What Will U.S. Air Travel Look Like in Ten Years? A Freakonomics Quorum

We’ve blogged quite a bit about airline travel over the past couple of years, covering everything from the future of pilotless airplanes to security snafus to the likelihood of an all-business-class U.S. airline. I don’t think this reflects our overwhelming curiosity about the subject as much as the fact that we both happen to be on planes a lot.

That said, it is an interesting industry, complex and full of change. For providers, costs are high and rising; consumers, however, have gotten accustomed to dirt-cheap fares. For all the security hassles, scheduling woes, and general discontent, the industry is extraordinarily safe and, at the end of the day, a marvel. (FWIW, here is a recent draft paper, by the economists Severin Borenstein and Nancy L. Rose, called “How Airline Markets Work … or Do They?”)

So in the tradition of past Freakonomics Quorums on the music industry, street charity, and climate change, we asked a few industry insiders — Clifford Winston, Richard Branson, Gary Topping, Patrick Smith and Josh Marks — to address the following question:

The U.S. airline market is a mess right now, with unhappiness increasing among customers, employees, and executives. While certain companies have become profitable again, the future looks murky. What will the U.S. airline industry look like in 10 years in terms of prices? Customer service? Safety? Technology? The economics of the business itself?

Here are their answers. Many thanks to the five of them for their thoughts and time.

Clifford Winston, Senior Fellow in Economic Studies at the Brookings Institution:

The U.S. airline industry is a victim of its own success — intense competition and low fares that have contributed to steady growth in air travel — and a victim of poor government policy toward airports and air traffic control that has prevented runway and airspace capacity from staying ahead of passenger demand. The results are mounting congestion and delays that raise airlines’ costs, infuriate passengers, and demoralize employees.

The solution requires the following: 1) to charge all aircraft for the delays caused by their takeoffs and landings, as well as the delays caused by their use of airspace near airports; to increase the number of runways at congested airports; 2) to introduce technological aids that would facilitate additional operations on parallel runways and reduce the separation between aircraft when they take off and when they land; and 3) to implement a satellite-based air traffic control system that, among other things, would give pilots the freedom to choose the most efficient routing, altitude, and speed of their flights.

By using the price mechanism to reduce peak-period demand for runway and airspace capacity, by expanding runway capacity at the most congested airports, and by adopting new technologies to enable more aircraft to use available runway and airspace capacity, air travel delays would be substantially reduced. In the process, competition would flourish, and the nation’s exceptional air safety record would get even better.

Unfortunately, congestion pricing is perceived by policymakers to be a political loser. And, based on experience, the time that it takes to build new runways and introduce new technologies is most accurately measured in decades.

Richard Branson, founder and chairman of the Virgin Group:

This summer, as Virgin America launched, I was asked to comment on the state of air travel. Where most people see mess, I see opportunity. Thirty years ago, when I was stranded at an airport, I chartered a plane, sold seats to other stranded passengers, and in effect started Virgin Atlantic Airways. Our airline began with stranded passengers in mind, and that focus — customers first — continues to drive all our businesses.

The American traveling public has proven, with their dollars, where the future lies for commercial air travel: next generation, low fare, point-to-point carriers. This segment now owns one-third of the market, up from about 5 percent in the early 1990s. Consumers have been abandoning legacy carriers for years, and that decision is proving that there’s money to be made if you listen to what customers have to say.

I’ll use Virgin America as an example, since it launched just two months ago — on a morning when JFK was hit by a tornado (only the second tornado ever to hit New York!), during what people said was the absolute worst time to start an airline.

Virgin America chose to design a travel experience around the question, “How do people travel now?” If they are subject to long lines, delays, weather, and shabby planes, then why not try out innovations that we and our passengers can control? Virgin America passengers are entertained with 25 movie options, TV, games, in-flight chatting, and music. They can order food whenever they want it. They have power to charge up computers and, by next year, will have WiFi access at their seats. And why not have a bit of fun with mood lighting and a soundtrack in the bathrooms? Not an earth-shattering idea; but still, a new approach in the airline business. As the best financed new U.S. airline of all time, Virgin America has the luxury of making these investments, driving down ticket prices, and sparking an in-flight entertainment war. As with most other things, more competition is good for everyone.

In addition to our financing, Virgin America has other key cost-savings, including a streamlined, tech-savvy business model and a brand new fleet that is fuel-efficient and saves on fuel costs (and mitigates the impact on the environment). With an increasing focus on climate change, airlines have an opportunity and a responsibility to innovate with cleaner fuels and efficient planes. We’ve made business decisions with that in mind, such as pledging 100 percent of our profits from all our transportation companies to direct investments in clean energy. I believe we’ll see a lot more improvements there — and perhaps more pledges towards bringing clean energy to an otherwise dirty industry.

You’d mentioned private aviation in an earlier post, so I’ll make a brief point about that. Travelers who’ve had enough of commercial air travel actually have greater options in private aviation. That market is growing at over 25 percent per year, in part due to the growth of business travel and a willingness to spend more to get places faster. It helps that travelers can fly in and out of over 5,000 private airports in the U.S., compared to 500 commercial airports. New pricing models and very light jets are lowering the barrier to entry. We’re doing our bit with Virgin Charter, an online marketplace for sellers to put up their flights and for buyers to find and book flights as easily, as if on Expedia. So, the way I see it, it’s a brilliant time to be in the air travel business. Especially if you put yourself in other people’s shoes and ask, “How can I make this better for them?”

Gary Topping, CEO of Topping Travel and former executive at Malev Airways, Qantas, and Windward Island Airways in the Caribbean:

Usually from chaos we eventually get order. But whether ten years is enough to bring the U.S. Airline industry to order is a topic that I’m not sure will ever be solved without some meaningful government involvement. Taxes collected by government departments from both passengers and airlines should be used for the purpose for which they were collected, not sidelined to other budget needs. Our airways and airports are in desperate need of upgrades before the system declines into complete gridlock.

In the future, the price of fuel will drive new technology, leading to the development of more fuel-efficient and environmentally friendly aircraft. Technology and fuel prices will also do away with the “65th in line to take off” syndrome. Baggage will be electronically tagged, never to be lost again.

Airway-clogging, gas-guzzling, inefficient, and uncomfortable RJs will disappear from the skies. The “Big Six” will become the “Bigger Four.” LLCs will merge and take over international flying across both the Atlantic and Pacific, and begin offering two classes of service. First Class will disappear, to be replaced by an upgraded business class. Economy will evolve into “Economy Extra” and “Economy Squeeze.” Niche carriers will expand their reach, with more flying into European markets, offering better value.

And finally, maybe an enlightened U.S. airline CEO will see through the fog of the bean counters and realize that “happy employees” also make happy (and dedicated) customers.

Patrick Smith, a commercial pilot, columnist for Salon.com and the author of Ask the Pilot: Everything You Need to Know About Air Travel:

To begin with, I would somewhat disagree with the premise. Flying is perhaps less enjoyable than ever before; but that, in itself, does not equate to a market in disarray. The industry is in a period of transition and readjustment, coming off the most ruinous five-year stretch in its history. The majors have survived, and are now in a game of catch-up, streamlining their business models to stay ahead of feisty mavericks like JetBlue.

Most passenger disappointment is driven by two things: security hassles and flight delays. The existing security protocols are, for the most part, immensely absurd and tedious, but there is only so much the airlines themselves can do about it. What the situation will be like ten years from now is anyone’s guess. Here’s hoping that as time goes on, the TSA revises its more wasteful and arbitrary policies, improving the flow of passengers through terminals. The likelihood of that happening depends partly on the mindset of the traveling public. Thus far, spooked by the specter of “terrorism,” be it real or perceived, travelers have expressed a rather troubling willingness to accept nonsensical, intrusive, and humiliating policy in the name of security.

The delays issue, on the other hand, is caused almost entirely by airline over-scheduling, a product of the industry’s self-defeating philosophy that frequency of flights is the ultimate key to success. Airlines have portioned ever more passengers onto smaller and smaller planes making more and more departures, bringing runways and taxiways to the point of gridlock. But although this is a serious problem, it’s also one that is eminently fixable. Carriers are finally beginning to see the wisdom of consolidating flights using larger planes and/or taking advantage of off-peak time slots. (If they don’t, the government might force them to.) Look for this trend to continue.

Airfares, meanwhile, continue to hover around historic lows. The average ticket costs approximately what it did in the early 1980s, despite tremendous spikes in fuel costs. Just for this reason, more people are flying than ever before. Thus, the service aspect becomes a two-edged sword: now that flying is a truly egalitarian, mass-market mode of getting around, it’s unreasonable to expect top-notch treatment. What the legacy airlines hope to come up with is a profitable, sustainable way of providing both dignified customer service and low fares.

Our safety record has been almost impeccable. Some 30,000 commercial aircraft depart each day in the U.S., carrying around two million people, and virtually every one of them arrives safely. The last accident involving a U.S. major carrier was almost six years ago — the longest such stretch in the industry’s history. There are now twice as many jetliners, carrying twice as many people, as there were a quarter century ago. Yet as a percentage of total flights, the accident rate has fallen sharply. Training and technology are the drivers here, and they continue to improve. Accidents will never be eliminated entirely, but in ten years we can expect to be looking at statistics that are no less impressive, or possibly better.

All in all, short of an extreme fuel crisis or economic calamity (either or both of which are possible), there is no reason to believe that the skyscape will look terribly different a decade from now. Our perspective, maybe, is what needs to change most. Domestic air travel will never again be glamorous or elite, and a certain degree of hassle and discomfort is unavoidable in a business that, by 2015, will be hauling a billion Americans annually, at affordable fares, in reasonable comfort and in near-perfect safety.

Josh Marks, founder and executive vice president of MAXjet:

The economics of the airline business have seen fundamental changes recently. Customer demand has shifted, with frequent-flyer programs becoming less important (has anyone noticed how hard it is to redeem miles these days?), and value-for-money becoming the primary purchase consideration. Economics have also shifted, with oil prices skyrocketing and the market growing tighter for new and used aircraft. In addition, airlines must cope with continuing airspace and airport congestion driven by an increase in schedules without a corresponding shift in air-traffic control capacity.

Specialization in the airline business is a trend that started three decades ago, with the emergence of Southwest Airlines. Southwest offered a radical change to the industry — a carrier with a focused product offering a focused set of routes. Southwest had a clear vision for its role in the industry and has executed faithfully on that vision through economic cycles. In the process, Southwest spawned blatant imitators as well as subsequent generations of low-cost carriers that combined a cost focus with product enhancements. Today, that specialization is spreading industry-wide, with new all-business-class airlines such as Eos and MAXjet offering affordable fares on international routes, and new entrants such as Virgin America launching with a focus on long-haul domestic flights.

It is unlikely that the aircraft you now fly domestically will be much different ten years from now. The next-generation replacements for today’s Boeing and Airbus domestic airplanes will just be entering service, and a few revolutionary Boeing 787s will be flying international routes. But other than that, the aircraft are not likely to change. It is also unlikely that our airport infrastructure will see significant capacity increases over the next ten years.

As such, without fundamental change in fuel efficiency or physical infrastructure, how will airlines continue growing? One key will be continued specialization. There is room in retail for Wal-Mart, Nordstrom and Saks, just as there is room in the airline industry for SkyBus, Southwest, JetBlue, United, MAXjet, Virgin America and others. And there is room because some days value-seeking consumers wish to shop at Wal-Mart, and some days these consumers will find their high value item at Saks. Like their retail counterparts, each airline will need to understand its specific value proposition and customer base to maintain a unique identity.

For regional passengers — flying from secondary city to secondary city in the U.S. — the mass-marketing major airlines stand the best chance of aggregating enough traffic to offer affordable fares. On high-volume routes with pockets of customers who seek the best product or the best fare, there will be a wide diversity of product offered and a range of fares. We are seeing that now in markets such as New York to Los Angeles, with even major carries like United offering a distinct product on the route from the rest of their network. Cheap fares will still be available, but do not expect a lot of comfort or freebies.

Another key will be more efficient utilization of airspace. Cancellations and delays cost the airlines dearly in lost revenue, wasted fuel, and repositioning costs. To improve utilization of today’s terminals, runways and airspace, the technology we take for granted in our cars (and even our BlackBerries) needs to be adapted to the skies. Global positioning systems and data communications between aircraft and controllers must replace the antiquated radar-and-radio infrastructure that we have now outgrown.