Will the Airline Industry's New Strategy Work?

The airline industry is generally considered a risky investment -- many major airlines carry large amounts of debt and are subject to bankruptcy rumors. In addition, airlines face the challenges of high elasticity demand (for every 1% that income drops, demand for airline travel drops by nearly 6%), unpredictable fuel costs, and plenty of competition.

Just to keep its head above water the industry has taken up various strategies. Many major airlines including Delta (NYSE: DAL  ) , United (Nasdaq: UAUA  ) , American Airlines (NYSE: AMR  ) , and US Airways ( NYSE: LCC) have laid off workers. "Unbundling" -- meaning every flight feature is sold separately -- has also become an industry standard. Charging for baggage is so common that Southwest Airlines' (NYSE: LUV  ) latest -- and very profitable -- tag line is "Bags Fly Free!" And let's not forget about Ryanair's (Nasdaq: RYAAY  ) infamous rumor that it was going to start charging customers to use the toilets.

However, the attempts to nickel-and-dime customers can only go so far.

According to a recent New York Times article, the newest strategy is to provide extra perks for the best customers. Now, frequent flyer perks have been around for a while, but airlines are apparently stepping up the competition and creating new tiers of status. Benefits for elite members include anything from free cocktails and waived fees, complementary access to airport clubs, special hotlines, and even free flights for companions. The idea is to pamper the big spenders in order to compete for their loyalty -- because they are valuable to the bottom line.  

What do you think? Is this a good strategy, and if so, will airlines become a good investment in 2010? Has anyone experienced this elite treatment? Let us know in the comments box below!

Claire Stephanic does not own any of the companies mentioned. The Motley Fool has a disclosure policy.


Read/Post Comments (7) | Recommend This Article (6)

Comments from our Foolish Readers

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  • Report this Comment On December 23, 2009, at 5:14 PM, Fool wrote:

    I work for a major U.S. Airline and realize this is a growth industry and alliances are better than mergers in order to survive. It is also crucial to keep our high revenue passengers loyal with perks. Airlines need the revenue from piece rate charges now imposed for services prior to departure and inflight. The bottom line is profit how to make it and keep the airline execs happy along with shareholders, which include airline workers. This is the crucial part of the airline industry that is often overlooked. Many airline workers are overworked, underpaid with underfunded pensions. Thus under these conditions create at some carriers unhappy employees. I believe profits are important but happy and motivated employees are just as important to help deliver profits for our companies and keep our customers including the high revenue customers loyal.

  • Report this Comment On December 23, 2009, at 6:11 PM, WiseFool888 wrote:

    I agree with the prvious post by Fool. I too, work for a major U.S. carrier. Our company would like to outsource any jobs possible. They like to spend money unwisely. And last, but not least, they don't know how to treat employees fairly which is a basis for running a successful company. Don't get me wrong, there is a lot of opportunity to make money on airline stocks simply by the nature of its volatility. However, it is my humble opinion, that in order to run a truly successful company, a company needs to treat all of its employees fairly. That is the problem we have today with most companys. Employees are forced to take massive paycuts while management get undeserved bonuses in the name of "retaining talent". Our company imposed 40% paycuts on the employees while management who took temporary paycuts are now no longer under paycuts and they receieved huge bonuses on top of the restored pay levels. Next, our company plans to spend millions trying to win/buy the JD Powers and Associates award. They fail to realize that by treating employees fairly and with mutual respect they can win that award and build a strong foundation for the company to survive, grow and prosper. That is what we need to strive for. I say this not only as an employee, but also as a private shareholder and citizen. In short, airlines are a good investment as long as you have the stomache for it. Thanks for reading/listening.

  • Report this Comment On December 23, 2009, at 10:19 PM, shanghaid wrote:

    I have simply learned two things. First, when flying international, I never use a domestic carrier. Great deals can always be had on South Korean, Thai Air to name a few. Second, when flying domestic for 4 days or less, I just take a carry on and brief case. I actually have more fun in travel when I travel light. So the airlines have trained me. Surprising to me, is the practice of advertising fares without the full disclosure of the baggage fees. You really never know the true price until you show up at the airport. Why is that legal?

  • Report this Comment On December 24, 2009, at 2:44 PM, mlb45 wrote:

    I like people who complain about being nickel'd and dime'd to death. When I rent a car I have to pay for the fuel I use. When I stay in a hotel food is not free. If I want a coke I have to go down the hall and pay up to 2.50 for a coke. Yet the airlines should give everything away for free. It cost money to provide food and drink. It cost money to haul luggage. It's called fuel. I have been on flights in the past in which a family of 4 used the airline as a freight carrier. The people who complain should keep in mind it's the employees who pay the final price. Pay cuts, no pensions. 25% increase every year for insurance, and no pay raises for years. The employees are nickel'd and dime'd every day.

  • Report this Comment On December 28, 2009, at 9:33 AM, faisalsadafi wrote:

    airline business is never a good investment and with more airlines buying more aircraft, competition will be higher which will effect the profit and ultimitely impact on the employees (given that employees contribute to around 40% of most airline's total cost). The pressure will always be on the employees. it is true that this path needs to be taken in order for the airline to make profit but i agree that it is not fair when top managers get everything.

    any new kind of strategy like creating new tiers to get customers loyalty will definitely be a good approach

  • Report this Comment On December 28, 2009, at 12:46 PM, shanghaid wrote:

    Ultimately, the airlines are in a competitive environment. To attract business they intentionally try to drop the advertised fare and then back add services later that were formerly free. Fuel surcharges, food, baggage. This is equivalent to shopping on EBay for a low priced item with a high shipping charge. You mean my airline ticket does not include the fuel to run the airplane? You mean it doesn't cover the cost of one 35 lb. checked bag? LOL, then what does the ticket price n Expedia actually refer to? I will assume with time, just like on Ebay, Expedia and their ilk will post a link to show the hidden charges in a popup window or offer you to configure the online reservation with the added fees as options to view. Once an online travel site does this - in order to differentiate themselves from other sites - we will blow away the fog and have true competition again.

  • Report this Comment On December 29, 2009, at 11:43 AM, thetucket wrote:

    shanghaid,

    I'm pretty sure a number of travel sites already do this (give you the option to see flights based on actual total charges, based on how many bags you'll check, fuel surcharges, taxes, whatever esle...) A number of travel sites do this for car rentals as well (taking gas into account).

    I agree with your earlier comment as well. Often, when searching for international flights, a domestic carrier like AA comes up a tiny bit cheaper and therefore is listed first on some search engines when searching by price, but even if it doesn't list it, I know full well that I'll have to pay extra for bags, food, drinks, and god knows what else. Thus, I always go for the foreign airlines. Their employees are paid better and get better benefits anyway, and that generally translates into better treatment.

    US airlines are in trouble, and will soon go the way of Amtrak--basically government owned utilities under the guise of private corporations. Short-term trades based on high volatility--that's the only way to make money on these guys. Don't get stuck with one of these in your portfolio because you'll be left out in the cold when they go bust (over and over again) and you collect nothing as a shareholder in bankruptcy!

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