Summer Travel '06, the Sardine Chronicles

April 11, 2006 — -- Breathing a collective sigh of relief has long been an annual springtime tradition for America's airline leaders.

After surviving the lean cash flow months of January through April -- with a little added help from the number of people flying over spring break -- even the worst-managed airlines have always looked to their summer sales as the potential savior of their annual bottom line.

After all, America goes on vacation in the summer -- roughly from mid-May through mid-September -- and with the rising demand that starts in mid-May for airline seats to just about everywhere, even the management team of Doofus International Airways is able to make a buck by simply ending the spring specials and other promotional fares that packed their planes during the down months, and letting the natural increase in passengers at normal prices pay the bills for much of the year.

Unfortunately, there are no "normal prices" anymore, and finding airline profits in a sea of red ink this year is going to require more than just an end to the specials. Instead, the summer flying season of 2006 will be marked by noticeably higher prices for fewer flights, and most of those will be packed to the gills.

Even though what's about to happen this summer will seem painful -- higher prices and overcrowding -- it's the beginning of a very necessary adjustment, without which a progressive collapse of more major carriers would be just a matter of time. The story of how we got to this point is something every airline consumer needs to hear, because it's a cautionary tale best summarized in the old adage, "If it seems too good to be true, it probably is."

Basically, for the last three decades, we've enjoyed lower and lower prices without realizing that our airline industry has been hooked on the self-destructive habit of selling its product -- the airline seat to somewhere -- for significantly less than the cost of producing it.

That below-cost addiction has already resulted in the loss of many tens of billions of dollars of airline capital and catapulted such airlines as United, Delta, US Airways, Northwest and others into Chapter Eleven. Worse, even after all the financial wreckage, the propensity for airline leaders to continue below-cost pricing has been unabated, because they still believe they can finagle their way to profitability using "yield management" to entice middle America with giveaway prices while mugging the business traveler at much higher rates and somehow averaging the two together to produce a profit.

Yield management -- the constantly changing, computer-based, Wild West method of deciding how much to charge for each seat on any given flight so as to end up filling every seat and making at least something off each passenger -- works well in theory. But not if you catch the expansion virus that almost automatically infects even the most enlightened airline managers.

In a nutshell, it's been the expansion virus that's helped bring so many of our legacy carriers to their knees.

Too Many Seats at too Low a Price

Watching the expansion of the airline industry since deregulation in 1978 has been similar to watching an addict's habit spiral out of control.

In the 1990s, when the dot-coms were supercharging American business and the airlines were becoming profitable again -- after some terrible downturns in the '80s -- airline leaders decided that if they could make a billion dollars of profit with 300 airplanes flying day in and day out, then it was logical that if they bought 300 more planes, they could make $2 billion in profit!

Of course, there was the small concern about where all those extra passengers were going to come from to keep those 600 planes full, but airline leaders knew that if they could keep cutting the price, more and more people would fly, more and more planes could be bought and filled, and more and more money would roll in.

The idea was great news for Boeing, one of the nation's most important industries, and it also seemed wonderful news for us average Americans. We really liked the idea of flying for less and less cash, and with frequent flyer programs, often for nothing.

That shining model of massive airline expansion, however, quickly became a giddy pyramid plan because of one inconvenient little fact: The costs of flying one passenger from Point A to Point B (maintenance, training, fuel, aircraft lease, fixed costs, etc.) for an airline running a fleet of 300 jetliners is about the same as for an airline running a fleet of 600.

But wait a minute. If those extra passengers were going to be enticed to fly with lower prices, and the costs remained the same, then clearly the profit margins (at best) were going to get much thinner. And, if all that were true (and it was), then doubling the size of a fleet of airplanes would double the costs, but not double the profits or the gross income. Even the average weekend user of Quicken can figure out where that sort of dysfunctional business plan leads.

Like an addict's spiral, the airline fleet expansion cycle, once started, rapidly became a habit that had to be fed.

The high-cost purchase or lease of more planes and more employees to provide more seats meant a voracious new hunger to entice more passengers to fill those seats in order to provide more revenue. But remember, these were passengers like you and me who were only going to be enticed to fly more often if provided lower and lower prices.

In other words, only by increasing the use of below-cost pricing to attract the number of passengers necessary to fill airline seats and provide some revenue could the cycle be sustained, and then only if every trick possible was used to keep the cash-cow business traveler from taking advantage of those lower and lower fares (thus the Saturday night stay requirements and outrageous "walk-up" prices for last minute flights).

In a nutshell, that's what's been happening for the last 15 years. Airlines have been growing larger and larger fleets of incredibly expensive aircraft while acquiring the attendant labor costs of all the people necessary to operate those flights, and all of it based on the idea that volume (more passengers) will somehow result in sustained profits. Such a system was uniquely vulnerable to any downturn, whether that was something as catastrophic as Sept. 11, 2001, or as routine as a periodic recession. When both hit in the last five years, the pyramid plan began to collapse of its own weight.

And, of course, as we bleed dollars at the gas pumps, the airlines hemorrhage rivers of cash in the tens of millions for every penny increase, meaning that the per seat, per mile costs go up even more.

What's happening now as we head into summer is a general, unspoken realization imposed on the airlines by circumstance that prices absolutely must get closer to true costs, yield management Ponzi schemes have to be curtailed in favor of basic economic realities, and hundreds of airliners representing thousands of airline seats have to be taken out of service.

And we, as the consumers, need to grit our teeth and work hard to understand that those great prices we've come to expect were never realistic, and absolutely have to rise, especially if we want a reasonably healthy airline industry.

Or we could nationalize whatever's left in a few years and call it FLYTRAK.