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.