Airlines 2.0: Crowded Planes, Higher Fares

Perennial money-losing industry is righting itself, but at a cost to passengers.

Fewer people are expected to travel for business in 2013; however, that doesn't mean lower costs.

Fewer people are expected to travel for business in 2013; however, that doesn't mean lower costs.

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There's good news for the airline industry. Unfortunately, it means bad news for their customers.

A decade ago, flyers' carry-on bags weren't stuffed full of travel-size bottles, airport X-ray machines couldn't see through your unmentionables, and you didn't pay to take your luggage on your trip. Perhaps unknown to flyers, the airline industry has also changed dramatically, along with the flying experience. Companies are hoping it means a smoother road ahead, but widespread belt-tightening has already meant more headaches for flyers.

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Last year, major U.S. airlines posted their third consecutive year in which they took in more money than they spent, according to a report released this week by the Department of Transportation's Inspector General. That profitability, however, was hard-won: over much of the last decade, the industry rushed to deal with economic problems. Major carriers' accumulated losses mounted over much of the last decade, eventually hitting nearly $63 billion in 2009. Revenues outstripped expenses at U.S. carriers as a whole as well, from 2001 to 2004, and again in 2008. That spurred airlines to get leaner. Available seat miles, a standard measure of capacity, have also dropped from a peak of over 744 million domestically in 2007 to 681 million in 2011, according to the Bureau of Transportation Statistics, and total seat miles, including international travel, also declined. Domestic passenger flights also fell by 13.9 percent from 2007 to 2012, according to the DOT report.

"It's a sea change, and it's like nothing I've seen in 30 years," says Bob Mann, independent airline industry analyst and former American Airlines senior executive, of the recent shakeups in the airline industry.

He's not just talking about airlines' cuts; he's talking about the thinning of the herd. In 2000, 10 U.S. airlines accounted for 90 percent of available seat miles. Today, five airlines account for 85 percent of those miles, as mergers whittled down the playing field—Delta and Northwest, for example, announced their merger in 2008, and United and Continental did likewise in 2010. Now, American Airlines and U.S. Airways are considering a marriage.

The changes have gone beyond the large airlines—there have been nearly 200 airline bankruptcies since 1990 at companies large and small, causing the death of several once-well-known airlines, like Aloha and ATA.

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You might call it the perfect storm of troubles hitting the industry. The unprecedented shock of September 11 understandably meant leery passengers, and it was followed quickly by a recession hitting flyers' pocketbooks. Airlines again had to deal with a recession in the late 2000s. Add to that the continuous volatility of fuel prices, and navigating a company through this turbulence can look near impossible. Thirteen airlines filed for bankruptcy in 2008 alone, and seven have filed in the last year, including American.

Indeed, bankruptcies have become so prevalent that they're practically the status quo, says one expert.

"It's becoming something that airlines have to do to survive," says Brent Bowen, head of the Department of Aviation Technology at Purdue University.

But some airlines are back in the black. Delta posted a profit of over $2 billion last year, four years after exiting bankruptcy. Continental, Southwest, and U.S. Airways each also had over $500 million in profits, according to the report. But others lag. Frontier and AirTran posted small operating losses, and American lost over $1 billion last year.

As airlines have worked to right themselves, customers have seen the results in myriad ways. First off, there's the pesky baggage fees. All those $25 charges add up: Fees totaled around $3.4 billion last year.

Cutting down has also made for less customer choice on both carriers and flights, as airlines cut routes, Lori Ranson, senior industry analyst for the Centre for Aviation, an aviation-industry market research firm based in Australia.