VOL. 127 | NO. 113 | Monday, June 11, 2012
Two frequent-flyer businessmen booked side-by-side seats on Delta Air Lines flights from Minneapolis to St. Louis last month, with one of them getting charged a higher price than the other each time they tried booking it.
Travelers walk to their cars at Memphis International Airport, where passengers are upset over high costs.
(Photo: Lance Murphey)
Delta pinned the blame, according to The Associated Press, on a new flight search engine. The Atlanta-based airline then switched to the old system, saying it didn’t know how many passengers had paid more because of the glitch.
When it comes to Delta’s Memphis airfares, there are no glitches causing high prices. And it is not a sudden discovery to frequent flyers.
Tennessee Gov. Bill Haslam said he heard it costs less to fly from Knoxville to London than it does from Knoxville to Memphis on Delta.
A quick check found an economy class seat on a Delta jet from Knoxville to Memphis going for $792 to $1,100 compared to $1,174 to $2,593 for a Delta economy class seat on a flight from Knoxville to London.
“It does impact businesses as well as families and individuals who want to travel,” Haslam said. “I think it does impact our economic development when it costs folks a lot to fly in or out of our cities.”
He has next to no power to change that, but he said he will work to bring competition to Memphis International Airport – where Delta operates one of its seven U.S. hubs – with hopes that airfares will drop.
“The impact of a low-cost airline is huge,” Haslam said. “But the amount of subsidy they need to be in a market quite frankly makes it impractical for the state to be subsidizing that if they don’t think it is worth it themselves.”
Memphis-Shelby County Airport Authority officials are feeling the heat like never before – more and more articles criticize the authority as Delta raises prices and decreases service.
Through a spokesman, International Paper Co. CEO John Faraci has expressed concern about the impact of business travel for the global corporation based in Memphis. Companies of that size cannot adopt an ongoing practice of flying executives and clients out of Nashville or Little Rock.
One recent Memphis traveler to New York City booked tickets for two on a Delta flight out of Memphis that were more expensive than the room at a moderately priced hotel in New York City.
A business-class seat on a Delta flight from Memphis to LaGuardia was listed at $1,306 to $2,190. A first-class seat on a Delta flight from Nashville to LaGuardia was $948 in most cases and as low as $766 in a few cases.
Nashville International Airport has at least one advantage over Memphis – it is a Southwest Airlines “focus city,” meaning a secondary hub that sees dozens of daily flights on the low-cost airline.
While airport officials in Nashville don’t have statistics on how many passengers are driving from Memphis to catch lower priced flights, they say the airport has always drawn passengers from other cities in the region. The newly renamed Bill and Hillary Clinton National Airport in Little Rock is similar.
“We have seen an increase in overall passengers, however, we do not receive information as to where passengers live,” said Shane Carter, director of public affairs and governmental relations for the airport in an email. “We serve such a large area that increases may likely be originating from a number of different locations in both Arkansas and beyond.”
Little Rock isn’t a hub or focus airport and has six carriers.
MSCAA president and CEO Larry Cox acknowledged perennial concerns about high airfares going back to the Northwest Airlines hub days but said this scenario is different.
“You can always go in the community and people will say the fares are a little high here,” he said. “But it hasn’t reached the level of concern we’re having today.”
As the volume of the criticism ramped up with three Facebook groups on the topic, the airport authority’s board of commissioners began acknowledging the concerns this spring that the higher fares are a danger to economic development and tourism.
Last month, the board approved a pool of $1 million in incentives for new nonstop air service at Memphis International with the condition that it must be new service and must remain in place for at least a year. The incentives followed what airport officials consider a breakthrough – competing nonstop service to Washington on US Airways that caused Delta to change plans to downgrade its Memphis-Washington service.
And prices dropped.
“They’re flying three Airbus airplanes a day and there may be a day or two they are flying only two a day,” Cox said of Delta’s response.
But a roundtrip Delta fare to Washington was $909 and a U.S. Airways roundtrip came in at $660.
Cox said he believes the incentives are just the trigger needed as competing low-cost airlines look at a factor that didn’t exist before. There is a vacuum at Memphis International with the 20 percent cuts in Delta service that began last August – fewer planes for it to flood the Memphis market if it wanted to.
When Fitch Ratings downgraded Memphis Airport bonds from A+ to A last month, the credit ratings agency cited the probability that Delta will cut service at the airport still more. Even without further cuts, Fitch estimates passenger traffic at Memphis will drop below 4 million – an enplanement loss of 30 percent compared to peak passenger levels in 2008.
It is the combination of higher airfares and less service that has proved to be especially volatile in the court of public opinion where Delta service has replaced the weather as a favorite conversation starter.
Frontier Airlines came to Memphis in 2007 with big plans and high hopes among some Memphis frequent flyers that it would provide the kind of competition that would mean lower fares. Northwest gave them a rough welcome to Memphis.
“They were clobbered with additional capacity, more frequencies by Northwest Airlines … and by AirTran, which was flying more than just one destination at the time,” Cox said.
Greg Principato, president of the Airports Council International-North America, remembers the response.
“Some years back when the other airlines had a lot more planes out there, a lot more capacity out there, if a low-cost competitor came in – especially to a fortress hub kind of situation – they would give them, as you said, a rough welcome,” he said. “That’s business. The courts say that’s business. Our view has always been that the airport is the entity that is really looking out for the interests of the community.”
Cox said the airport’s effort to recruit competitors has been under way for years, although he speaks little about it publicly because other airports react to the efforts. The game changer, according to Cox, isn’t the incentives approved last month by the airport authority board. It’s the permanent cuts in capacity Delta made this past August, which the airline has said won’t return even if the fuel prices that prompted them drop like a rock.
“I don’t think any incentive program will cause any carrier to make a final decision,” he said. “The change in circumstances of Delta reducing the size of their hub from a major hub to a smaller hub and in addition having this incentive program levels the playing field where you can have true competition. I think the Delta reduction was the most important thing in this. I don’t think the incentive program two years ago – it wouldn’t have made any difference.”
Principato agreed with Cox’s formula and is complimentary of the airport’s leadership. He also said Delta executives are making a business decision that works for them. But Principato has been vocal in his belief that airlines and airports don’t serve the same masters.
It was about a year ago that Principato came to Memphis for the Airport World Cities Conference and Exhibition and, with the CEO of Delta Air Lines standing nearby, said airlines had very different interests than airports.
“The airlines want to control airports and limit competition,” he told a gathering of several hundred airline executives and airport leaders at The Peabody hotel. “They believe the purpose of the system is not to move people and goods but to move airline stock prices and balance sheets.”
After polite applause from the audience including city leaders, the stage was switched for the question and answer forum with FedEx Corp. founder and CEO Fred Smith and Delta CEO Richard Anderson.
Anderson countered Principato by saying airlines have to remain competitive by keeping prices as low as possible.
“Rents and landing fees have a tremendous effect on our cost structure,” Anderson said after citing rising fuel prices. “We’re always looking to find the most efficient providers of high quality services.”
And Anderson added that Memphis International Airport was such a provider.
“We have other places in the country that are eight to 10 times more expensive and the quality may not be better. … Airports are monopolists. You can’t decide to not go to that airport if you want to go to Hartford. They’re municipal monopolies.”
But when the airport is Memphis International, most of the passengers are not arriving or leaving their destination. They are connecting to go somewhere else. And those passengers can choose to get to where they are going another way. And for decades Memphians and those in the region who are leaving to go someplace else have at least considered leaving from Nashville and Little Rock.
Four months after Principato made those comments, Delta cut 20 percent of its service at Memphis International Airport and tickets that were already among the highest priced in the nation rose even more to fewer destinations. In January there were more cuts by Delta at Memphis International.
Principato’s remarks could be comments now on the “Delta Does Memphis” Facebook group – the original and much more critical Facebook group on Memphis airfares with 3,616 members by the end of May. The airport authority and Greater Memphis Chamber formed their own in late May with 121 members as of June 1.
Principato enjoyed his trip to the city with his wife. And he later urged his adult children to explore the city’s music and cuisine. He said they have passed for now after checking the airfares to get here.
Memphis-Shelby County Airport Authority board chairman Arnold Perl and chief operating officer Scott Brockman talked about high airfares at Memphis International Airport with Eric Barnes, publisher of The Memphis News and The Daily News, and other members of the company’s editorial board. Here is a longer, edited transcript of the editorial board discussion.
Eric Barnes: Is there a hope that over the course of the next year that airfares can go down dramatically, so that we’re not in the top five list? And is there a chance we are going to get back many of the flights that Delta has cut?
Scott Brockman: “It depends how you define dramatically. Do we have opportunities in the interim – six, 12 or 18 months? We do because of some of the things that have happened with Delta – some of the routes that have gone away. The story is more understanding the complexity of air service to begin with. The fulcrum in the industry has shifted for everybody. What used to be considered grossly high fares was probably on an average fare basis $150 to $200 cheaper than today across the spectrum for everyone. … There are always possibilities and we are looking at those.
Barnes: Is all of that just a way of saying there is not enough demand to get the kind of service that people in the business community want – and at a price people in the business community want?
Arnold Perl: Memphis has the smallest origin and destination market of any airline passenger connecting hub in the United States. That puts us in a precarious position with an airline company because there are less people to support the investment that they are making. … On our origination traffic – it’s roughly 30 per cent of all of the traffic flowing out of this airport. The typical model for a hub is anywhere from 40 percent -45 percent local traffic. Going back to your original question … put that into context. We are fighting 120 knot headwinds. … Delta has downsized, not increased. But before the sharp spike in fuel, Delta was planning to increase its service in Memphis, not decrease.”
Barnes: And you trusted that Delta meant what they said?
Perl: Delta has a business model and their business model is all about profitability. … We’ve had a hub in Memphis for over two decades. It started with Republican Airlines. It went to Northwest Airlines and now Delta. The CEO of Northwest Airlines, Richard Anderson, is the CEO of Delta Air Lines. We’ve had experience with Richard Anderson for close to some 25 years… In terms of the dramatic increases in new service, low cost carriers have typically looked at two factors in whether they were going to increase their presence in a market or especially enter a new market. First, does that community have high air fares. Memphis has historically had higher air fares. The second factor however is that they would enter a market and select those markets where that community has been underserved with air service.
Barnes: Many people would argue you that one benefit of the current dominance of Delta is that you can get anywhere from Memphis, even though you might pay a premium to do so. But isn’t there an argument for Delta actually cutting more flights from Memphis because it would create more opportunities for more competition?
Brockman: We still have north of 60 nonstop destinations. … You have to balance all of that out. We are down from where we were. … A lot of small cities have lost their air service or gone to basically they’ve got three carriers running to a couple of places. What’s also changed in the industry is since deregulation up until the bankruptcies – they’ve all gone through it except Southwest. The change is that they finally I think got it. Before they used to chase market share. It was all about market share. I’m the world’s largest carrier. It didn’t matter if I’m selling my product at a loss. I’ve got a great banner for an ad campaign. I’m going to lose money on every seat, but I’m going to make it up in volume. Well, you can’t do it. So they all got smarter.
Barnes: That doesn’t bode well for Memphis getting more service, cheaper service. If that’s not possible, is there the chance we are going to get lower fares?
Perl: I think that is the most likely scenario for the future. … It’s not increasing the number of flights out of Memphis International. Right now, we fly to some 47 of the top 50 markets. The challenge for us is not serving major markets. We do that today. The challenge today is having lower air fares. And the only way to get lower air fares is with competition. We saw that with the U.S. Airways Washington service.
Brockman: But understand the biggest fallacy or misnomer is that the airport doesn’t want some airline to come here. It’s just totally incorrect. Our sole mission is to provide the greatest level of air service that we can. … The reality is any airline that wants to serve Memphis, whether it’s today or back when Delta was flying 225 flights a day – they can serve if they want to. … I think Memphis still provides value to have a hub. I think the hub has been ratcheted down to make it stay a hub. If Richard Anderson wanted to gut Memphis … they would have done it a long time ago.”
Barnes: So, you feel that if Delta comes down to the 125-150 flights per day range that there will eventually be competition that adjusts rates and doors will be open to other competition coming in? Is that a possibility?
Perl: I’d say it’s a probability.
Brockman: The advantage we have now is that as the hub got smaller there are now opportunities to cities that are now on the radar screen. Those are the discussions we are now having with a variety of players whether it is Southwest. We’ve had discussions with American Airlines.
Barnes: But you can’t have it both ways, right? You can’t have the 250 flights to endless destinations and a somewhat modest price?
Perl: You can have it both ways only in a significant population center like Atlanta. But you can’t have that in Memphis.
Barnes: We’ve all heard the talk about ‘if only Southwest Airlines came to Memphis.’ Can Southwest Airlines save the day?
Brockman: First of all, we don’t need to be saved. The airport is not crashing and burning.
Perl: Southwest is viewed by this airport, this community as a definite plus. It’s not just for their fares. People have a fondness for the Southwest brand, the Southwest service – on time, no check baggage fees for the first two and a half bags. There is clearly an affection for Southwest Airlines nationwide. It’s a little like states clamored 20 years ago for Coors beer when it was only sold west of the Mississippi River. … We’ve been courting Southwest airlines for 20 years. For 20 years we’ve been dealing with them – writing them, meeting with them, talking to them. Recently they came into Minneapolis airport which had also recruited them for 20 years. Why didn’t we get them? We didn’t meet their requirements of high airfares and an underserved air community. They are all around us – Little Rock, Jackson, Ms. and Nashville. Right at the epicenter, they are not here. But we are the only one of those communities that has the hub. But for the hub, I can assure you Southwest Airlines would have been here more than one decade ago.
Barnes: Can they make us competitive and get us out of the top five fares? Can Southwest be a dramatic game changer?
Perl: Air service is flights plus fares. The Nashville model (a Southwest focus airport) is different than the Memphis model. It’s not by choice necessarily. The Nashville model, 15 years ago was the Memphis model. They had an American hub with a transatlantic flight, Nashville to London. They were very similar. The only difference back then was Southwest was in Nashville. It wasn’t in Memphis…. It was only when American pulled the plug on their hub in Nashville that they changed. What did Southwest do? They then expanded significantly. … It wasn’t a decision that the Nashville business leaders said get rid of the hub. American pulled the plug on the hub.
Barnes: I hear people saying they want you guys to pull the plug on Delta and roll out the red carpet and let Southwest make Memphis a focus city.
Brockman: Your assumption is you could guarantee that you somehow have the head chair at the Southwest board table and are somehow making those decisions.
Perl: No airport authority or community can pull the plug on any airline. If Delta or American or United want to fly to Memphis, they’ll fly to Memphis. We have the capacity to accommodate any and all airlines at the terminal and for the flight activity. … We are not constrained on neither the terminal nor the airfield. … People are frustrated and we are hearing and seeing a lot of the frustration. Are we guaranteed to keep a Delta hub in the future? No. We’re not guaranteed to keep anything. Why do we feel confident about our future? We feel confident because we are among the lowest cost airports in the United States of America for any airline to operate in. We have among the lowest landing fees because FedEx pays the lion’s share. FedEx is the X factor in this. It is the Memphis advantage. There are also the temperate weather conditions.
Barnes: There is a sense of conspiracy out there. A sense that somehow you are acting to protect Delta.
Perl: I understand that whether it is Facebook or any other blogs – it’s a natural outgrowth of frustration on increasingly higher barriers. There is the reality about why is it happening and what is being done about it. … We’ve had more air service per capita than any other community in the United States. Historically we’ve had higher fares. That’s been a historical fact.
Brockman: Federal law requires me to have fair and equitable competition among any airline that wants to operate. If they want to serve, I need to make space available and I need to charge them the same rate I charge everyone else. … When I first arrived in Memphis nine years ago, one of the first things we had to do to meet federal law was to file a competition plan. Any airport that has a hub that dominated more than 75 percent of its flight activity had to file a competition plan. The plan had to provide proactive and compelling evidence to show that the airport would accommodate any and all airlines that wanted to come in or expand operations.”
Barnes: What do you say to business leaders who say they’re just going to move their executives if the airfares don’t get better?
Perl: I think everyone shares a concern about high fares. The business community is somewhat different in that the speed of getting somewhere and getting back is of critical importance. In terms of economic development activities, Mitsubishi said during the courtship – one of the first questions asked was is there nonstop air service. … Whether you have robust air service is the driver to site location consultants. Fares are an ingredient of the overall analysis. … The fares are a legitimate consideration and that’s why our focus has been on recruitment, competition. Is it hurting us? The answer is yes, but that’s not the only question. What are the overall benefits to this airport to have this robust air service we have?