On A Wing and Some Air

What is next for Commercial Aviation?

What is next for Commercial Aviation?

I’ve said it hundreds of times to my friends and “family” in the competitive airline industry,

“The only constant you’ll find in the airline industry, is change.”

Until 1978, the carriers in the United States operated in a regulated industry. The C.A.B. – the predecessor to the F.A.A. – oversaw all decisions on routes and what prices could be charged on said routes, ensuring that airlines would be able to operate profitably. This meant if two airlines operated on the same route, the prices were the same, the only thing the airline could compete with was service and standards on board.

Time Magazine feature this as their cover, showing the dramtic chane in perception of air travel.

Time Magazine feature this as their cover, showing the dramtic chane in perception of air travel.

Deregulation of the commercial aviation industry in the United States took place in 1978 and changed the way carriers could operate. Airlines now began to reduce point to point flying and began operating with centralized hub operations connecting passengers and improving efficiency. New entrants considered “low fare” or “low cost” airlines began to emerge charging whatever they wanted on any route. These new entrants did not offer full service with meals and entertainment. Instead, they offered peanuts and fares to match: no “frills” and cheap tickets. This surprised the long standing full service airlines, as passengers flocked away from them and towards these new airlines. Now, these full service airlines had to change their business model to keep passengers coming their way, or face empty planes and possible bankruptcy.

Sadly, over the next 20 years classic and iconic airlines continued to fail or to manage themselves properly, they either were merged into other airlines, or shut their doors completely. Airlines line Braniff, Eastern, Midway, National and Pan Am disappeared from the sky forever. Hundreds of new airlines with seemingly amazing business plans launched in hopes of gaining their slice of the busy US aviation market, however only a handful of them survived long-term.

In the late 90s, airlines were embracing new “regional” jets and routes to smaller cities across the country that once seemed near impossible. Regional airlines moved away from their titles with some of their aircraft touching both coasts in a single day. Smaller cities over 1500 miles apart could now have flights with just 50 seats on them. Major international airlines were embracing the new Boeing 777 and connecting cities over 7000 miles and some +14 hours apart. It seemed that North American and the world itself was in actuality becoming globally connected.

Major airlines in North American continuously tried to out-do each other expanding service between major cities, touting “almost-flat” first class seats on transcontinental flights, and offering premium cabin customers 5 star food and beverages on international long haul service. Gas was still somewhat cheap and older aircraft that were not as fuel efficient as new aircraft were now fully paid for and seemingly able to “print money” on certain routes.

PSA 727

Low cost airlines continued to move along picking up new routes slowly but surely. Southwest continued its migration over California as USAir removed the last of its former PSA 727s from the West Coast and placed them on routes in the Northeast. JetBlue became an entrant offering a free satellite connected TV at every seat back and free snacks in an effort to “bring humanity back” to air travel. Delta gave away the last of their older less efficient DC-9s to former low cost airline Valujet, now operating under the name AirTran. Spirit Airlines plugged along with their older MD-80s on Atlantic City and Caribbean routes. Frontier Airlines began a fleet modernization plan and began expanding again giving them a bigger foothold in the Central and Western US market. Major airlines considered these “low cost” carriers not much more than a nuisance on certain routes and certainly not a threat as they held a mere 7% of the market in 1990.

The economy was bursting at the seams, and the dot-com industry had just burst. Then the events of September 11th, 2001 happened and everything changed all over again.

No one wanted to fly. The economy tanked. Businesses stopped sending their people on trips for work and instead began relying on new technology for video conferencing. The airlines were now losing their last large stream of heavy and hard revenue: business travelers.

Airlines were now operating aircraft that held 300 seats with less than 100 people on them. Thinking this was only a short term reaction, airlines continued with the business as usual attitude. However, things didn’t change; people didn’t want to get on planes, as they were still too scared. Something had to change for the airlines; it would end up being the airlines themselves. Like deregulation, it meant a major change in how they operated. First it meant removing less efficient aircraft, the first to go were Boeing 727 aircraft as they required a 3 man crew to operate versus most modern aircraft which only required a two man crew. The 727 had three engines instead of 2 requiring it to need even more fuel. Fuel was becoming a big concern as it was getting more and more expensive.

Some airlines began to see no end to the red ink and filed for bankruptcy, others followed. Soon the government had no choice but to offer them loans to stay afloat or have the US aviation industry collapse in upon itself.

A menu for food sold onboard for US/AA Airlines.

A menu for food sold onboard for US/AA Airlines.

Soon airlines began removing services that were once considered standard of “full service” airlines. First, airlines would decide to longer offer meals on longer domestic flights with the exception of premium cabins. The only exception to this was Continental Airlines, because they had made the decision years previous to purchase their business partner who provided on board meals essentially bringing the operation in house. Eventually though, even Continental would find it to be a cost they would have to cut and meals were removed from their domestic economy cabins as well. The only choice left: sell food on board to those who wanted it for a profitable amount.

Airlines began slicing off unprofitable routes by the dozen. This left a problem of additional aircraft that they didn’t need which in turn resulted in aircraft being retired and sent to the desert. However, airlines still had these regional 50 seat jets on ordered while they were profitable, now they would have to be operated on routes between large cities because they knew they could fill them. Aircraft such as the single aisle Boeing 757 now began flying transoceanic service. Airlines were doing whatever they could to cut costs.

Some full service airlines still weren’t lean enough to get back in the black and this meant furloughs and layoffs. Tens of thousands lost their jobs. Those who didn’t lose their jobs were forced to give concessions to allow their employers to stay afloat. The trends continued with every airline looking to find ways to cut cost, everything from discontinuing free soda and water on board, to removing entertainment systems off the aircraft, to reducing seat pitch and adding more seats on the aircraft.

Finally, in the mid-2000s, the environment began to change. People started flying again. Not just everyday travelers but business travelers began to return to the sky, the economy was changing. Airlines found themselves inching towards profits again. Shakeups began in the aviation industry again as airlines began to merge to stay afloat, stocks began to rise and airline CEOs began to jump away with golden parachutes. The airlines found themselves leaner than ever and having money in hand again.

Some airlines realized this was the turning point and began placing orders for new aircraft to modernize their fleet. Other airlines took their money and put it back into the airline to improve their service and interiors of aircraft. Soon, airlines began announcing new routes again and advertising improved on-board service.

Low Cost Airline Growth since 1995

Low Cost Airline Growth since 1995

While these major legacy carriers had been reducing service and making cutbacks, something extraordinary had happened. Low cost carriers grew by leaps and bounds. Southwest had had added over a hundred aircraft, JetBlue had grown to over 100 aircraft, AirTran was now flying Coast to Coast as well as internationally. By 2006 low cost and low fare airlines now controlled 30% of the US market. More importantly business travelers were now using these new airlines instead of their full service “legacy” airline counterparts.

Following their lead, legacy carriers tried to create their own brand of low cost counterparts. United created Ted, an offshoot from their main carrier using Airbus A320s, and Delta created Song, a brightly robust carrier using Boeing 757s. While both fit markets for a certain length of time, both ended up eventually being folded back into their parent carrier. As the market had changed over time, now had the low cost carriers. Recently, JetBlue unveiled their new transcontinental product “Mint” in 2014 with flat-bed seats aiming to take away some of the lucrative transcon market from legacy rivals American, Delta and United.

The market has since changed over the years, but now with reference to international carriers aimed at leisure and business travelers. There has been significant growth with charter airlines and leisure long haul airlines. Airlines operated by Air Transat, Condor, Monarch, Thomas Cook, TUI Fly, etc. have all experienced growth over the past 10-15 years as legacy airlines have steered away from leisure routes and focused on business routes. Air Canada now has a low fare offshoot called Rouge. Lufthansa is starting a long haul leisure airline with offshoot EuroWings. Singapore Airlines has Skoot. Qantas Airlines has Jetstar. Each airline now has a counterpart catering to the low coast market.

Emirates Airlines A380

Emirates Airlines A380

What has been said by US legacy carriers to be possibly one of the most destructive forces has been the entrant of full service carriers from the Middle East. These carriers offer lavish high end travel options for passengers in premium cabins and even enhanced service for travelers in economy cabins with far higher standards than US carriers.

US Carriers have stomped their feet and point fingers at these carriers claiming that they are given a blank check from their government to operate with, and being so is uncompetitive if not outright unfair. Those carriers receiving these charges however retort back and point to the US government bailouts for legacy carriers after 9/11 – both continue going tit for tat.

The seemingly most recent and loudest new entrant into the US market that current US carriers are pointing fingers at isn’t a full service airline at all; it’s Norwegian Airlines. Norwegian has a large low cost carrier operation throughout Europe, but it has now begun service from multiple points in Europe to cities in the US. What is the problem here? US carriers claim that the airline is operating with a foreign certificate to get around labor laws, yet they are employing Asian, European and US citizens to staff their aircraft.

norwegian-59fd5e578fd1d702

What makes Norwegian different? While they are a low cost international airline, they do not cater towards full service business class passengers. Instead they cater towards leisure travelers going on holiday or vacation. They do offer a premium economy and an economy section on their long haul aircraft, but not on their short haul intra-european network. Norwegian also operates their aircraft in a higher density layout and doesn’t offer free meals, drinks or snacks, everything from blankets to food is for sale. However, they differ from legacy carriers on international routes also in that they only operate most routes a few days per week in each market. This allows them to enter muliple markets at reduced frequency using a smaller number of aircraft.

For example:

Norwegian’s 787 aircraft operate with 32 seats in Premium Economy and 259 seats in Economy.

Total is 291 seats

United Airlines 787 aircraft operate with 36 seats in Business, 70 in Economy Plus, and 113 in Economy.

Total is 219 seats

American Airlines 787 aircraft operate with 28 seats in Business, 57 in Main cabin Extra, and 141 in Economy.

Total is 226 seats.

Like other long haul leisure carriers, with Norwegian they offer the same aircraft with fewer amenities and about 30 percent more seats on their 787 aircraft. However, as mentioned previously Norwegian only operates its flights a few days of the week between different destinations. This is unlike legacy and full service airlines which operate their international flights on a daily basis to target business travelers with less flexible schedules.

Norwegian however is not the only foreign carrier eyeing the US low cost international market. RyanAir, a super low fare carrier of Europe – who charges for everything from printing a boarding pass to drinks – has made its intention of flying across the Atlantic known.

So, what does this mean for current US carriers? As we have seen in the commercial US aviation history, it’s either adapt to the competition or see those passengers head to your competitors.

In some markets domestically Delta has already gone head to head with their low fare counterparts offering “basic” fares which include no extras such as picking their seat in advance. These fares however are only available in markets where they compete head to head with low cost rivals such as Southwest and Spirit Airlines. However, it might be safe to say that we may see these basic fare types may start popping up on routes where they compete internationally with airlines like Norwegian in the future.

The US carriers however are now being pulled in both directions. Compete with the Middle East ME3 carriers with high service standards for business travelers and compete with low fare long haul carriers. It seems there is now a need for 3 or more classes of service on some markets.

Why does this seem familiar? That’s because it’s already happened.

A seatmap of a Delta L1011 with 3 classes of service.

A seatmap of a Delta L1011 with 3 classes of service.

Back in the late 90s most US airlines that offered 3 classes of service on their long haul fleets – First – Business – Economy but that began to transition to a business/economy model. This changed due to US businesses being no longer able or willing to fork over high dollars for tickets booked in an “F” class but would however allow their employees to book in business class cabin which was often coded with “J” class for the fare booking.

We are now again seeing history repeating itself. Airlines are operating business class, economy “plus” cabins and basic economy as a 3 class cabin. As this evolves it will likely resume itself to a true 3 class / first – business- economy class layout just with different names. Business class will offer lay flat seats and fine meals, the premium economy/economy plus offering a bigger better seat with better meal and amenities, and lastly the standard economy seat and appropriate service.

Most likely in the next 5 years you can expect to see some if not all major US Carriers offering premium economy on their long haul fleet. This doesn’t mean they will remove business class entirely but you can probably expect to see the business class reduced in size as a premium economy is introduced.

Major carriers in the US have placed large orders for bigger planes for their long haul flights over the past few years, and with the current change and shakeup in the industry it wouldn’t be a surprise to see these new aircraft arrive already fitted with a business class, premium economy and economy cabin- perhaps even premium economy and economy plus to meet every passengers checkbook.

A big question is what will become of the aircraft that major US carriers will be soon retiring. Recently, Canadian low cost airline WestJet purchased a handful of Boeing 767 wide-body jets that Qantas Airlines of Australia was retiring. The refitted them with a premium cabin in addition to a normal economy cabin and will begin transoceanic service this winter. American, United and Delta all are set to retire a large portion of their wide-body aircraft over the next 10 years as they replace them with newer more efficient aircraft. What will become of those older less efficient aircraft?

Since many airlines – like Norwegians – low cost long haul business model seems to be working and getting a lot of attention, it’s not impossible to guess that we may see something like their operation under a legacy US carrier umbrella in an effort to compete. Some of the legacy carrier’s older aircraft could be refitted to just a premium economy and a high density economy cabin layout, operating for a few extra years on oddball or primarily leisure routes, only time will tell it seems.

The one thing that is for sure, and that is the only constant in this industry, has been and will always be, change.

 

This editorial contains forward looking statements and opinions; any coloration to future or planned events that actually take place is coincidence due to historical roles of preceding events, sepeculation and or conjecture from expected timelines of aviation operations. Statements made in this editorial are the views of the author and only the author.

 

 

 

 

 

 

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