was a scrappy newcomer with far cheaper expenses. The big guys are now bigger, leaner, and more dominant on many routes. The playing field is not what it was just a year ago.

The successful niche Southwest carved as a medium-sized player won’t work once the domestic industry becomes the massive trio of United, Delta, American and a bunch of other guys. From the perspective of competing, everyone else could just be road kill.

There are immediate benefits to the acquisition, which would be Southwest’s largest. AirTran flies to Mexico and Latin America, markets Southwest has coveted but floundered in figuring out how to reach them. And the fleets are essentially the same, although Southwest will now have some seven dozen Boeing 717s in its fleet from AirTran. But that legacy model was headed to retirement anyway in a few years as AirTran had moved to the larger 737 for future purchases.

Southwest partisans may be a little sad, worried what may happen to their airline. It’s not an unreasonable concern but Southwest is full of able managers focused on protecting their core franchise: harmonious relations with the public.

The biggest concern for Southwest in this deal will be, as usual, the blending of two cultures that aren’t terribly similar. Southwest is notoriously choosy about new hires and sends them to extensive training on how to fit into the company. AirTran, on the other hand, has had no such luxury for its HR needs. Expect some bumps in that part of the integration. But don’t think AirTran is the end of the M&A line for Southwest. If this deal works, it may well feel pressed to add more airlines in the race to compete.

via Southwest Airlines’ Big Deal: It Had Little Choice – BusinessWeek.

Southwest Airlines to Buy AirTran for $1.4 Billion – BusinessWeek

Sept. 27 (Bloomberg) — Southwest Airlines Co., the largest low-fare carrier, agreed to acquire AirTran Holdings Inc. for about $1.4 billion in cash and stock, giving it access to Atlanta, the busiest airport in the U.S.

The offer values Orlando, Florida-based AirTran at $7.69 a share, 69 percent more than its closing price on Sept. 24, Southwest said today in a statement.

Atlanta is the largest U.S. market Southwest doesn’t already serve, the carrier said in the statement. The acquisition also allows Southwest to expand its presence at main U.S. airports including New York’s LaGuardia and Boston’s Logan. The announcement comes as UAL Corp. merges with Continental Airlines Inc., creating the world’s largest carrier.

via Southwest Airlines to Buy AirTran for $1.4 Billion – BusinessWeek.