A time for great change

PITTSBURGH — While airports were convening here in September for the annual meeting of Airports Council International-North America, the merger of United and Continental was being finalized and Southwest’s proposed buyout of AirTran was announced. Both are signs of significant change occurring in the airline industry, which has signficant repercussions for U.S. airports. One thing that hadn’t changed was Capitol Hill’s inability to get long-term

FAA/industry reauthorization passed, and instead passing its 16th consecutive short-term continuing resolution. One hot topic: global integration of a new security regime.

On the subject of security ACI-NA president Greg Principato comments, “I have to give the Administration a lot of credit. After the Christmas bombing attempt, they had to move quickly. Beyond that, their entire M.O. has been that they want to collaborate; they want to harmonize. We were able to bring U.S. and global airports and arrange a meeting with Secretary Napolitano and [ACI World president] Angela Gittens in Africa in April. We have a good deal of cooperation now with DHS and their counterparts around the world with the airport community.
“The idea that we have to harmonize and be on the same page — I think that’s the right impulse. We’ll see at ICAO over the next couple of weeks whether it works or not.”

Prior to the conference, TSA Administrator John Pistole met with airports from ACI-North America and the ACI-Europe. “It was packed with discussion, questions, probing. It was an excellent way to put these things out front,” says Principato.

“There are some differences. The Europeans are under a mandate that by April 2011 to allow liquids and gels, regardless of size, to go through on certain flights. They’re struggling with how to comply with that. In the U.S. it’s more of a wait and see attitude to see if the technology will work or not.”

An overriding current that seemed to run through the show on the topic is that it is time to take a global, strategic, best practices approach toward aviation security — one that brings all stakeholders to the table.

Airports and airlines

Deborah Meehan, president and COO of SH&E, Inc., spoke candidly about the changing state of commercial aviation, and the new role airports play in the passenger travel experience.

“I believe we are far from an equilibrium,” says Meehan. “I think Southwest’s proposed acquisition of AirTran shows that people are still churning and burning, and thinking about who they are.

Meehan relates that there have been some rapid changes in the industry, and several months have passed since the industry was in the doldrums. “You feel a lot better now,” she remarks. “My message is: we are just simply not out of the woods.

“When I think about airports I think about three things: What you can do to make the passenger’s life better while at the airport; how you can generate more traffic; and how you can generate more non-aeronautical revenue so you can help your carriers serve the market.”

Carriers have been driving profitability by controlling capacity, explains Meehan. That is not what the carriers typically did in the past, she says. Meehan relates that the carriers have fought for marketshare for years; this year they decided they are not going to fight for marketshare, they’re going to fight for profitability.

“But that is coming at the expense of passenger comfort, traffic, etc.,” adds Meehan. Take Milwaukee for example — almost 20 percent growth, much of it attributed to AirTran. “Either the new Southwest decides to fight the battle against the Frontier/Republic people in Milwaukee, or they decide that it’s not strategic,” comments Meehan. “I think it could go either way.”

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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