"$5 a bag? Costs force airlines to look at fees"

Monday, February 28, 2005

$5 a bag? Costs force airlines to look at fees 
AmWest rejected charging for sodas
By Dawn Gilbertson
The Arizona Republic


American Airlines is tossing pillows from its flights and shrinking legroom.
America West Airlines is selling ads on ticket jackets, napkins and tray
tables and has even considered charging for checked bags and sodas. 

With no end in sight for sky-high fuel prices and low airfares, money-losing
airlines are looking everywhere but the couch cushions for spare change.
Everything but safety is on the table for tweaking as they try to shore up
their shaky finances.

Despite the potential for customer backlash, airline executives are largely
unapologetic about the moves. America West Chief Executive Officer Doug
Parker, revealing that the airline recently looked seriously at charging $5
a bag for checked luggage, suggested the main reason the airline didn't do
it was logistics.

"At the end of the day, this business is not working," he said. "We have to
be creative and figure out ways to generate enough revenue to cover the
costs of running the business."

No one disputes the sorry state of the airline industry. U.S. carriers lost
a whopping $10 billion in 2004, and the forecast is for more red ink this
year. They paid 40 percent more for fuel and could not pass any of it on to
passengers because of stiff competition. 

The same competition drove U.S. airfares down nearly 4 percent on average
last year; fares are down 20 percent since 2000. 

Last week, Standard & Poor's said the weakened financial condition of nearly
all U.S. airlines raises the risk of a simultaneous spate of bankruptcies.
United, US Airways, ATA Airlines, Hawaiian and Aloha are already there.

Airline consultant Robert Mann said the line-by-line budget focus on cost
cutting and new sources of revenue is a matter of survival for airlines. 

"This is not a choice. This is not an option. This is a necessity," he said.

Tempe-based America West certainly isn't at the top of the critical list.
Its costs are among the lowest in the industry, ranking near low-cost leader
Southwest Airlines. Its cash position is much stronger than after the Sept.
11, 2001, terrorist attacks, when it was the first in line for a
government-backed loan. And unlike the industry biggies, it is not asking
its 13,000 employees for major labor concessions. 

Still, the airline is loaded down with debt and has limited ability to raise
more money. (Southwest, on the other hand, is profitable, has more than $1
billion in cash and a big, untapped credit line, among other financial
sources).

If America West hopes to survive this industry storm, it cannot afford to
sit still. The focus on saving money and finding ways to bring in new
revenue has become so pervasive, the airline has spawned a small army of
amateur accountants.

Mickey Latta, a reservation sales agent in Tempe, suggested cutting some of
the scripted information that agents were required to tell passengers when
they made a reservation because it is repeated when they book the ticket.
The company says the eight seconds that shaves off each call will save
America West about $100,000 a year. 

Travis Christ, the airline's vice president of marketing, got creative when
top executives said his $200,000 budget for a new marketing campaign was set
in stone. He couldn't squeeze in the $20,000 needed to produce and send
employees a video explaining the Get on Board campaign, so he got a student
loan company to advertise on it.

The list goes on and on: customizing and maintaining computer systems
in-house instead of paying a vendor to do it; requiring Parker's approval
for all replacement hires at headquarters; even a trade-out with Cold Stone
Creamery to provide dessert at the airline's recent media day.

"It permeates way down, not only to our own employees, but to our partners,"
Scott Kirby, executive vice president of sales and marketing, said.

Technology giant EDS, which runs America West's computer reservations
system, this year sold the airline 300 Compaq computers for $15 each rather
than throwing them out. They were only a couple of years old.

"They realized that a lot of those computers were more modern than a lot of
the computers we have," Kirby said.

Regardless of how far executives zoom in the microscope - they'll do it in
earnest again Monday, when January expenses are scrutinized - there's only
so much America West and other low-cost carriers can do on the cost side
because so many costs are untouchable. 

"To the extent that this airline's profitability gets dramatically better,
it's going to be because revenue gets better," Parker said. 

The biggest part of the equation is getting airfares up, something America
West has been trying to do vigorously by shunning ultracheap fares on peak
travel days, regardless of what the competition is doing. 

But it also is about finding new ways to make money, and that's where the
revolutionary - some would say crazy - ideas like charging for bags and soft
drinks come in.

The payoffs can be big. The airline began selling last- minute upgrades to
first class a few years ago, and that option now brings in $25 million a
year. That's about half of the increase in America West's fuel bill in the
fourth quarter.

"There's no single expense line (in the airline's control) that can get
anywhere close to $25 million of revenue," Kirby said.

He estimates that the new advertising on tray tables, napkins, ticket
jackets and more will bring in $10 million a year. Officials nixed the idea
of ads on the overhead bins, though. There were visions of a NASCAR entry,
Chief Financial Officer Derek Kerr said. 

The luggage and soft drink ideas went much further. Both were canned chiefly
because they would have been too hard to implement. 

America West was worried, among other things, that check-in lines would get
longer if agents had to collect money for the bags (up to $60 million a
year), and that flight attendants wouldn't have enough time to collect $1
for soft drinks on short flights.

Parker believes they would have overcome any backlash, as they did with the
groundbreaking on-board food sales, which have been copied by competitors.
(America West doesn't make money on the sales but saves money by no longer
providing food).

"Four or five years ago, when every airline was making money, we would have
never considered it because of the consumer risk," Kirby said. "This
environment has forced us to consider much more."

Mann thinks airlines will continue to dream up similar moneymaking moves,
but whether travelers ever see them will depend largely on the competition.

Southwest, America West's rival at its Phoenix and Las Vegas hubs, has said
repeatedly that it won't "nickel-and-dime" passengers. 

"That is literally a shot across the bow to anyone who's thinking about
charging for things," he said.


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