Attention All Passengers (10 page)

Overall, the DOT received thirty-two complaints of unfair competitive conduct from new-entrant airlines between 1993 and 1999. Then the Transportation Research Board convened a panel of experts—including Alfred Kahn, the Father of Deregulation—to examine this phenomenon and concluded four major airlines were still engaging in practices to drive out new competitors.
3
The research board also defined “predatory pricing” as actions designed to drive out or suppress competition with the intention of later increasing prices.
4

Back in 1983,
Time
trumpeted “Dirty Tricks in Dallas,” detailing the Justice Department's federal suit against American Airlines and a taped conversation in which CEO Bob Crandall spoke to Braniff CEO Howard Putnam about both carriers raising fares. Other allegations, according to
Time,
included American pilots causing delays on runways to disrupt Braniff flights and American taking its time delivering $9 million for interline ticket agreements. The Harvard case study also cited ticket agents encouraging customers to fly American instead of Braniff and fabricating technical problems with American's aircraft so Braniff made costly plans by scheduling additional flights to accommodate passengers who never showed.

Another weapon in the majors' arsenal is their grandfathered right to operate at overcrowded, high-density airports where they charge higher fares, such as LaGuardia, JFK, O'Hare, and Washington National. Because major airlines control most of the takeoff and landing slots, they can use these rights to their advantage, even swapping them among one another, as Delta and US Airways did in 2011.

The Dirty Secret of Airfares: Bias

In the 1980s the computer reservations system Sabre, sister company to American Airlines, was accused of blatantly biasing screens for travel agents so American's competitors were listed below it. (An earlier study by American found that travel agents overwhelmingly booked the first carrier listed and rarely shopped on a second screen, a practice that still holds today among consumers surfing travel sites.) Former CEO Crandall tried to defend such practices before Congress by saying, “The preferential display of our flights, and the corresponding increase in our market share, is the competitive raison d'être for having created the system in the first place.” But not surprisingly, biased displays were banned.

Even so, airlines have found other ways to game the system. One method seems to be with third-party travel sites, so that biased displays were carried over from reservations systems to travel sites. Shortly after I became editor of
Consumer Reports Travel Letter
in 2000, I decided to test such rumors by repetitively searching for identical fares on competing sites in real time, and benchmarking the fares through analyst Bob Harrell, who had access to Sabre and could simultaneously retrieve computer reservations data. Our first test, in October 2000, examined Cheap Tickets, Expedia, Lowestfare, and Travelocity and found “disturbing evidence of bias,” including advertised airlines dominating flight listings and bogus itineraries listed first. In June 2002 we tested again—this time with six sites, including Orbitz—and confirmed they all received some compensation from airlines. But then and now, it's difficult to know how such payments affect displays.

Starting in 1995, airlines began cutting base commissions to travel agencies, from 10 percent down to 0 percent. However, many airlines continue to pay TACOs, travel agency commission overrides. These secret agreements can be tied to an agency's total booking volume for an airline, an increase in such volume, or even its volume in conjunction with a rival airline's volume. The danger to consumers, as the Oster-Strong report stated, is that overrides are often not revealed to them, so travel agents have an incentive to withhold information on competing flights.
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Both the General Accounting Office and the DOT's inspector general also criticized the practice.

In 2001, we decided to test this theory at
CRTL
. We transferred our apples-to-apples testing methodology and applied it to brick-and-mortar travel agencies. While contacting 840 agents throughout the country and requesting flight and fare information on routes with low-fare competition, in real time we benchmarked through Harrell's reservations system. The results: Only 51 percent of agents provided complete airline and pricing information upon first request, and only 63 percent provided it when asked a second time. Overall, 25 percent of the agents failed to mention all the low-fare alternatives, and 12 percent didn't mention them at all.

By Any Other Name: Codesharing Deception

In the mid-1990s, travel advocate Bruce Bishins filed a regulatory complaint against codesharing that stated: “Ours is the only industry which permits Coke to be poured into Pepsi bottles and still sold as Pepsi.” And Dr Pepper as well.

Every air carrier has a two-letter code issued by the International Air Transport Association: AA for American, DL for Delta, etc. That code is coupled with a flight number. But in the case of codesharing, two—or more—airlines can sell tickets on a flight operated by a single carrier, and usually such agreements are reciprocal, so in other regions that carrier sells tickets on flights operated by its partner(s). Today codesharing is found in three prevalent forms: between mainline carriers and their regional partners; between domestic competitors, such as United and US Airways; and within international marketing partnerships, particularly the three global alliances—oneworld, SkyTeam, and Star Alliance.

Not surprisingly, codesharing began with a regional carrier. Way back in 1967 a Henson Airlines flight from Hagerstown, Maryland, was linked in Washington, D.C., to Allegheny Airlines.

Ironically, those companies that most benefit from codesharing today were among the early detractors. When Bob Crandall was chairman of American, he vocally criticized the practice and later called it “bad for the industry and worse for the public interest.” Back in 1984 the
New York Times
reported that a spokesman for United had assailed codesharing by saying, “It misrepresents two airlines with different levels of service which are indicated as one airline. We think it misleads the public.” Today, of course, United is one of the most aggressive proponents of codesharing and a member of Star Alliance.

So who benefits from codesharing and international alliances? Unsurprisingly, it's not the passengers, because the practice increases airfares as well as airline profits.

In 2010 I cooperated with the DOT Inspector General's Office on an audit of codesharing practices and how they affect consumers. One inspector told me the goal was to bring attention to such policies, so there are no gaps or opt-out opportunities. The inspector general also agreed with my recommendation to the FAAC that the Transportation Department's Monthly Air Travel Consumer Report be reorganized with regional airlines aligned beside their mainline partners, so therefore consumers could easily see how
all
domestic airlines perform in the rankings each month.

The Death of Antitrust

For the legacy airlines, codesharing means big profits with little exertion, and the highest yields are found in international alliances. For example, oneworld reportedly generates more than $3 billion annually in “incremental revenues”—and that's the smallest of the three global alliances. Together the airline members of those three partnerships carry 73 percent of all passengers worldwide.

If you're an airline executive, there is virtually no downside to codesharing. As airline analysts note, it increases an airline's size and scope, which is critical. However, it's artificial expansion, in name only; Coke is still not Pepsi and United is still not US Airways, no matter how many marketing and advertising campaigns imply otherwise.

The long-standing antitrust laws were designed to keep airline executives from colluding on pricing. Of course, such laws have been broken repeatedly through the years. But antitrust immunity means illegal behavior is now legal, and price-fixing can be done in the open. The game-changer in airline codesharing came in January 1993, when Northwest and KLM were granted immunity for routes between the United States and Europe. Since then, dozens of other carriers have received such blessings.

A white paper published by Daniel M. Kasper and Darin Lee concluded: “Based on the empirical evidence, it seems clear that global alliances and antitrust immunity have produced to date enormous benefits for consumers, both in terms of lower fares and more convenient, integrated service.” But the dangers to consumers are still emerging.

Not only do global alliances provide more market power that can be used against smaller competitors, but experts worry these partnerships can allow member airlines to bully airports and even governments. And the larger these alliances grow, the harder it will be to control them.

Also, there are dangers in picking the wrong partners when there are tangible safety or service issues. In June 2011 Delta found itself immersed in a public relations brouhaha when the
Huffington Post
and other media organizations reported the SkyTeam alliance was welcoming Saudi Arabian Airlines, the flag carrier of a nation with discriminatory and anti-Semitic visa policies. In this case, codesharing meant Delta and other SkyTeam members were in the uncomfortable position of enforcing its partner's unsavory procedures.

The Peculiar Tone-Deafness of Airline Executives

“I honestly don't think many airline executives have any concept of what it's like to be an average passenger,” says one industry veteran. It's a fair point. After all, senior execs don't get bumped. They board first. Flight delays and cancellations are rare indeed, since operations personnel ensure they are provided the best aircraft and freshest crews. Their baggage is not checked, let alone “mishandled.” They never sit in middle seats or fight for overhead bin space. And they are never subjected to what I term the Information Vacuum—when passengers stare at flight information display screens and wonder, Will I get home tonight?

(For the record, I repeatedly contacted the current heads of several domestic airlines, but only Glenn Tilton of United/Continental and Gary Kelly of Southwest agreed to interviews; the CEOs of American, Delta, Frontier/Republic, JetBlue, Spirit, and US Airways did not make themselves available or did not respond in time.)

In July 2011 the
Atlantic
published data from the American Customer Satisfaction Index to compile “The 19 Most Hated Companies in America.” Mixed into a list dominated by the electric, gas, and telecommunications industries were four domestic airlines: American (#8), United (#7), US Airways (#6), and Delta (#2). The comparison to commoditized utilities was not accidental. To many observers, airline executives work in a service industry but act as if they work for utilities, and don't seem to hear the rising crescendo of passenger complaints.

“They just don't get it,” says Charlie Leocha of the Consumer Travel Alliance. “The reality is they treat people like cargo and they treat their workers the same way, as if they're numbers on a flowchart. They could have treated passengers better. They live in a different world.”

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So You Think You've Found the Lowest Fare

The airline business is the closest you can get to war in peacetime.

—Herb Kelleher, chairman of Southwest Airlines

W
hen the airline industry claims that airfares have remained stagnant over the last thirty years, my response is—well, yes and no. Fares are a function of competition, and on routes with no low-cost carriers, passengers get gouged. And one academic found fares fluctuate by the distance of the flight.
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In a white paper on airline deregulation, Elizabeth Bailey of the Wharton School noted: “There has been enormous price dispersion from deregulation both within and across routes. Across routes, fares have fallen more on long routes than short routes.” What's more, there is such a range of prices being offered on any given flight, it's entirely possible two passengers crammed in elbow to elbow paid fares that differ by a factor of ten. And let's not forget that added fees represent airfare hikes in disguise.

Many airline executives and Wall Street analysts, of course, look at airfares from a very different perspective. “They can't raise prices fast enough,” says Helane Becker. “Our biggest concern is smaller airlines will get cocky and start to cut fares.”

I spent thousands of waking hours from 2003 to 2006 endlessly trolling the Internet for the lowest airfares. As the project manager for a grant-funded analysis of online travel for Consumers Union, I went overseas and even examined travel sites in countries throughout Europe. Yet every time I was interviewed on TV or radio, my sound bite was the same: “Smokey Robinson was right—you gotta shop around.” Our findings were conclusive: no single travel site offers the lowest fares on all occasions, and in turn the lowest fare could turn up on any given site. The complexities of airline pricing and airline distribution have created a labyrinth that no one can truly penetrate.

What's more, it can pay to shop at various times (particularly on Tuesday afternoons, when new fares are loaded into reservations systems) and to tweak your itineraries; departing even one day earlier or later can mean big savings. Using nearby airports can help land a better ticket price as well. And no matter where you find a good airfare, make sure you check with that carrier's own “branded” website, since the airline may be offering the best deal there.

But the flip side is that airlines watch their customers very carefully, and now more than ever, all customers are not created equal. I was on board a Virgin America Airbus A320 recently and the flight attendants repeatedly reminded us the forward lavatory was for the use of first-class passengers only; in other words, 8 people shared one toilet, while 141 shared the remaining two. So it's no surprise that ratio of 8 to 70.5 seems fair to the airline's pricing department.

It's a given that passengers in business class and first class are treated better—boarding first, more overhead bin space, a powerful curtain separating them from
us
. And naturally frequent flyer elite members travel in rarefied air as well. News reports in the summer of 2011 focused on Tom Stuker, the first person to reach ten million miles on United Airlines; the carrier not only named a Boeing 747-400 in his honor, but he even has his own dedicated reservations line (presumably not in India).

What many passengers don't realize is how the airlines further divide the rest of us in economy—by the type of ticket we purchase, how much we pay for it, and where we buy it. Sometimes this divide is all but acknowledged by an airline executive. For instance, after
Consumer Reports
published an airline survey in 2011 that ranked US Airways last, Robert Isom, the airline's executive vice president, stated: “I wonder if this survey really captures the customers we focus on.” The flip side, clearly, is Isom acknowledging his airline carries an awful lot of customers US Airways does
not
focus on.

Don't let anyone tell you the booking channel doesn't matter—for the airlines, the medium truly is the message, and the message is all about how you'll be treated. Travel ombudsman Linda Burbank notes this as well: “I get very few letters from elite frequent flyer members.” In fact, where you book and how much you pay for a ticket does have an effect. Burbank sees a lot of complaints from passengers who booked through third-party travel sites rather than directly through the airlines. This can lead to issues over fare increases and change fees, since now you're navigating the fine print produced by two sets of corporate attorneys.

In the case of business travelers, their tickets are often bought through corporate travel departments or mega-travel agencies that receive discounts and other perks based on volume. Again, not all passengers are treated equally. Reservations agents are often paid based on productivity—that is, tickets sold—so spending time on the phone assisting passengers who have already booked actually costs the employee money. Little surprise that some agents choose to “transfer the call to limbo.”

In 2011 I attended a conference where Pauline Frommer, daughter of travel writing icon Arthur Frommer and editor of Pauline Frommer Guides, said, “If you book ten months before you travel, you're a sucker.” So when should you book? Oh, boy. Sometimes bargains are found early in the process, and sometimes quite late. How's that for a wishy-washy response to a dysfunctional industry? “It's incredibly frustrating,” admits Jami Counter of TripAdvisor. “If you're comfortable with the price, you almost should just buy it.”

The alternative is to keep shopping. But at least airline pricing has gotten simpler thanks to the Internet, right? No one's ever uncertain about a good airfare, huh? Of course, the guy next to you may have paid $400 more, or $1,200 less. And an upgrade to business or first may be four to six times the cost of economy, though you do get that $3,500 hot towel. Just choose the booking channel and you're on your way. Visit an airline ticket office? No, most have been shut down. Call? Don't forget that fee. Contact a travel agent? The few not driven out of business by airline commission cuts don't usually find it profitable to process tickets anymore. Go online? Sure. But where? Expedia, Orbitz, or Travelocity? An “opaque” blind bidding site like Priceline or Hotwire that conceals the name of the airline and the itinerary details until after your credit card is charged? A wholesaler or consolidator that offers no refunds? The airline's own “branded” site? Don't forget, you still need to factor in Saturday night stayovers. And the time of day, week, and year you'll be flying. And peak and nonpeak travel times. And an advance purchase window of 7, 14, or 21 days. And whether or not it's refundable. Or cheaper at a nearby “secondary” airport. You'll probably need to connect at a godforsaken hub located eight hundred miles in the wrong direction, so add on some additional fees. Of course, you need to calculate the mandatory add-ons, including federal taxes, passenger facilities charges, 9/11 security fees, and fuel surcharges. And then you can start adding up the rest of the fees. Otherwise, yes, shopping for an airline seat has never been easier.

The Complex World of Airfares

According to one of the mega-travel agencies, at any given moment there are
six billion
airfares housed in the industry's global distribution systems, formerly known as computer reservations systems. About half of those fares are designated for corporations, leaving roughly three billion different pricing combinations for everyone else. No wonder most people think the guy in 24F paid less—chances are, he did.

A lot of what confuses, frustrates, and angers airline customers can be traced back to simple letters of the alphabet: those “fare basis codes” that are stamped onto the tickets. The most recognizable are F (first), C (business), and Y (economy). In fact, each airline can have a dozen or more subclasses of fares, with as many as twenty-six separate airfare codes for one class of service.

These letters indicate the many types of restrictions that may apply to each ticket, such as advance purchase (when the ticket was bought), minimum stay requirements, and refundability. Like snowflakes, no two flights are priced exactly the same, and complex yield management logarithms determine the mix of fares available based on routing, time of year, day of week, time of day, etc.

There's a flip side to this complex ranking of passengers. Not only do the codes indicate how much a customer pays, but they also indicate how that customer will be treated during “irregular operations.” The ticket price and the booking channel will determine if the passenger is bumped or encounters an extended delay or cancellation.

The Associated Press summed it up: “The good news: The better code you have, the better your chance of not getting bumped. You also might receive more frequent flier miles if you're in the top tiers. The bad news: The main way to improve your code is to pay more.” And woe to those who purchased their tickets online, but not through the airlines' own “branded” sites; consider that customers who buy tickets through “opaque” sites such as Priceline and Hotwire forfeit frequent flyer mileage entirely.

It wasn't always like this. Traditionally there were only four fare categories: F and Y for first and coach, FN and YN for night flights. And the same fares applied from entire regions of the country, so prices were identical from cities such as Boston, New York, Philadelphia, or Washington to cities such as San Diego, Los Angeles, or San Francisco.

Airfare pricing expert George Hobica also knows of no other industry other than perhaps semiconductors with such complex pricing: “I don't think you can talk about it in rational terms. It's a race to the bottom.” There's that term again, only here applied to pricing rather than cost structures.

Analyst Bob Harrell can even pinpoint the date airline pricing changed for good in America: April 24, 1977, when American Airlines introduced the SuperSaver program, offering discounts of up to 45 percent off fares between New York and California, which the carrier describes as “the most popular fare in its history.” Note that this occurred prior to deregulation in 1978, as the Civil Aeronautics Board under Alfred Kahn was ushering in a new era. Harrell says, “That was the beginning of the incredible level of complexity. Pricing complexity goes up and down. They're always tweaking it. But most of the scientific ways to bring more revenue bring more complexity.”

For consumers, the antidote in recent years has been low-cost carriers such as Southwest, which offer a more simplified fare structure, often consisting of just several prices for a single itinerary. But even bare-bones Southwest has allowed complexity to creep into its system, particularly after introducing fully refundable Business Select fares.

Time and again, I've run into this issue, when people ask me that simple question—“Is this a good airfare?”—and I'm forced to sigh and respond, “Well, you see in 1978 the industry was deregulated. . . .”

The Commoditization of an Airline Seat

In researching this book, the one term that was most often raised by others without prompting was
commoditization
. Analysts note there's little difference among economy seats these days, so a plane is a plane is a plane.
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Think of it in terms of hotels. There is clear differentiation among brands—no one confuses Econo Lodge and Ritz-Carlton—and that carries over into how travel sites display these products. There is much arguing within the lodging industry over how hotels are rated by stars, but even allowing for some latitude in such subjective rankings, the consumer is never confronted by a booking screen that lumps in Super 8 and Four Seasons side by side. So why don't customers choose a hotel room strictly on price, as they do with airlines? I once had a hotelier explain it to me this way: “There's a big difference between which seat you'll rest your ass on and which pillowcase you'll rest your head on.”

Yet airline executives argue their brands are different, too—how can you compare full-service United and low-cost Southwest? But every day hundreds of thousands of travelers do just that: compare them side by side strictly on fares. What's more, Southwest consistently ranks higher in customer satisfaction than United, which industry wisdom says is because Southwest does a better job of “managing expectations.”

Industry experts note the Internet has kept travel prices down by pressuring airlines and other travel companies not to be ranked unfavorably.
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In other words, no airline wants its lowest fare to be listed in the Siberian confines of a second screen, particularly since marketing research indicates many consumers never scroll down that far anyway. So the Web has become the great equalizer, bottom-lining every airline's lowest price even if some of those airlines offer very different products, services, and cost structures.

Actually, Rolfe Shellenberger traces commoditization back to the airline industry's roots. He points out that in the pre-automation days, the most critical travel publication was the
Official Airline Guide
, a phone-book-sized text first launched in 1929 that listed the times and destinations of every commercial flight in the country by carrier. In those days passengers generally selected flights by choosing an airline, since price was nonnegotiable and flight frequencies were often duplicated. Then in 1958—the very same year the jet age began in earnest with the introduction of the Boeing 707—the
OAG North American Quick Reference Edition
was launched, which sorted and sequenced the flight schedules of all airlines. Thus an entirely new way of booking flights became available. So for the first time consumers could look up flights based on routes and time of day, and not just by airline. As Shellenberger says, “The
OAG
bastardized the entire industry by saying all airlines are the same.”