John Heimlich
Air Transport Association chief economist John Heimlich last week during an Association of Corporate Travel Executives Webcast provided an update on the financial status of the U.S. airline industry. Given high fuel prices, the weak dollar and general economic concerns, "this is not a good time," Heimlich said. "Fortunately, business spending has not been cut too much." Heimlich also said that "it is almost entirely unrealistic" for airfare increases to offset a predicted $18 billion in incremental fuel costs the industry would face this year over 2007. Meanwhile, in comparing U.S. carriers' financial strength with that of European airlines, Heimlich noted that "Lufthansa's market capitalization in U.S. dollars [as of last week] was about $3.5 billion more than the Big Six global network carriers [American, United, Delta, Continental and Northwest airlines and US Airways] combined. A sad state of affairs for U.S. aviation leadership." After his presentation, Heimlich fielded questions on a variety of topics from participants and Webcast moderator and ACTE president Richard Crum. An excerpt follows.
With fuel prices rising, why is it not possible for airlines to have the commensurate change in prices to compensate for that?
The fuel prices are running right up against a consumer-led recession. Just as our fuel costs are going up, our customer base has less and less to spend on travel. That is not a good combination. We do not have the pricing power that we saw in '06 and '07. The economy is starting to slow, and gas prices and food prices are taking more money out of customers' pockets. The highly fragmented domestic market, from a competitive standpoint, makes it difficult for the carriers to raise fares. You are seeing price increases but ... customers do not have an unlimited willingness to pay to fly on a U.S. airline. At the low end, we have seen them go to the car, train or bus--Acela Amtrak is filled to the gills. We have seen increasing popularity of business jets and air taxis. And getting away from the macro economy, what is the No. 1 reason people travel by air? Speed, time. Over the past five years, or past 20 years, has travel by airline gotten faster or slower? It is a resounding slower. If your product declines in its number-one selling point relative to other ways of doing business, you have to discount it. Not only is it longer in terms of air traffic control, it also is longer in terms of the airport security experience--the variability and hassle factor. I am not criticizing anyone in particular, but the reality for the customer is that total trip time is longer and less predictable.
How are airlines improving fuel efficiency, and are there differences in the fuel efficiencies of U.S. carriers versus [non-U.S.] carriers?
The only difference in fuel efficiency between the U.S. carriers and the European carriers is that the European carriers tend to have younger fleets on average. As far as the other methods of achieving fuel efficiency, I would say they are not different and, in fact, the U.S. carriers have been more aggressive because they have had to rely on non-fleet means of getting there. So how are we becoming more fuel-efficient? Bringing orders forward for airplanes for earlier delivery, like American has done; United, Northwest, Alaska Airlines, Spirit and AirTran all accelerated the retirement of older, less-fuel efficient airplanes; fleet renewal is the most obvious and has the biggest payoff; retrofitting airplanes with winglets offers 3 percent to 6 percent payoff on emissions, depending on how the aircraft flies and the particular model; flying with less weight; eco-washing engines to minimize dust and drag; less friction on the aircraft by taking off an antenna here and there; adjusting the cargo for the center of gravity. These things add up. In some cases, taxi on one engine. More accurately counting the number of children on the flight so you don't have to use the 200-pound U.S. Department of Transportation assumption for weight, which requires you to bring more fuel. And remember, it takes fuel to carry fuel. There are countless examples. JetBlue once told me that on flights that are delayed more than 30 minutes at the gate, they would drain the lavatories so the airplanes took off with less weight.
Can you review for us quickly the current government policies that impact fuel prices?
Definitely filling the strategic petroleum reserve at this point in time, which already has 701 million barrels in there, is absolutely ludicrous. It makes no sense for the taxpayer. The administration is now sitting on a probably well over $70 billion asset. A modest release of that would do far more for the economy than a $600 check will. Sitting on 2 million barrels of home heating oil that we don't need until next winter is also ludicrous at a time when there is an extreme shortage in the market. And all the diesel and heating oil is all flowing towards Europe and Asia, that's another thing. We don't have a friendly policy toward energy infrastructure. Everyone wants [refineries], but no one wants them in their backyard. And we need to work better with our partners. Everyone at the Organization of Petroleum Exporting Countries, with the exception of Iran and Venezuela, has a selfish interest in not deepening the U.S. recession. If we're managing our international alliances correctly, we should be able to persuade the Saudis to put some barrels on the water. They can do that without violating their production quotas.
If foreign ownership restrictionswere relaxed, would it improve the efficiencies of U.S. carriers?
Let's call a spade a spade. It is an artificial restriction on access to capital that you don't see in other industries. The nature of the debate is 99 percent inside baseball. It is always about airline management, labor unions, Department of Defense ... It should be, in part, about the consumer. Until the debate transforms to what it would mean for the consumer--like it was for deregulation or Open Skies--you'll never see it get anywhere because those inside baseball parties are so dug in and Congress is not inclined to do anything about this any time soon, in my opinion, especially as the dollar is so weak. It is my strong sense that Lufthansa would have put a lot more into JetBlue had [the limit of the possible investment] not been capped. It is extremely cheap for them to do it with the euro where it is right now. So it would be a shot in the arm of capital, but would it make them more efficient? I am not sure how we would measure that, but it would create more opportunities. You have carriers like United and FedEx being very vocal, saying there should be no restrictions whatsoever. We don't have a set position on it at ATA, but clearly there are implications for Virgin America and other carriers. I wouldn't want to see making ease of entry even greater without doing anything on ease of exit. We wouldn't want to open the floodgates of foreign guys setting up shop here. People always ask, "Should we lift [the restrictions]?" I'd like to hear a compelling argument to restrict. Most of that comes from labor groups, and I am not saying there are no issues, but all the issues can be addressed. To get this to move forward in Congress, we need to hear from folks like you. What is the interest to the traveler? We need more study to go in that direction.
What will be the cost to the airlines from the U.S. Department of Transportation's rule change to double compensation for involuntary denied boardings?
There was one point in time when we supported that and one point when we didn't. I don't have a number for the cost. I think it remains to be seen how carriers adjust their inventory management practices--if at all--in response to the higher penalties, and whether they will attempt to reduce the amount of denied boardings as a result.