Flying is worse than ever for consumers—but more lucrative than ever for airlines.

Commentary about business and finance.
Aug. 4 2007 7:52 AM

The Best of Flights, the Worst of Flights

Flying is worse than ever for consumers—but more lucrative than ever for airlines.

Flying today is a Dickensian affair. Flight diaries read like production notes for Oliver: endless lines, screaming children, basic necessities confiscated, uncomfortable physical inspections, cramped conditions, and food of dubious quality.

For frequent fliers, it is clearly the worst of times. In the first quarter of 2007, only 71.4 percent of flights arrived on time, and 19,260 passengers were involuntarily bumped—up 13 percent from the year before. In July, 16,988 flights were canceled, up 54 percent from July 2006, according to FlightStats.com.

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And yet for airline companies, these are the best of times. The industry was laid low by 9/11 and the 2001 recession, as giants like United, US Airways, and Delta filed for Chapter 11. But the airlines' winter of despair has given way to a spring of hope. In a recent conference call, American Airlines CEO Gerard Arpey crowed about "the largest quarterly profit [$317 million] since we launched the turnaround plan more than four years ago." Last week Northwest Airlines, tanned and rested after its sojourn in Club Bankruptcy, reported a healthy pretax quarterly profit of $273 million, despite rising fuel costs. The Amex Airline stock index is up 79 percent since March 2003.

What explains this dichotomy? After all, if workers at a restaurant chain routinely spat in customers' food, took three hours to deliver an appetizer, lost checked coats, and, every so often, grabbed diners by the lapels and kicked them out the door, the chain would quickly go bust.

This Tale of Two Airline Industries can be explained by a few basic macroeconomic factors and by one highly unexpected microeconomic development—airline managers are doing a much better job running their unwieldy empires.

Customers cut airlines slack in part because they can blame other forces for their misery. The Federal Aviation Administration's creaky, vintage system causes many delays. The Transportation Security Administration oversees the Soviet-like security lines. Weather-related problems can be attributed to a higher power.

The overwhelming majority of Americans lack an efficient alternative to the unfriendly skies. Even if a six-hour flight from New York to Los Angeles turns into an 11-hour Hieronymus Bosch-like ordeal, it's still light-years faster than a cross-country train or car ride. For all the hype surrounding corporate jets and the advent of air-taxi services, they constitute only a tiny sliver of the market.

Meanwhile, five-plus years of economic growth has boosted demand. Between April 2003 and April 2007, the number of domestic passengers rose 21 percent—while the number of flights rose only 4 percent.

Therein lies the secret to the airlines' success. Given the high fixed costs—planes, fuel, and labor—an unsold seat represents a damaging loss of revenue. As recently as the mid-1990s, the industry's load factor—the percentage of seats occupied—stood at 66 percent: In essence, the commercial aviation industry routinely threw out about one-third of its product. But thanks to rising demand, improved use of information technology, and savvier marketing, airlines have dramatically boosted their load factors. The industrywide figure rose from 72.3 percent in 2000 to 78.8 percent last year, according to the Airline Monitor. United Airlines in June filled 89.1 percent of its seats.

Alas, fewer empty seats translate into longer security lines, more overbooked flights (and hence more bumped passengers), and more baggage on every flight. (The frequency of mishandled baggage rose nearly 20 percent from May 2006 to May 2007, according to the Department of Transportation.) It also means less comfort once the plane is aloft. The chances of being stuck in a middle seat, sandwiched between frequent visitors to the Golden Corral all-you-can-eat buffet, in a row opposite the bathroom, have vastly increased. (In my case, they seem to be about 84 percent.)