4 ways major airline carriers have reached new lows

Despite tailwinds, airlines continue to operate like its 1985. From a distance, it may seem like it’s a great time to be an airline. Packed airports, no price regulations, little competition and record low energy prices. Despite all of these positive tailwinds, carriers still can’t get out of their own way.

4 Ways Airlines Have Reached New Lows

Plummeting energy prices: a blessing and a curse

The stocks of all three major U.S. airlines (American, Delta, United) have been turbulent, sliding over 30% since late April. It turns out plummeting energy prices are both a blessing and a curse. On November 20th, our post titled ‘If a $362 business class flight isn’t a fare war, what is it?’ predicted lower oil could be problematic. Though lower oil saves airlines money, it also diminishes the buying power of industrial travelers. Travelers with exposure to energy and manufacturing have historically been among the biggest buyers of business class travel, but have been forced to tighten their belts in response declining margins. Our revelation has now become reality. Wall Street has caught on and now airline stocks have been selling off.

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Archaic reservation systems

Carriers could respond proactively to a rapidly changing world. Instead, they sit on the oligopoly status the Obama administration gifted them and use pricing models from the 1985. Who does anything today the same way they did it in 1985? In case you think we’re being extreme, carriers still use reservation systems built in the late 1960s. Sure, they use a pretty interface making it web or mobile friendly but it’s still the same old archaic system. American still uses Sabre, Delta uses Travelport (formerly Worldspan) and United uses Galileo. Next time you buy an airline ticket, remember that you’re being connected to a reservation system used when most planes still had propellers and JFK was the president rather than an airport. Airlines’ refusal to update their fare systems is the equivalent of Apple continuing to push the Apple IIC today. Oh, don’t know what an Apple IIc is? Google it!

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Outdated pricing models

Airlines continue to play ‘footsie’ with luxury travelers, massively overpricing fares several months before departure only to slash prices up to 90% to fill empty premium class cabins. International business class fares typically start high, then fall sharply in response to anemic demand before spiking higher as seats are filled during the 90% fare cuts. This pattern is known as ‘high – low – higher’. Carriers are well aware that business fares are overvalued based on so few seats being sold in advance. Carrier’s keep waiting for that magical day when flyers return to overpaying several months in advance. Newsflash! Since 2009, fewer travelers have been overpaying in advance for luxury air travel. Fewer than 15% of international business class seats are sold at their initial asking price. This means the other 85% of the seats are filled at massive discounts or through mileage programs.

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Hey carriers, here’s another NEWSFLASH. Instead of using a ‘HIGH-LOW-HIGHER’ revenue model, why not try something novel like ‘LOW to HIGH?’ In other words, why not give leisure travelers an incentive for purchasing early by offering the lowest business class prices months in advance. Then, start raising fares as seats are sold. Brilliant idea? It’s actually quite simple. For all the breaks the Obama administration has given U.S. carriers including hurdle free mergers, it’s time airlines stop trying to trick flyers into overpaying and start acting with transparency. With all of the breaks airlines have received, ranging from bailouts to lack of government interference, there’s no reason airlines need to deceive leisure flyers with OVERVALUED business fares only to slash prices by 90% when they’re not looking. While they’re at it, how about eliminating those absurd fuel surcharges which are typically over $800 on most round trip tickets between the U.S. and Europe.

Low price-earnings ratios

Despite all the positive tailwinds (low oil, merger approvals, financial bailouts, no regulations) the U.S. airlines still can’t make it work. Airlines don’t build the planes. Airbus and Boeing do. Airlines didn’t create the destinations. We thank the LORD every day for his beautiful green earth he’s given us. Despite all the breaks, Wall Street has given American and United a Price Earnings ratio (P/E) of 2. In case you didn’t know, a P/E of 2 is usually given to industries without growth or going out of business. U.S. airlines have used up every possible lifeline and there are no new catalysts in sight. Weak growth, terrorism, and Zika virus are additional area of concerns likely to ground carrier growth for the foreseeable future.

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It’s time for U.S. airlines to get proactive and start responding to empty business class cabins. Like other industries, carriers need to stop valuing seats on what they’d like them to be worth and instead on what travelers are willing to pay!

Lars Condor is the Managing Director of Passport Premiere.

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Comments (7)

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  1. Maya Russell says:

    Interesting reading this post. How can they still have archaic reservation systems in 2016!They need to catch up fast.

  2. H Corver says:

    Very interesting an valid read! With an increasing amount of air travelers annually, one would think airlines are ready to change their sales strategies. Clearly not … yet.

  3. J Misley says:

    Just FYI, United left Galileo/Apollo years ago and now books everything on Amadeus (same archaic type system though).

  4. Nice one. But I thought these systems are updated to meet the travellers needs, Well from this article its clear they are not. I second your Idea of low High. This can motivate travelers to purchase the ticket earlier enough.

  5. Kay Row says:

    I do not fly Internationally on Domestic carriers. Lufthansa for all my flights to europe, and Qatar/ Emirates Airlines for all my Middle East and Asia travels. AA,UA, Delta have never tried to whoow My business either. Soo disappointed.

  6. Annette Edgar says:

    Passengers are fed up being squeezed 8nto overcrowded planes and fed slop in economy. It’s time airlines raised their prices to a level where travel was comfortable for all and still make good profits. Most people would pay an extra 20% on their annual holiday and travel in reasonable comfort instead of being pushed on planes like cargo.

  7. Terrence says:

    Good points discussed above. But the main thing that bugs majority of travellers nowadays is that airlines keep treating them like cattle, milking cows really. Airlines have been racking up record profits since oil prices plunged. With more fuel efficient planes , their profits trebled. Yet instead of passing on some of the savings to passengers ie : better in-flight food, bigger seats, bigger leg room, better treatment of passengers ( several airlines are facing lawsuits over violence to passengers ) , or even better priced fares –
    Airlines do the exact opposite : they add more seats to squeeze more people in the plane like sardines , almost no leg room, almost no reclining without offending the passenger behind you, forgettable in-flight food, and very bad treatment of passengers in general.
    It’s high time for airlines to be subject to regulations just like any other industry to prevent surreptitious pricing , over booking, customer gouging, and abuse.

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