Forget #PaxEx: Here’s What the Market Wants from Airlines

We often discuss why airlines make perplexing decisions in favour of unbundled fares and aircraft configurations.  The Peanuts posts are entirely dedicated to the topic of the airlines’ quest for profitability is a sin and the various airlines’ decisions on how to package their products.

Some get it right.  Other’s insist on telling their customers why they (the customers) just don’t get it.

But what about the people who pay the airlines to fly those planes?  What do the markets and the stockholders think?

Well, if this recent article on Barron’s is to be believed, then unbundling services is the way to go, as is making drastic changes to your loyalty programs and adding more seats on those planes.

As Ben Levisohn writes in his May 16 article, Delta Air Lines Still the Best; More Seats for JetBlue? Morgan Stanley’s John Godyn believes that recent changes at Delta make it the best airline in the US Market.

This the particular part of the quote in question which caught my eye:

In a nutshell, we feel slightly more confident in DAL’s non-fare revenue opportunities and ability to maintain sub-inflationary [cost per available seat miles] ex-Fuel growth in 2015 and as a result raise our current 2015 EPS estimate of $3.90 to $4.00 – reaffirming our Street-high stance.

I love that he used the term “nutshell.”  This is definitely a peanuty point of view.  DALs “extra” charges make it an attractive stock to Godyn, as well as their smart cost-cutting across the board.

As recently reported by Karen Jacobs of Reuters and featured on Skift, Delta is fully aware of this.  Here’s the quote from that article which might be of greatest interest to passengers.  (Delta President Edward Bastian speaking at a Bank of America Merrill Lynch conference.)

Bastian said Delta saw the greatest opportunity to boost profit in ancillary products that include food and seat upgrades, adding that 20 percent of the carrier’s revenues are now derived from non-traditional ticket sources.

Of course Delta thinks this way.  They are a business; a publicly traded company.  They need to make a profit and depend on support from the markets to fund their growth.

Let’s go back to the Barron’s article.  Levisohn quotes the Wolfe Research’s Hunter Keay and Jared Shojaiain as saying:

One area where we believe JBLU has an opportunity to improve earnings is cabin densification. Simply put we think JBLU doesn’t have enough inventory for sale. The concept of flying planes with 34” of legroom in coach is an idea that’s not only shunned by the most profitable airlines in the country, but it’s also one that has failed in the past. American tried it and failed 15 years ago – what makes JBLU so different?

Well, there go my views of the potential success of a Low-Cost LUX business model–right out the little round window.

It’s a shame, because I still feel there is a niche market with potential for growth based on product differentiation.  Still, there’s no arguing with the numbers and a 1.2% gain in share price for JetBlue over last year (as quoted by Levisohn) is not a very impressive figure.

It gets better, for those of you wondering about tighter seating on the A320 (something I just wrote about for the Runway Girl Network), here’s what Keay and Shojaian had to say:

Southwest Airlines…perhaps a [comparison] for JBLU considering Southwest Airlines’ customer service focus, operates its B737-700s with 31” of pitch. If JBLU converted all its A320 coach seats to Southwest Airlines’ B737-700 seat pitch then it could add at least one more row without sacrificing any high yielding Even More seats. This alone could result 18% EPS accretion.

The cackling you might hear in the background originates all the way here in Denmark, where I am in stitches over this.

So it is written.  So it shall be done.

From a PaxEx perspective, we should point out the real possibility that Godyn, Keay, and Shojaian never fly on Low-Cost Carriers, nor in coach on traditional carriers.

But these numbers are not their numbers.  The numbers are our numbers.  We, the passengers, keep voting with our wallets.

Southwest, the first of the true Peanuts, has managed to hold on to their “no-baggage-fee” policy and other niceties, but perhaps we shouldn’t count on those in the long-term.

So maybe Ben Baldanza of Spirit has it right.  Spirit might be the extreme example, but passengers do seem willing to support this model, even begrudgingly.

I’m putting my nutshells on the table now and saying that even this Ultra-Low-Cost will veer towards a more mainstream Low-Cost model soon.  Regardless of the economic benefits, the general loathing and disdain shown to Spirit is more than any brand can stand for very long.

But I could be wrong.  After all, it’s up to passengers to decide.

The good news in all of this is that things don’t tend towards extremes.  Things generally veer from the extremes to find a comfortable middle ground.  For the most part, I’ve found that to be true.  There’s no reason to think that one day we’ll all be crowded like sardines in a tin can, with no other product on offer in the market.  There will always be airlines willing to offer more, just to be different, even if it isn’t the wisest business move.

What Keay and Shojaian do not point out, when they mention America’s previous failure with a better cabin product, is that aviation is essential infrastructure.  Even if massive government bail outs become unavailable to save an airline from disaster (American) then some sort of fix will be worked out to get major airlines out of trouble (think American again, this time with USAirways).

Those rescue attempts come at a price.  They are limited to major carriers, and there are fewer of those around than ever before.  This leads to a greater need for the public to cleanup “mistakes” in product.  It also leads to higher fares and fewer options for passengers.

Keay and Shojaian are right to point this out as a possible strike against JetBlue, from a market perspective.  JetBlue is not at a level where it can be considered essential infrastructure. Regulators might decide that a JetBlue failure puts market competitiveness at risk, but we shouldn’t count on that.

Or JetBlue might make this entire discussion moot, and heed the advice of Keay and Shojaiain.  There are so many things going on with that carrier now that anything is possible.

This video from Spirit should get us all ready for the worst case scenario.  Thanks to Samantha Shankman at Skift for bringing it to my attention, and giving me another good reason to giggle.

Can I just say that this “suitcase,” which can fit everything you “need” when you fly, seems made of airplane life jacket material?  Spirit really wants passengers to “ditch” the excess.

I don’t know about other people, but I never could manage to wear those many layers of clothing when I lived in Florida.  Not even when I lived in New York, in the middle of winter–with a foot of snow.  Nor when I went to Alaska.  So, hmm.  Good luck to Theresa.

Where is all of this headed?

The market will surely decide.  The market, in this context, isn’t just the stock market and its (likely) First Class flying analysts.  It is the larger market.  It is ourselves.

If we keep voting against our stated preferences, in dollars and cents, then it makes no sense to complain.

Unless, we’re hate-flyers.  Then it’s perfectly all right to complain.

We wouldn’t want to eliminate the only pleasure those passengers get from flying.

But, if any airline could dream up a way to charge passengers for complaining, they’d make a fortune.

JetBlue featured image taken by Anthony Quintano and used under Creative Commons Licence.

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