There was a time, not long ago, when the American Council of Life Insurers would regularly hold meetings in Los Angeles, San Francisco and San Diego, but not any more.
“We tend to hold our meetings on the East Coast now,” Victoria Smith, the council’s managing director, conference development, says.
It’s not that the Washington, D.C.-based trade group is no longer enamored with the West Coast.
“San Diego was a prime location for our meetings,” Smith says. Just holding a meeting in San Diego “would attract quite a few attendees.”
Nevertheless, the Council decided that it would be best to keep the 15 to 20 meetings it hosts annually on the East Coast.
Several factors influenced the decision, Smith explains, including the soft economy and the credit crunch. But the key motivation driving the decision is the increasingly unpredictable air transportation system.
For instance, tens of thousands of airline passengers were impacted in April when American Airlines was forced to suddenly cancel some 3,000 flights as the Federal Aviation Administration conducted safety inspections on its fleet of MD-80 jets.
“I doubt that such a massive ground will ever happen again,” says Lianne Pereira, associate director, Events and Meeting Services, for the Dallas office of KPMG LLP, a global accounting firm.
Nevertheless, Pereira contends, the turmoil in the skies is increasingly influencing how meetings are being planned.
“There is now greater concern that attendees will have difficulty with their travel plans,” Pereira says. “Plan ‘B’ contingencies are now the norm.”
“It’s the future meetings where the problems are beginning to surface,” adds Robert Becker, president of Meeting Planners, a Crown Pointe, Ind.-based firm.
“Groups that have traditionally gone coast to coast every other year are rethinking it,” Becker says. “For instance, vendors that attend certain trade shows are now looking more at the possibility of hosting regional dinners to meet with clients rather than traveling to the shows.”
Add to that, Smith says, airport congestion problems and the growing likelihood of canceled or delayed flights due to weather, and the Council concluded it just became too cumbersome to organizing cross-country meetings for the trade group’s largely East Coast-based members.
The Council’s decision now seems particularly astute, especially as the airline industry wrestles with a situation that is arguably unprecedented.
Feeling the Pinch
As anyone who drives a car, heats a home or pays a utility bill knows, fuel prices have soared—particularly over the past several months.
In May, the price of crude oil topped $150 a barrel, forcing gas prices to surge to previously unheard of heights of over $4 a gallon in some markets.
And just as consumers were feeling the pain at the pump, so were the airlines.
The price of jet fuel hit a record $158 a barrel in May, according to the International Air Transport Association, a trade group that represents some 240 airlines throughout the world.
At press time, prices were still trending upward, making the possibility that jet fuel would surpass $160 a barrel by summer.
The Air Transport Association (ATA), a trade group representing the major carriers, estimated that its members would spend nearly $60 billion on fuel this year, significantly up from 2007’s $41 billion fuel bill.
“The fuel issue began to raise its head in 2004,” says William Swelbar, research engineer with the Massachusetts Institute of Technology’s International Center for Air Transportation, which studies the airline industry. “But I don’t think anybody, with the exception of a very few, speculated that in May of 2008 the U.S. airline industry would be paying over $150 a barrel. This is so unusual. We really haven’t seen anything like this before. It is a game-changer.”
John Heimlich, the ATA’s vice president & chief economist, agrees.
“The consequences are the higher the price of fuel, fewer and fewer routes are sustainable,” he says. “Given a level of revenue, if the costs go up, eventually you will have to alter the type of plane you’re operating or cut either the route or the frequency of the route.”
Small Guys Lose Out
While it is unlikely that an airline would cut a New York to Los Angeles route, service to smaller communities is more vulnerable.
“These are not good times for small communities,” Heimlich contends.
Indeed, Mesa Air, citing fuel costs, recently said it would end service to several communities in Nebraska by the end of June, while United Airlines said it planned to drop 19 flights out of its hub in Denver.
Similarly, USA 3000, a carrier that operates scheduled and charter flights, announced plans to significantly reduce service to Florida, once one of its key markets.
Airlines are also looking to reduce costs by operating less equipment.
Delta, which intends to merge with Northwest Airlines, noted in its financial results for the first quarter that it would sideline some 90 mainline and regional jet aircraft this year due to rising fuel costs.
Other airlines have taken more drastic steps.
Since last December, seven airlines have ceased operations, including Maxjet, Big Sky, Aloha, ATA, Skybus, Eos, and Champion, while another carrier, Frontier, filed for Chapter 11 bankruptcy protection in April.
“There was no one factor that contributed to the shutdowns,” Heimlich says. “But high fuel prices are the great equalizer. We all buy the same fuel, so it really is the dominant industry factor at this point.”
Heimlich says that if fuel prices were to, as predicted, continue to increase this summer, passengers “can expect additional domestic service cuts.”
Swelbar added that further airline shutdowns and mergers also are possible.
“It is an entirely likely scenario,” he says. “We have Wall Street suggesting that we need to take out capacity at the equivalent of a United, American or a Delta,” to create a more consolidated and arguably profitable airline industry.
“Now, that can only happen over time,” Swelbar adds. “But we are talking about capacity coming out at much greater levels than the loss of Aloha, ATA or Skybus.”
Open Your Wallets
Regardless of what happens next, one thing appears certain: Passengers will be paying more to fly.
According to the ATA, fuel costs account for at least 36 percent of the price of an airline ticket.
Carriers have already added fuel surcharges to the prices of airline tickets, but that may not be enough to offset operating costs.
That said, fare changes are not always simple to execute. Typically, one carrier will lower or hike a fare and competing carriers on the route will match it. However, if they don’t, the carrier attempting the fare change will withdraw it.
But given the current circumstances, Swelbar expects most future fare hikes will remain in place.
“You are already starting to see fare increases find their way into the marketplace,” Swelbar says. “It is not going to impact those who have booked their seats and made plans [months] in advance, but it will impact those of us who have to do a business trip or those who are starting to think about holding meetings in the fall and winter and the spring next year. That’s where the effect is going to be felt.”
The operating challenges posed by the rising cost of jet fuel are further compounded by the fact that the U.S. economy by many measures has slipped into a recession, which likely means fewer consumers will be flying.
So far, the ATA, along with Airports Council International–North America (ACI-NA), an airport trade group, is projecting that 211.5 million passengers will fly during the months of July, August and September, down only 1 percent from last summer.
Ironically, the slight drop in the number of flyers won’t necessarily translate into empty planes.
In an effort to save fuel, airlines will strive to operate flights at near full capacity.
ATA and ACI–NA estimate that this summer airplanes will be flying at a hefty 85 percent of capacity, and that has some concerned.
“When you take a plane with 100 people on it,” says Terry Tripler, airline expert and owner of triplertravel.com, “and you cancel it because of, for instance, mechanical problems, where do you put 100 people if the next three flights are full?”
Kate Hanni, founder and executive director of the Coalition for an Airline Passenger Bill of Rights (CAPBOR), a passenger rights advocacy group, believes that will be a key question for many airline travelers this year.
“I was getting calls from passengers that were stuck in Hawaii because the airline had a mechanical problem and there was no other plane to get them home,” Hanni says.
Like Tripler, Hanni anticipates that such instances will become more problematic across the U.S. this summer as airlines operate fuller and fewer flights.
“The airlines are going to blame the high cost of fuel as the reason why they can’t accommodate people better,” Hanni says. “This is really a situation that is not in the passenger’s favor in any way, shape or form. I think we are looking at a complete and total breakdown of the airline industry.”
From Bad to Worse
In fact, there are growing concerns that, even in less trying times, the U.S. airline industry is already approaching a point where it is unable to keep pace with escalating consumer demands for air service.
The Department of Transportation reported that 2007 was “the second worse year for delays,” beating out 1995, which previously held the record.
How bad was 2007?
A whopping 27 percent of all flights during that year arrived late at their destinations.
Most of the delays were due in part to over-scheduling that left airplanes backed up on runways, unable to take off on time.
The DOT estimates that in 2007 1,300 flights were delayed on the ground for three hours or more. That was up 24 percent from 2006. Another 7,249 flights were delayed from two to three hours.
As flight delays became less the exception and more the rule, passenger complaints in 2007 (related to ground delays, flight cancelations and missed connections) jumped 58.2 percent from 2006.
Congress has taken notice. Lawmakers have included certain passenger rights provisions in a FAA funding bill now pending in the Senate. However, the bill has stalled and it is unclear whether Congress will pass the legislation this year.
Meanwhile, the DOT, working with the airlines, has proposed several measures to reduce delays and improve on-time performance.
For instance, last December the DOT, in association with the FAA and certain airlines, unveiled several initiatives that include capping flights out of New York’s JFK International Airport, a major chokepoint for delays, and establishing a “czar” to help manage commercial flight activity in New York and New Jersey.
The initiative followed a directive from President Bush, who two months earlier called on the top aviation officials to “take action” to ease the growing air traffic congestion problem across the U.S.
In addition to capping flights, there are also plans to develop a new air traffic control system.
Referred to as the Next Generation Air Transportation System, or Next-Gen, the system would cost over $4.3 billion and utilize satellite-based technology rather than radar to efficiently manage air traffic.
But those solutions will take years before they significantly impact air travel, according to travel advocacy groups, which have urged the government to take more immediate steps to improve air travel.
“The entire travel community—including hotels, rental cars, destinations, theme parks, and most importantly, travelers—is dependent on a safe, secure and efficient air travel system,” said Travel Industry Association of America (TIA) President and CEO Roger Dow in a statement. “With respect to efficiency, today’s air travel system is broken.”
Meanwhile, Swelbar says, the rising cost of jet fuel has essentially undone years of cost cutting by the airlines, which generally struggle to remain profitable.
“What makes this particularly difficult is you’ve had an industry that has been restructuring itself for years,” he says. “It has taken $20 billion of costs out of its operations [over the past five years]. But they took $20 billion of costs out of $40 billion worth of fuel [costs] ago. Now there are no obvious areas of costs where you can cut significant amounts out. Most of that low-hanging fruit has been picked. That is why you are seeing the industry look at itself in the mirror and ask the question: Have I really priced the product properly over time? I think we know the answer to that. They haven’t.”
Planners Scratch Their Heads
Meeting planners are also asking themselves questions.
Smith of the American Council of Life Insurers says that while limiting meetings to the East Coast has helped attendees avoid many of the airlines’ trials and tribulations, it hasn’t necessarily improved attendance, to say the least.
Attendance at one of the Council’s meetings held in March, for instance, was down 20 percent, Smith admits, adding she was personally surveying her members to try to find out why.
“I am curious to see whether it is the rise in the cost of air fares, the time of the year or the credit crunch,” she says. “But these are tough times.”
