October 23 - Fleecing US-Europe Passengers


INDUSTRY ANALYSIS

By Kevin Mitchell


Fleecing US-Europe Passengers

It is that time of year again where senior executives at Delta Air Lines, American Airlines and United Airlines (Big Three) boast to Wall Street how successfully they are fleecing US-Europe passengers.

With over 80 percent of US-Europe seats controlled by the Big Three, and their foreign alliance and joint venture partners, the US-Europe market represents a golden goose for them. A market awash with golden eggs. With fuel and labor costs rising, this market power has never been more critical to them. The Big Three and their anti-consumer collaborators have tightened their vice-like grip on the goose’s neck to encourage it to lay even more golden eggs eclipsing previous record-breaking profits. Given rampant and ill-advised grants of antitrust immunity permitting the Big Three and their partners to fix prices, limit capacity to profit-maximizing levels and coordinate schedules, they don’t have to press the goose’s neck too hard.

Delta and United recently announced their third quarter financial results. Predictably, both were giddy over how successfully they are fleecing US-Europe passengers. Andrew Nocella, United’s Executive Vice President and Chief Commercial Officer, told Wall Street analysts that Passenger Revenue Per Available Seat Mile (PRASM) – unit revenue – in the transatlantic was again the strongest year-over-year of any region United serves. Nocella ominously predicted “we continue to expect strong results across the Atlantic for as far as we can see” and United’s President, Scott Kirby, commenting on markets generally, observed “[t]his is one of the best revenue environments we’ve ever seen.”

Just how lucrative and vital is the US-Europe market to United’s bottom line? United successfully recaptured 100 percent of its year-over-year fuel cost increase -- hundreds of millions of dollars. No doubt US-Europe windfall profits contributed mightily to this.

Oligopoly partner, Delta, was equally elated in its third-quarter earnings call. Glen Hauenstein, Delta’s President, boasted to Wall Street analysts “transatlantic unit revenues increased 8 percent driven by yield improvement and strong demand environment.” By the way, “yield improvement” is code for successfully squeezing the goose’s neck and getting even more money from consumers as a result. Putting an exclamation point on it, Hauenstein triumphantly told analysts “[t]he revenue environment is the best we’ve seen in years” and “core demand in the Transatlantic remains incredibly strong.”

The third oligopoly musketeer, American, has yet to announce its third-quarter results. However, there is no reason why its divvied-up share of the US-Europe market will be any less lucrative, and its enthusiasm about continuing to fleece transatlantic passengers will be any less buoyant.

Nevertheless, what about ultra-low-cost competitors in the US-Europe market like Norwegian, WOW Air and Primera Air -- haven’t they been able to counter at least some of the Big Three’s immunized pricing power? The short answer appears to be no. Ed Bastian, the CEO of Delta, predicted this in July during Delta’s second quarter earnings call. Bastian observed, “when you think of how fuel weighs on the ultra low cost carriers in that marketplace, it tends to have more of an impact on them and their raising fares has translated into our ability to get higher fares for not only business but for leisure as well.”

As fuel prices have continued to rise, Mr. Bastian’s observation of a disproportionately negative impact on ultra-low-cost carriers, to the benefits of the Big Three oligopoly, has proven prescient and troubling. Primera Air abruptly went out of business. Norwegian and WOW both have announced they are reducing US-Europe flights, while the Big Three’s US-Europe profits continue to soar.

The rising price of fuel is accomplishing what the Big Three’s multi-million dollar lobbying efforts in recent years failed to do: protect their golden eggs in the US-Europe market by limiting new entry. Along with their labor unions, the Big Three failed spectacularly in their three year $50 million lobbying campaign against the US-Europe competitive choice Emirates Airline, Etihad Airways and Qatar Airways (Gulf Carriers) are permitted to offer with transatlantic Fifth Freedom flights. Their attempt to prevent Norwegian from being granted a US foreign air carrier permit, which it was entitled to under the US-EU Open Skies agreement, also failed resoundingly.

For the Big Three, it appears to be all green skies – I meant blue skies – in “their” golden-egg US-Europe market. That is terrible news for consumers and the wallet of any passenger planning transatlantic travel. However, one ray of hope has emerged. Let’s hope it is a beacon to other regulators.

Earlier this month the UK Competition and Markets Authority announced it is reviewing the immunized joint venture among American, British Airways, Iberia Airlines and Finnair. It is about time! This is a long overdue step the US Department of Transportation (US DOT) should take for all three US-Europe competition strangling partnerships headed by the Big Three.

The premise for exempting the three partnerships from meaningful competition oversight was the conclusion reached by regulators that the benefit to consumers of these virtual mergers would outweigh the risk of higher fares due to government-sanctioned collusion. History and cold hard facts have proven this assumption wrong. Every three months the Big Three’s quarterly earnings calls irrefutably attest to that. Government authorized cartels are producing record US-Europe profits, and purported consumer benefits are illusory at best.

Given the Trump Administration’s emphasis on US businesses winning, it is possible some officials are cheering the quarter-over-quarter fleecing of US-Europe passengers because it inflates the Big Three’s profits. However, this is a “win” at a very steep price. A Pyrrhic victory for consumers and the US tourism industry. It is US-Europe passengers like you and me who are paying the price. We are the ones being fleeced to juice the Big Three’s balance sheets. Moreover, artificially high fares stifle US-bound international visitation and the entire US travel industry, a critical sector supporting millions of jobs, suffers as a result.

The UK Competition and Market Authority bravely took the much-needed first step. It is time the US DOT steps up too and reviews US-Europe antitrust immunity grants with a public docket and a more robust role for the US Department of Justice. If the Big Three can demonstrate that consumer benefits, in fact, outweigh the substantially higher US-Europe fares and profits they crow about each quarter, then they have nothing to fear. However, the fact they would bitterly oppose such an expanded review tells you all you need to know.


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Mitchell is the founder of the Business Travel Coalition and OpenSkies.travel

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