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Airlines cut perks, get back to basics for survival

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Source: Media Article

Date: Oct 30, 2004

From: New York Times
Author: Micheline Maynard

CHICAGO - After half a decade of turmoil, a picture of air travel in the United States is starting to emerge, and it is far different from the caring image the airlines like to present.

In an artsy television commercial for United Airlines, for example, a cosseting flight attendant gives an excited traveler water for a rose he is taking home to mom, while in American Airlines' advertising landscape, travelers are flying for happy reunions. After all, the airline declares, "We know why you fly."

In truth, Americans fly because it is cheap and often the fastest way to travel as planes have become not luxury liners but subways of the sky.

"This is the way the world is going," said Robert F. Tumminaro, a manager at an auto parts company in suburban Chicago, who checked himself in at a Southwest Airlines kiosk at Midway Airport recently, bypassing a skycap and carrying his own rolling suitcase and computer bag.

Just four years ago, he said, he would have taken United, where he had accumulated thousands of frequent-flier miles. Fed up with United's high fares and numerous delays out of the nearby O'Hare International Airport, Mr. Tumminaro said, "I flipped my United card back at them" and switched to Southwest.

Planes, many of them fully packed, are set to carry more than 600 million passengers this year, masking the fact that the big airlines are in a financial free fall, having lost $30 billion since 2000, with expectations of losing another $5 billion this year and next.

The airline carrying the most passengers within the United States is now Southwest, according to the Transportation Department, far outstripping its roots as a regional carrier from Texas. The growth of Southwest illustrates why fares keep dropping, pushing 3 of the industry's top 10 airlines into bankruptcy.

The average transcontinental trip, which set travelers back more than $400 each way four years ago, now costs closer to $200, according to Back Aviation Solutions, an industry consulting firm.

All this has sent the big airlines scrambling to devise strategies that will keep them in business, a process of creative destruction that is akin to the chaos that afflicted the telecommunications industry in the 1990's. While no one expects airline seats to be sold like minutes in a telephone plan - at least not yet - it is clear that the full-service approach that United and American would still like their customers to think is the norm is fast vanishing from the American scene.

"The traditional structure of being a one-stop shop for all the travel needs of your customers is not going to be the future at all," said Jagdish Sheth, professor of marketing and corporate strategy at Emory University in Atlanta.

The upheaval is the climax of a process that began with deregulation in 1978, and that has accelerated this decade because of a business slump, the September 2001 attacks, the onslaught of low-fare competition and high fuel prices. And like the transformation of Ma Bell, the status quo has been flipped on its head in the airline industry with upstarts like Southwest and JetBlue leading the way.

At Midway Airport and at Baltimore-Washington International Airport, Southwest has installed its self-service kiosks, which print baggage claim tags, along with the usual boarding passes and credit card receipts. As a result, one customer service agent can oversee two check-in stations, said Virginia Bona, Southwest's assistant station manager at Midway.

What is good for the passengers may not be good for workers. Elnora P. Hamb, 64, who sat watching customers using the kiosks at Midway recently, said, "I think it's putting people out of jobs."

Mrs. Hamb, national president of the Women's Missionary Council of the Christian Methodist Episcopal Church, like millions of other American consumers, is avidly participating in that process anyway. Instead of calling airline reservation lines, she said she regularly goes on the Internet to shop for cheap tickets, bent on saving travel costs for her church.

Most often, she said, she flies on a low-fare airline like Southwest, which lets her amend her itineraries at little or no cost, thus avoiding the fees charged by the big carriers for last-minute changes.

The transformation in the industry is rewarding companies like Southwest and JetBlue that are thinking up new ways to meet their customers' needs with few frills and low fares on popular routes. But that model is hardly the global industry's leanest.

An even more extreme model is Ryanair, serving Europe from its base in Ireland. Ryanair charges minuscule ticket prices and makes passengers pay for everything else, from checking bags to drinks and food. It has ordered new planes without window shades, magazine pockets and reclining seats.

Nothing quite that drastic is planned by airlines serving the United States, but the trend for basic travel is already clear.

Though the big airlines still pay lip service to the idea of competing with the low-fare companies, in truth they are casting a desperate eye on the last corners of the market where they can still charge top prices for tickets, namely flights where passengers still want first class seats.

That approach is being followed by American, Delta, Northwest and United, which said recently that they would cut domestic service and expand international flights, including the first service to Vietnam by an American carrier in three decades.

"We want to focus our efforts on those markets," said John P. Tague, an executive vice president at United. "There is a very strong residual demand for that kind of product. We are confident it's going to work."

At the same time, United has introduced what it calls p.s., for premium service, on flights between New York and California, which features seats that turn into beds, gourmet food and the kind of style that brings back visions of the glory days.

A new survey by the Brookings Institution suggests that many customers may simply not care about the opportunity for luxury flights. The survey measured each of the major airlines according to the value that it provided passengers, in terms of low fares and the number of cities served.

Far and away, the study found, the most value was provided by Southwest, distantly followed by United and Delta. American, Continental and US Airways actually provided negative value. That indicated customers felt "getting rid of them would be good" because their absence would allow better airlines to take up the slack, said Clifford Winston, a Brookings economist.

The survey leads him to believe that in the industry's next phase airlines will have to be efficient. Otherwise, "they will pay for it in not being able to survive," Mr. Winston said.

Getting there, however, is proving existentially painful.

Shrinking has become a way of life for the big airlines, which cut 110,000 jobs after the September 2001 attacks and have even more cuts on the way.

American, Delta, United and US Airways all have announced plans to eliminate jobs of pilots, mechanics, flight attendants and customer service agents. Most are taking planes out of their fleets and at the same time, sharply cutting benefits like vacation time, post-retirement health care and pensions that have added billions to their costs.

"The harsh reality is that our world has permanently changed, and we must change with it," Delta's chief executive, Gerald A. Grinstein, told employees in September.

Southwest is not immune either. About 1,100 workers took an early retirement plan this summer. And the airline filled its last two flight attendant classes from its own ranks including some of the gate agents who once worked at Midway, Ms. Bona said.

But the cuts are coming from a position of strength. Even as the major airlines cut back, the healthiest low-fare carriers are expanding their route systems and ordering hundreds of new aircraft. Granted, they are not completely immune from the problems buffeting the industry.

ATA Airlines, a low-fare airline based in Indianapolis, filed for bankruptcy protection this week, after its aggressive expansion plans were stymied by high fuel costs. And JetBlue disappointed analysts in the third quarter, when its earnings fell, prompting Standard & Poor's Ratings Services to assign a negative outlook, meaning its debt rating could be cut if it cannot make improvements.

But JetBlue still made money and like Southwest, it is striving to be efficient. Southwest now employs just 75 employees per aircraft, compared with more than 100 at each of the major companies, and only slightly more than the 70 employees per aircraft at JetBlue, whose workers are not represented by unions.

"The companies are doing their downsizing and the workers and unions are being left behind," said Gary Chaison, a professor of industrial relations at Clark University in Worcester, Mass.

Whether entire airlines will be left behind is a matter of intense debate in airline circles.

Given the intense pressure from high jet fuel prices and stiff competition from low-fare companies, some say it is inevitable that old names will disappear - a prospect that US Airways raised repeatedly this fall, as it successfully pleaded with a federal bankruptcy court judge to grant emergency pay cuts.

Others point out just how hard it is to kill an airline. Vanished names like Eastern, Pan Am and T.W.A. floundered for years in the 1980's and 1990's before finally going under. And even as US Airways, Delta and United are mired in bankruptcy or close to it, new carriers like Virgin America are poised to move into the American market, assuming they can find financial backing and win regulatory approval.

Moreover, JetBlue and Southwest are each buying additional planes. JetBlue, which started in 2000 with a single New York to Florida route, now serves more than 30 cities, and expects to add dozens more over the next few years as it adds hundreds of Airbuses and regional jets to its fleet.

What is evolving may end up being better for the country and certainly will be for passengers, said Herbert D. Kelleher, the chairman at Southwest. "I don't see it as dark and foreboding and bleak," Mr. Kelleher said in a recent interview. "Every time we go through one of these harrowing experiences, the industry has endured, it has survived and it has successfully provided what I consider to be an essential service for the American public and American business."

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