A time for great change

From airline economics to airport revenue sources, commercial aviation is changing

Meehan notes that the current average domestic load factor is 78 percent. “Not only are the carriers cutting capacity, they’re raising fares,” she says. “The price of the average domestic round trip is up 10 percent for the Thanksgiving holiday. This is the feeling going forward. Is the economy ready for these kinds of increases in prices? We are back at fare levels we thought we would never see again.”

With regard to the low-cost carrier model, Meehan asks, is it maturing? “I used to say yes, now I’m not sure,” she relates. “The low-cost carriers have such a cost advantage than I think the legacy carriers do.”

Orders for new airliners are seen as another issue. Aircraft deliveries were at 155 per year between 2000 and 2005 — between 2006 and 2010, that dropped to 126, says Meehan. “In terms of the booked orders for airlines, there’s 89 aircraft annually coming on for the next five years; that is just not enough to account for replacement,” she adds.

What does this mean for airports? Traffic is down because of the recession; it is coming back. But traffic has the potential to be choked off by capacity declines and fare increases, warns Meehan. “That puts airports under intense pressure to reduce costs, keep costs low, and to defer investment.

“The new thinking is coming from technology; the way you are going to be able to improve the passenger experience is through technology.”

By leveraging the knowledge that airports have of their passenger, and in understanding and knowing who they are, how they feel about what the airport offers, and what the airport could be doing differently; and also finding that out by age group, by gender, and by how often they travel — will help generate more income because it gives the ability to target the customer, explains Meehan.

“Airports should think out of the box,” she says. “When it comes to what people complain about, it’s delays, and security … things you can’t really do much about. What airports can control needs to be done better. To return to real sustainable growth, we need to improve the passenger experience; the passenger has to want to travel.”

On the topic of ancillary air carrier revenues, Meehan says those revenues have quadrupled, and are basically driving the profitability of the U.S. airline industry.

“I see the legacy carriers being challenged by such a large Southwest Airlines carrier that doesn’t have baggage fees,” says Meehan. “I see baggage fees disappearing — I think the creative carriers will start to think about charging for things that were never offered before, such as comfort — extra leg room, empty middle seat, etcetera.”

The New Southwest

“The airline industry is consolidating and is still in a period of uncertainty, but it has at least reached profitability,” says Meehan. “The question is, is that profitability sustainable? The combination of Southwest and AirTran increases that uncertainty.”

With regard to the proposed Southwest/AirTran merger, “I mostly see positive impacts for airports,” relates Meehan. “I don’t see it impacting sort of the point-to-point markets. Is there going to be a shift in the real focal point markets? Maybe. I think a question mark would be, does Southwest continue the hub and spoke operation of an AirTran, or do they go for higher utilizations and move it into [Southwest’s] very successful model of point-to-point.

“For the most part, I think this is strongly positive for airports. To me, the name of your game is passengers. I see consolidation in the low-cost carrier area, making them stronger. If the low cost carriers become the price-setters, that’s good for us. The stronger they are, the better it is for passengers, and the better it is for airports.”

Meehan speculates that Southwest will get rid of the Boeing 717 it will inherit from AirTran’s fleet because it is “just too fundamental to the Southwest model to be a 737 player, and to be a single-aircraft player.

“With the combined carrier there will be some modest shrinkage in the short-run, with growth in the long-run. I do not necessarily think they will take airports off the grid; these guys are all about connecting points to their focal points and putting people on the grid. I think Southwest will accelerate the retirement of the 717, but it will act as a bridge until they figure out what they’re going to do.”

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