American Airlines And US Airways Merger?

Via Reuters, a very interesting development today from the American Airlines bankruptcy proceedings. AMR unions have had an extremely nasty public feud with management the past several months, and it only looks to deteriorate further next week as the company seeks permission in bankruptcy court to void labor contracts and impose new terms for restructuring.

In a dramatic twist, however, the unions representing American's pilots, flight attendants, and ground workers have struck a deal with US Airways that supports a merger between the two airlines. The deal would preserve 6,200 of the 14,200 jobs American says it would cut if they proceed with current plans. According to airline consultant Robert Mann, a scenario where airline unions actively support a merger is virtually unheard of, since it almost always means job cuts. He goes on to say, "For the American unions, it's a real indictment to the company's plan. In fact, they are casting their lot with the devil they don't know rather than the devil they do." Yikes.

US Airways has been actively exploring the possibility of a merger with American Airlines since news of the bankruptcy broke last fall, hiring advisers and even giving a presentation to representatives of AMR's unsecured creditors detailing the benefits of integration. But despite the support of the unions, any eventual deal will still require approval from AMR creditors, the management team, and its board of directors - which, at this point in time, seems highly unlikely.

As for the technical aspects of a potential merger, David Bates, president of the Allied Pilots Association, said in a letter to its members that a combined carrier would be branded American Airlines and be based in Fort Worth, Texas, which is where AMR is currently located. More importantly, the new airline would remain in the OneWorld global alliance. In addition, American's orders for narrow-body aircraft would proceed and the former US Airways system would be aligned with American Airlines routes to add more cities.

Personally, I don't see a huge downside to a merger. American is still quite a bit larger than US Airways, with a more well-known international presence, so it does make sense to maintain the branding. And with US Airways's reputation as the ugly stepchild of Star Alliance, and American's dominance of OneWorld, it's only logical that the combined airline would remain within OneWorld. I just hope they continue American's relatively generous award availability rather than follow US Airways' lead in tightening inventory. It's all speculation now though, as we'll see in the coming months what exactly will happen to American Airlines.

Dreamliner "Draws" Boeing Logo Across North America

This is pretty awesome indeed. A Boeing Dreamliner "drew" the numbers "787" and the corporate logo across several thousand miles of North American skies last Sunday. Gizmodo caught the plane in the act on FlightAware.

According to Boeing's vice president of marketing Randy Tinseth on the company's blog, "This wasn’t a joy ride. It was an 18-hour Maximum ETOPS (Extended Operations) Duration flight test for a 787-8 with GE engines. Our team coordinated with the many air traffic control centers, choosing the routing to avoid restricted airspace. In the end, the flight covered over 9,000 nautical miles - all of it captured by our friends at FlightAware."

This follows another etch-a-sketch drawing in the sky back in August 2011, when a 747-8 Freighter successfully completed it's certification flight test program by carving a giant "747" across the country.

Changes To Airline Fare And Fee Rules Coming Tomorrow

Starting tomorrow January 24, 2012, new rules from the Department Of Transportation will take effect, changing the way airlines advertise their fares and bundle their fees. Here are the most important changes that will happen:

• All mandatory per-passenger taxes and fees must now be rolled into the advertised price and will be clearly disclosed so passengers can more accurately compare prices across airlines. Hence, we will no longer be seeing those $39/$49/$59 base fare commercials with a small asterisk saying "plus taxes and fees".

• Ancillary services that incur extra charges such as baggage fees, on-board food, and priority seats still do not have to be included in the advertised prices. However, a list of all optional fees must now be clearly disclosed through a link on the airlines' homepage, upon booking, and on e-ticket confirmations. Undoubtedly, airlines will tack on these disclosures in fine print at the bottom of the page, but I suppose a fine print disclosure is better than no disclosure at all.

• What's more helpful, in my opinion, is the rule stating that airlines must now provide a 24-hour window for passengers to hold or cancel a reservation without payment or penalty for reservations made a week or more in advance. This gives passengers more flexibility to price compare or plan out their itinerary without having to worry about fare increases.

• Airlines are now required to give prompt notification of delays of more than 30 minutes, cancellations, and diversions. It is not clear how these notifications will be distributed to passengers.

• Baggage allowance and fees must remain consistent throughout a passenger's itinerary. While this sounds great on paper, I'm not sure how well it can be implemented, especially with complicated itineraries that includes multiple codeshares and partner airlines.

On the whole, I think these are positive changes that will help passengers understand the full price they will be paying for their tickets. While there may be sticker shock initially as airlines begin to advertise fares that include taxes and fees, the added transparency will be a benefit in the long run.

Two Interesting Articles In The New York Times

The New York Times published two interesting articles about the airline industry in the past two days. The first article from Monday details frequent flyer programs' gradual shift towards revenue-based rather than mileage or flight-based rewards. Increasingly, airlines are now tying elite status levels to spend generated on their self-operated flights. United has already announced some details of it's revamped MileagePlus program, which will include a new 4-flight minimum requirement on United, Continental, or COPA in order to achieve status. There were rumors flying around prior to their announcement that United would also initiate a new minimum revenue requirement as well, but it doesn't look like that will be the case. Needless to say, however, that may be where all frequent flyer programs are indeed headed in the near future.

Southwest Airlines, as one of the most prominant examples of this trend, completely revamped their Rapid Rewards program this year, shifting from a flight-based scheme to a spend/fare-based one that differentiates both the amount of points earned and the points needed for redemption solely on how much the ticket costs. Operating a frequent flyer program like this automatically designates a specific value to each point or mile earned, and gives the airlines a much better handle on the costs of maintaining loyalty. Unfortunately for us, however, this means it becomes much harder (or practically impossible) to redeem points/miles for high value awards.

The second article talks about how the airlines have fought their way back to profitibility despite the economic downturn by way of consolidating, shrinking, and tacking on dozens of ancillary fees. It's an interesting look back at how airlines nowadays compare to the gloomy days just after September 11th, and even earlier during their heavy expansion in the 90s.

In particular, the article singles out American Airlines, who is the only major airline to remain unprofitable in recent quarters. Left out of the major mergers during the past few years, AA is plagued with high cost, debt, and poor labor relations that are threatening to drag it into bankruptcy protection. Despite it's ambitious turnaround plan to purchase 460 new fuel-efficient aircrafts from Boeing and Airbus, a lot still remains out of it's control, as the economic climate and labor negotiations continue to pummel prospects.

But while most airlines are on more solid footing nowadays, the sad truth is that much of the belt-tightening gets trickled down to the passengers, who must endure fewer flights, more crowded planes, less service, and higher fees. Just another sign of the times I suppose :(

Six Different A380 Configurations

There was a very cool article today in the online LA Times travel section comparing the 6 different configurations of A380s currently in operation. The 6 carriers - Singapore, Emirates, Qantas, Air France, Lufthansa, and Korean - have varied the density on their super-jumbos greatly, ranging from a very comfortable 407 on Korean Air to a tight 538 on Air France. I must say, the first class cabins on all 6 of them are looking mighty fine ;)

I still haven't had the opportunity to fly in an A380 yet, though I've seen them plenty of times at airports all around the world. Hopefully in 2012 (or even earlier), I'll be able to try out one of these whalejets... perhaps another trip to Seoul is in the cards?

Federal Taxes Are Returning

Fortunately (or unfortunately?), the Senate has finally passed legislation temporarily funding the FAA, allowing about 4,000 furloughed employees to return to work. President Obama signed the bill just a few hours ago. While this is great for the FAA, it also means that the federal government will now return to collecting taxes on all airfare. Officially, airlines will be required to start charging federal taxes again at 12:01 AM on Monday August 8, 2011.

Most airlines have already raised ticket prices in the past few weeks to match the reduced taxes, and stand to reap upwards of $1.3 billion. I don't, however, expect to see a jump in airfare starting on Monday. Instead, airlines will most likely adjust the base fares down to their pre-tax holiday levels. Alaska Airlines, Hawaiian Airlines, and Virgin America were the only airlines to pass the tax savings on to consumers during the entire FAA shutdown.

Meanwhile, based on instructions the IRS issued today, customers who purchased tickets prior to July 23, 2011, and flew during the FAA shutdown are NOT eligible for a refund on the taxes and fees paid. The government, however, will not be retroactively collecting the unpaid taxes owed during the shutdown, so those who took advantage of the tax holiday can breathe a sigh of relief. Visit the IRS website for more information.

Finally, if you haven't bought miles or transferred your American Express Membership Rewards points to an airline program yet, make sure you do so before 12:01 AM on Monday August 8, 2011! I went ahead and took advantage of the Delta Skymiles transfer bonus with 40% rebate on Membership Rewards points last night and didn't have to pay the $30 in federal taxes that would have come with it. This is in effect a 67% Skymiles bonus on transfers of 50K MR point increments through September 30, 2011.

The worst part about this whole situation is that in just 6 short weeks, Congress will have to take up the issue all over again to avoid another lapse in funding for the FAA. And since none of the core political differences that caused this impasse has been resolved with today's temporary resolution, expect more partisan bickering and perhaps another shutdown in the coming month.

Get Airline Tickets With Reduced Federal Taxes?

As of midnight today, the Federal Aviation Administration has been partially shut down due to Congressional failure to pass an extension of the agency's operating authority. Partisan bickering over labor provisions and air services subsidies to rural communities are the main reasons for the deadlock, and there doesn't seem to be an end in sight.

What this means for us consumers is as of half an hour ago, the FAA is no longer able to collect portions of the federal taxes charged on airline tickets. About half of the taxes goes to a trust fund that pays for FAA programs and employees (including the excise tax, international arrival/departure tax, and the flight segment tax). This is the half that the government can no longer collect. The other half goes towards airport and security fees that will continue to be charged.

According to the Virgin America FAQ regarding the federal tax situation found here, the following is the breakdown of which taxes are still being charged and which are no longer being collected:

Which taxes have expired – and which ones still exist?

• The federal taxes that will temporarily expire at 12:01am Pacific time on July 23, 2011 are:
• The 7.5% tax that applies to domestic transportation (as well the 7.5% tax on the sale of frequent flyer miles)
• The $3.70 domestic segment tax
• The $16.30 international arrival/departure tax
  
  
• The federal taxes still in place:
  • Commercial Fuel Tax
  • PFCs (tax code XF)
  • September 11 Passenger Security Fee (tax code AY)
  • APHIS passenger inspection fee (tax code XA)
  • APHIS aircraft inspection fee (tax code XA)
  • Customs passenger inspection fee (tax code YC)
  • Immigration passenger inspection fee (tax code XY)
  
  

The issue gets a little more complicated, however. What isn't clear is whether or not people who purchased tickets earlier paying full federal taxes will now be owed a refund if they fly during this period of time. And what's more, if you purchase a ticket now and don't pay a portion of the federal taxes, no one knows for sure if you will then owe that amount when the time comes for you to fly - assuming the dispute is resolved and the compromise bill is passed beforehand. Since federal taxes are based on your date of travel, this becomes a big question mark. The IRS will need to issue a guidance soon to clarify all of this.

But for now, I'm seeing reductions in airlines fares all around, starting with an email from Virgin America urging us to "Grab a seat with fewer federal taxes for a limited time only." United Airlines also appears to have stopped charging portions of the federal tax. Other itineraries I've been keeping track of have dropped $20-$60. Beware though, because unless there is a guarantee from the airline, which seems to be the case with Virgin America's promotion, there is no promise you won't be required to pay the taxes at a later date.

Finally, what's also interesting in the list above is that it states the 7.5% federal tax on the sale of frequent flyer miles has also been suspended. I'm not aware of any big promotions right now like the US Airways 100% bonus on purchased miles that just ended last month, but if anyone knows of any other promotion going on, it might be a good time to buy.

(EDIT: Unfortunately, it looks like all good things must come to an end. Most airlines have already adjusted their prices upwards to offset the savings from the eliminated federal taxes. As of midnight 7/24/2011, only Virgin America and Alaska Airlines are still offering reduced fares, but I don't expect these to last very much longer either.)

Interesting Read About The Current State Of Airlines

There's a news report out today about the $3.4 billion airlines collected just with baggage fees in 2010, up a staggering 24% from 2009. Add in reservation change fees and that number jumps to $5.7 billion, not to mention the dozens of other ancillary fees not included in those figures. In fact, fees alone made up more than 80% of the $2.6 billion in profits that the industry eked out in 2010, after years of record losses. So why, with oil prices high but not nearly at 2008 levels, are airlines predicting major losses again for 2011?

The blog at Airfarewatchdog takes an interesting look at the industry today versus the 1970s and offers some reminders as to how we got into this current predicament. We all feel nickel-and-dimed nowadays when we head to the airport, but it may surprise you just how much we're actually paying in inflation-adjusted terms.