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.
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.
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.
"They're really not growing for growth's sake," says Ranson. "They're looking at networks and determining where the most profitable routes are."
That often means fuller flights. When airlines combine, they have more planes to pick from on their routes, allowing them to "put the right-sized aircraft in the right market," says Ranson. A too-large airplane flying regularly from Boston to Detroit, for example, will mean extra seats and fuel—and thus money—being regularly wasted at a time when every dollar counts.
Cutting down on the number of seats, as well as the number of competitors offering those seats, may mean less of a race to the bottom in pricing. As the Inspector General's report points out, this is a marked departure from the 1980s, when airlines sold empty seats at discounts.
"When you have excess capacity in any industry, it makes it difficult to generate pricing power. It doesn't matter if it's widgets or seats for New York-Chicago," says Mann.
Indeed, though fares are still below where they were just 10 years ago when adjusted for inflation, they have started to bounce back. Average domestic fares grew by 6.5 percent in 2010 and again by 4.9 percent in 2011.
So what lies ahead for customers? Bet on tightly packed flights and fare hikes. More bankruptcies and mergers also could be on the horizon as airlines continue to work for greater profitability.
The outcome of a potential American and U.S. Airways merger, as with any combination, could mean either a more efficient and well-run airline or bumps for both the companies and customers. The immediate aftermath of a merger can be a decline in service, as airlines work out the kinks of integrating two companies' systems into one, says Purdue's Bowen. Longer-term, he adds, mergers can become problematic.
"Sometimes they get better, and sometimes they don't," he says. "A lot of times you just get a bigger, worse airline."
In many ways, there is more than one airline industry. So-called "low-cost carriers" like Airtran and Spirit have as a group been more successful than their larger counterparts, focusing on smaller fleets of economical aircraft and high-traffic routes. Low-cost carriers amassed small profits—$2.1 billion—from 2000 to 2009, in contrast to legacy carriers' $65 billion in losses. So as larger carriers cut routes, smaller carriers can fill in the gaps.
"If you look at U.S. network carriers, everything is centered in their hubs. They have cut out any kind of flying that doesn't touch their hubs," says Ranson. "That in some ways does create opportunities for low-cost carriers and so-called ultra-low-cost carriers."
In other words, even if larger airlines continue to shape and reshape their businesses (and push their fees and prices upward), passengers may yet have ways to travel on the cheap.
Danielle Kurtzleben is a business and economics reporter for U.S. News & World Report. Connect with her on Twitter at @titonka or via E-mail at email@example.com.