Award Fuel Surcharge Debate

Via View From Wing we learn that Lucky at One Mile at a Time went out on a limb in regards to Delta's new $25/$50 fuel surcharges for award charges saying: "...I think this is a good thing. No, I hate to see new fees, but I’m relieved that it’s “only” a maximum of $50."

He's not wrong. I just booked an award ticket in business class for PHL-BCN. I hadn't given it much thought, but given the current enviroment, I expected a few hundred dollars in fees per each ticket. If you dropped the hard cash you'd be subject to the $165 Q per segment surcharge that appears in this fare calculuation:

PHL US BCN Q165.00 M 2921.50DX0RY US PHL Q165.00 M 2921.50DX0RY NUC 6173.00 END ROE 1.00 FARE USD 6173.00 XT 5.50YC 7.00XY 5.00XA 30.80US 2.50AY 12.00JD 2.50QV 4.50XF PHL4.50

Instead, I just paid the taxes and fees which were under $100 per person. Lucky is right, $50 is not bad, given its only 1/3 of what many airlines are charging currently for international travel.

Annoyance

From the Anchorage Daily New's Scott McMurren:

It's tough to keep a good attitude about airlines these days. Hardly a day goes by without the worst airlines hiking fares and adding on more frivolous fees, at the same time reducing services. Everyone knows that fuel prices are up, up, up. But it appears that many carriers are using the gas prices as a "get out of jail free" card to annoy passengers with an array of add-ons and extra charges.

I wonder what he will find more annoying: Paying an additional $2 for a Jack and Coke or not having the choice because air service to Alaska doesn't exist anymore?

United: Good Luck Flying on November 30th

Do you usually fly United Airlines home for Thanksgiving? Targeting a return date of Sunday, November 30? Think again.

Others have noted United's decree to return to the Saturday night stay. Now it appears they are also betting on peak travel days. With the hubub over Southwest's opening of its fall and winter schedule, I did a quick check on two markets for the Thanksgiving weekend. United has closed all low inventory for the November 30th travel date. I picked two United markets. NYC-CHI which has plenty of competition. And also PIT-CHI which has far less competition. See below:



United is priced at least 50% above the competition in both these markets.

So, two takeaways:

1. Jump on the competitor fares right now.
2. United is not afraid to be agressive. They are making a play to actually cover costs.

OpenSkies Podcast

Earlier today I recorded a podcast with IAGblog's Addison Schonland. The discussion focuses primarily on OpenSkies and its implications for premium airlines. Check it out. Let me know if you have any thoughts.

Clarification: In the podcast we discussed OpenSkies offering the only flatbed between New York and Paris. In fact they offer the only business class flatbed between the two cities.

Midwest Update

Earlier this week I wrote about Midwest Airlines cutting 40% of its capacity by eliminating its MD-80s. Yesterday the Milwaukee Journal Sentinel posted a comprehensive roundup of the continuing restructuring talks. Highlights include:

• Aside from the 12 MD-80s, Midwest will also pull at least 5 of its Boeing 717s. Collectively, this is a 50% fleet reduction.
• In connection with this service reduction, pilot and flight attendant staff will be cut by about 50% also.
• One restructuring scenario calls for junior captains to be demoted to first officer. The resulting pay decrease would be about $90k, from $120k to $30k.

As Midwest continues to tumble three likely scenarios exist:

1. Midwest files for bankruptcy.
2. Midwest is absorbed by the Northwest/Delta merger.
3. Midwest succeeds in its restructuring.

I think #3 is the least likely. For me, it is a coin toss between bankruptcy and the Northwest/Delta merger. Sadly, this spells the end for our favorite cookie baker.

CHI-FLL

United announced yesterday that it would be consolidating its Southeast Florida flights at Miami International Airport by eliminating its 4 daily frequencies to Fort Lauderdale and 1 daily flight to West Palm Beach. United operates to about 10 Central and South American countries from Miami and will thus concentrate on the international flights, rather than worry about competing with Spirit and Southwest at FLL.

Sure, in today's environment this is not a shocking move. But, it is worth noting that by eliminating 4 daily flights United has knocked out a 1/3 of the capacity (on a frequency basis) from CHI to FLL. The remaining carriers Southwest, American and Spirit operate 4, 2 and 2 daily flights, respectively. Of course, Southwest could pick up the slack if there was excess demand, but I'm sure everyone would be just as happy to see fares go up.

Fuel Surcharge Mania

British Airway's broke new ground earlier this weekend when they announced that they would begin to tier fuel surcharges based on cabin. Passengers will now be charged £109 for economy, £121 for World Traveller Plus and £133 in Club World and First Class.

Fuel surcharges are nothing more than price increases. While it tends to be manipulated as fuel rises, there is no magic formula out there that dictates the fuel surcharge based on fuel costs. It actually only recoups a small portion of the costs.

The significance of this move is the impact it has on corporate contracts which account for a large portion of BA's Club World traffic. Corporate contracts are locked in at an agreed price. Some fluctuate based on the J rack price. However, many of the company's are also responsible for the fuel surcharge even if its increased during the contract period. So the premium targeted fuel surcharge increase indicates they need to get the corporate contract rate up.

Airport Domino

Naturally all the media coverage has focused on how the reduced capacity will raise consumer prices. Another impact will be less landings and ultimately less income for airports. This will hurt all airports but, of course, those smaller airports are likely more vulnerable. Thus, this story out of Canada: "Ottawa International Airport Authority said it's doing its part to soften the blow of rapidly rising fuel costs on the airline industry by slashing its general terminal fees by five per cent starting July 1." The article cites savings of $600k per airline.

Airports are generally an underrated aspect of the equation. At the base, airports are a commodity. However, the various landing and parking fees do matter, especially in the cash flow crisis we are seeing now. Given the situation, we may see more airports offering similar relief.

OpenSkies Roundup Part I

A quick post on the first Openskies reviews: There is an solid summary up on the Online Travel Review. His critical assessment, which I agree with: "All of us were blown away by the value of the Prem+ product. Seriously, it is a steal for what you get." Scott McCartney has a video of the interior with an interview with Dale Moss and an accompanying article on the treaty that engendered the new airline. One Mile at a Time has promised that an extensive review will be up soon.

Midwest Kicks the MD-80 to the Curb (Aka trimming capacity by 40%)

Once upon a time Midwest quietly flew the best product in the sky between Milwaukee, Kansas City and a select lucky cities. The ticket price was competitive, the employees were happy, the wine and steak were plentiful, and you could eat as many cookies as you wanted too because you were lounging in giant seats. All of this took place on Midwest's workhorse, the MD-80.

Midwest started peeling away the service years ago. Now the plane is gone. Late Friday the company broke the news (without a press release) that it would be quickly grounding its 12 MD-80s. It now will be left with 25 717s. So, the quick math on that is about 1/3 of its fleet. But, when you factor in the seat differential between the two aircraft, the move knocks out a whopping 40% of Midwest's capacity.

In a recorded message to employees the "CEO Mr. Hoeksema said Midwest Airlines put together a good plan to cope with $115 oil two months ago. 'That was a good plan for the situation.'" But, he goes on to say, that the game has changed entirely too quickly.

The blunt remarks are telling and I encourage everyone to check them out (via the Dallas Morning News Blog).

Questions Answered

The Houston Chronicle offered up a bit of service journalism on Saturday in answering its readers questions about the United-Continental cooperation. As for my quip last week regarding the checked baggage issue, the Chronicle clues us in on how Alaska and American are dealing with it. Essentially, it all comes down to your first flight:

Q: How about the whole checked-bag fee issue?
A: ....United hasn't started charging the fee yet, but American Airlines has, even though one of its domestic partners, Alaska Airlines, has not.Alaska Airlines spokesman Paul McElroy said in cases in which a flight involves both carriers, the fee is charged based on which plane the passengers board first. In other words, flying from Austin to Seattle using both carriers, a passenger would pay the fee on the initial American leg before switching to Alaska in Los Angeles. Coming back, the passenger would not pay the fee boarding Alaska, even though the homebound leg would be on American.

Luv Does Chicago

The Chicago Sun-Times has a quick roundup on a luncheon with Southwest Gary Kelley in which he discussed Southwest's future. Unlike most of the other carriers, Southwest is actually moving forward with a strategy rather than simply reacting to the latest jump in fuel prices. Of course, the article notes Southwest's fuel hedging that they claim will save them $2 billion this year. And it mentions Southwest's plans to add Internet and other entertainment options.

But, the speech's emphasis, the article notes, was about treating people well -- both the Southwest employee and customer. Personally, sometimes I find the "cheer" a bit over the top, but these days Southwest is one of the few places you will find people smiling. Setting aside financials and route structure, the comparison really tells you why Southwest is on its way up and US Airways is stuck at the bottom. While waiting for my 3rd US Airways flight of the day to be cancelled earlier this week, I overheard another gate agent announce that, due to a computer glitch, they were going to board alphabetically. Apparently, a passenger or two made a joke about it and it was only a matter of seconds before the gate agent was back on the microphone berating the passengers for improper behavior. It was really quite shocking.

I'm sure the Republic Airways employees that were actually flying the plane were cheerful, but I doubt anyone on that plane got beyond the behavior of the US Airways gate agent. These days the stock prices on the Yahoo chart to the right react solely on the rise and fall of crude oil. But, it is important to remember that, once this all settles down, there are factors, such as service, that do matter.

United and Continental Join Hands

News broke late yesterday that United and Continental had formed a cooperation agreement that would involve a code share and also Continental leaving the SkyTeam for the Star Alliance. (United's link and Continental's link).

Mark Ashley raises a few questions regarding the compatibility of the two mileage programs. Of course its a far way off, and Continental is rumored to be instituting its own charges, but here's my question: If I book a United and Continental code-share with one flight on United and one flight Continental, do I have to pay $15?

Shifty Colonials

OpenSkies' debut is stealing the headlines today (read my take below), but the American child of the UK's other airline is also in the news. Unfortunately, it is not good.

A couple days ago they announced a 10% reduction in services via the reduction of a midweek flying and also the strange launch of JFK-LAS service. Buried in the news reports though was a interesting tidbit reported by the Guardian's Andrew Clark (via Sharkey) . Virgin America "asked the US department of transportation for a special exemption from revealing the extent of its losses." Further reports indicate they are out on roadshows seeking new investing.

Sure, Richard Branson has deep pockets. But, he has hit the ownership limit and, more importantly, the company likely can not seek additional foreign equity. Good luck with those US investors.

Welcome OpenSkies

In less than 24 hours OpenSkies' inagural flight will be jetting across the Atlantic. When OpenSkies was announced Eos, Maxjet, Silverjet and L'Avion were all flying their own all-business class configurations. Now, Openskies' codeshare partner, L'Avion, is the only one still flying. Interestingly enough, OpenSkies is offering a product that offers the Eos, Silverjet, and Maxjet products, respectively, in three cabins (Biz, Economy+, Economy).

Overall, OpenSkies (EC) has a very solid chance at succeeding. Below I've outlined the Pros and Cons:

Pros

1. Nothing screams success more than the aforementioned 3-class configuration. The EC product is really First, Traditional Business, and E+. It is relevant across every flying segment. The 3-cabins allow EC to charge a strong premium during traditional strong business months of June and October and discount appropriately during August and December. In addition, they have really boxed in the other carriers. For only a small premium to the market's traditional business class pricing, a customer can fly in First Class on EC. If the traditional business class seat is good enough, then it is less expensive on EC.


2. The 757's with winglets should help mitigate the rising fuel costs. To be sure, this is no life saver, but it is better than flying most anything else. (I think only Continental runs 757s to Paris on a few frequencies.)


3. Oneworld: EC is the first business class product to connect to a real Miles program.

Cons:

1. Corporate Contracts: I don't know have any intelligence on the corporate contracts out there for the New York-Paris market. But, I'm sure the market has gotten more competitive since EC entered. They will have to penetrate this market to succeed.


2. Travel Agents: Are they wary of these new business class products after the demise of all the others? It creates a hassle for them and its possible they no longer are willing to adopt change.


3. Recession: As the economy goes, so does superfluous business travel. Startups (even those backed by BA's big pockets) are sensitive to cash flow.


4. Connecting Travel: Right now it does not seem like you can purchase a connecting ticket on BA with codeshared AA flights. (i.e. ORD-JFK-ORY). I'd bet this is something they are working on.

If I was a betting man, I'd put my money on the Pros outweighing the Cons.

Correction 6/26/2008: Contrary to my initial interpertation, the Economy cabin on EC is plain, old Economy. It is not traditional Economy Plus.

SeaPort

There's a new shuttle airline out in Seattle flying out of Boeing Field into Portland. The approxitamely 50 minute flight is will be flown on a 9-seater Pilatus PC-12. SeaPort will only offer flights during the business rush hour from 6:00 - 10:00 in the morning and then 5:00 - 8:15 in the evening. Prices start at $74.50 with unrestricted tickets going for double that price.

I've only flown out of SEA once so I can't speak to the "avoid the hassle" aspect of the flight, but for some I'm sure this will be more convenient. Anytime you can avoid the crowds it is likely worth it, especially since they'll have a robust schedule at peak times. As for comfort, Alaska has Horizon Air running Dash-8's and United has Skywest running EMB-120 props, so it is not like you'll be sacrificing comfort. For what it is worth, they've matched SeaPort's $74.50 pricing.

All Star Miles

United is auctioning a package to NYC to see the 2008 All-Star game in Yankee Stadium's final season. The package includes tickets to all the events, hotel accomodations, after party passes and First Class accomodations on United. The bidding is currently at an astronomical 701,000 miles. The kicker is the winner will be sitting in the Upper Deck for the All-Star game. I doubt the same lax attitude about seat hoppers will be present during the All-Star weeeknd. So, there you go, for nearly a 1,000,000 miles you get to barely see the All-Star game.

Its Time to Fly

Last week I discussed the impact of the new fees for legacy carriers Amerian and United. On Friday the Cranky Flier chimed in as well lambasting United for missing an opportunity to further differentiate itself from the competitors. With economy plus and PS, United has long catered to business travelers, but also has been scared to cut the garbage traffic loose. Cranky writes:

This shows the problem that United is once again trying to serve all different
types of passengers when that really shouldn’t be the case. Yes, I understand
that they need cash right now and that they’re in worse shape than others due to
mismanagement, but if you want to be a premium carrier, you don’t implement fees
like this. You try to differentiate yourself instead of helping Southwest
establish itself as the true premium carrier that doesn’t actually charge these
fees.

United has made a choice to join the bottom dwellers and it will be interesting to see if, over the long run, this erodes its base.

Goodbye Silverjet, again

Only days ago there were signs that Silverjet would survive with a new cash infusion. Those dreams are now over as funding has fallen through for the second time. This report notes that the downfall came when the CAA, the British aviation authority, required the new Silverjet to have a certain amount of cash on hand to assure services would continue.

The new Silverjet would have struggled and aside from the 400 people who thought they may be able to keep their jobs, this is, in the long run, is probably for the better.

If Silverjet has any legacy, I think it will be the millions it poured into very creative marketing. You Tube examples below:

The Spin

It is probably safe to assume that at some point over the past few months an executive at all these legacy carriers raised his or her hand and said something along the lines of, “I understand we are hemorrhaging money. But, if we start charging for everything, then what does our brand stand for? What is our product?” At that point in the meeting, everyone turned back to the slide showing fuel costs as a percentage of average fare. But, since my hypothetical straw man asked the question, it is interesting to look at US Airway’s wrapping around its changes.

The link on the website reads, “Changing how we are doing business…” and if you click on it you learn that US Airways is:

...transforming [its] business by initiating a 'pay-for-what-you-use' model
for items like baggage and beverages. Combined with new Dividend Miles policies,
a headcount reduction and a reduction of flights, we expect these changes to
help us return to sustained profitability.

The formal press release is a bit more blunt noting, "US Airways accelerates business model transformation."

Kudos to US Airways for admitting it is now, overnight, a different beast. With old American West leadership at the helm I bet this is a bit easier to swallow. In fact, its probably what they wanted all along. They now have the numbers to force it down everyone's throat.

As for our more proud legacy friends, United and American are acting a bit more discrete about the complete overhaul. United for instance notes it is "tailoring our products and services around what our customers value most and are willing to pay for." It is clear that these Giants have fallen and it will be a while before they find themselves. As the service continues to decline (I'm not sure what else could be taken away), the pressure from LCCs with better on-board products and, frankly, better attitudes will continue to rise. As Southwest puts it, "LUV is freedom from fees."

The News

Yesterday, US Airways and United jumped on the American bandwagon announcing fees for the first checked bag. US Airways went a bit further and now will charge for $2 for formerly “complimentary” beverages. In addition, US Airways tacked $25 onto its miles award tickets. There is extensive coverage of these changes here and here and here.

It is important to note that these policies are not uniform. American is doing something slightly different from United. United is doing something slightly different than US Airways. The media has picked on the subtle language put out by the airlines (more on this later) that the baggage charges apply to “most” passengers. The airlines are trying to draw a fine line between leisure passengers and business passengers. If you have status on the airlines or are flying in a premium cabin then the charges don’t apply to you. If you aren’t one of these people then the charges do apply to you. The gray zone right now is with full fare, refundable tickets. American considers these passengers “business travelers” and is not charging the baggage fees. United and US Airways are not excluding them.

AA's Charge

With the introduction of a fee for the first checked bag, AA put itself out there as leading the pack in raising the cost to fly. Over the weekend, AA attempted a $25 across the board fare hike and had to pull it back as other airlines balked, likely due to a weakening in demand they are seeing as prices rise. So, AA went the backdoor route yesterday and threw the $25 on top of the fare as a fuel surcharge on -- as the fine print says -- "domestic routes except those where the carrier competes with low-fare airlines." So, for all those people that live in small cities, that means you. As if it wasn't already expensive enough to fly out of Charleston, WV, it just got worse.

Teddy

The Chicago Tribune followed the Cranky Flier's lead yesterday by publishing a mocking obituary to TED, United's failed "low-cost" experiment. In sum, Ted never made any sense. They ripped the first class out of a handful of A-320s and created all E+ and E aircraft. At launch there was a bunch of Tedspeak in a half-hearted attempt to match Southwest's quirkiness. I'd bet a large sum of money that by the time they killed Ted, less than 10% of the tickets booked on Ted flights were actually booked at Ted.com (or whatever it was.) United customers just ended up on Ted. As the Tribune article accurately points out, at best, it probably just upset United's frequent flyers that happened to be flying to Florida or Arizona.

As it is, the Tribune article oversimplifies things just a bit. The Tribune chides United for not actually "copying" Southwest. While, of course, United still had to operate with its operating costs, so it was difficult for it to copycat one of Southwest's greatest advantage. As for the service aspect -- as in delivering what you promise -- the criticism is accurate and one that is more poignant as legacy carriers raise costs and reduce service.

The Silverjet Set

As each day passes it looks more and more like we'll be blessed with a reincarnation of Silverjet. A new investor is pouring money into the operation and the business expects to restart within weeks.

Of course, the question that has not been answered is: how? Even loyal customers must be angry for being put out by the airline. And those not so loyal customers will find it strange to purchase tickets on an airline they last heard stranded thousands of guests. Aside from this "Who is your customer?" issue, they still have the same costs of flying the 767s below cost as they'll have to discount heavily again to build up a base. If I were them, I'd pull out some of the seats and put in higher yielding "First Class" seats to raise the average fare and cater to the more demanding front cabin passenger.

PS

Four years ago United launched PS service using 757s. At the time, the product's competitive advantage was the product itself: The reconfigured planes debuted with three cabins -- First, Business and Economy plus -- power outlets at every seats, and improved entertainment options. Since the launch, JetBlue has increased its New York - Los Angeles presence and Virgin America has come aboard with affordable business class with superb entertainment. Still, for the majority of business travelers flying on the company's dime and contracted price, United is the way to go.

Regardless, four years later, PS has developed a competitive advantage that stands stronger in today's climate than any product differentiation: fuel efficiency. Today's Wall Street Journal has an informative piece on the fuel's devastating impact to the bottom line. Essentially, the average airline ticket barely covers the fuel bill leaving little to cover other costs and no room for profits. The article contains a look at the New York-Los Angeles market and accompanying data table shows just how well PS might be doing for UAL. While AA using 72% of collected fares per filght to pay for the gas guzzling 767, UA is only paying 53% on its reconfigured 757s. It seems even its regular configuration out of EWR is also doing far better than AA's 767s.

Of course, United and all airlines would like to see this number much much lower. But, as fuel prices continue to rise, it is hard to imagine how AA will survive running key routes with such fuel inefficient planes. Even when they get rid of the MD-80s and A-300s, they still have to deal with the 767s.

*A: The Star Alliance Game

I recently cashed in 160k United Mileage Plus miles for a summer trip to Europe. This information is generally out there, most notably via a View From the Wing , but I thought I would share a few lessons learned:

1. As always it is best to start all Star Alliance searches using the global search tool at ANA.

2. UAL's starnet blocks most of the Lufthansa flights even though they would be available if you were dealing with Lufthansa directly. This really hurts as United's transatlantic options are not great and one of the real powerhouses of the Star Alliance is Lufthansa, both for its schedule and onboard service. Flyertalk suggests this Lufthansa embargo lasts for about 3 months prior to departure up to a week or two before travel.

3. Also generally known: Most of the United agents have no idea how to book award travel. They don't understand the routings so you need to know what you are talking about before you call. Also on multiple occasions agents missed available flights. When I asked them to recheck by flight number they were able to locate them.

4. You are able to hold award travel. Many agents told me I couldn't do this. But, I eventually found one that let me.

5. Always be sure to check Business Saver awards before you go with Economy Premium awards.