Airlines did a slightly better job of delivering on-time performance in 2010 – despite taking heavy hits due to bad weather in December. But boosting on-time performance and cutting cancellations is far more than a PR tactic aimed at smoothing the ruffled feathers of the flying public. As regulators and lawmakers prepare to embrace new consumer protections, operational inefficiency has the potential to hit an airline where it really hurts: its profit.
While airlines in general boosted on-time performance, individual airlines struggled or soared. For example, perennial on-time leader Southwest (NYSE:LUV) sunk to sixth in 2010 with 79.5% of its flights on time last year, compared to 83% in 2009. Those numbers, which indicate Southwest’s challenges managing a more complex operation — higher load factors, more hubs, and increased turnaround times for aircraft — raise a concern about earnings going forward.
This struggle — and the corresponding pressure on share prices — is likely to grow as Southwest adds further complexity to its operations with its pending acquisition of AirTran (NYSE:AAI). Southwest shares have rebounded along with the entire sector, but they’re still below their highs of the year.
Meanwhile, AMR Corp.’s (NYSE:AMR) American Airlines, which posted an on-time performance of only 77.2% in 2009, boasted an improvement to 79.6% last year. First-place United, operating separately from its current United Continental (NYSE:UAL) structure, ended the year with an on-time performance rating of 85.2%, paid out performance incentive bonuses averaging $1,240 to its frontline employees.
A far more significant measure was the dramatic improvement in flights that were held for hours on the tarmac waiting to take off or transit to a gate. There were only 15 total tarmac delays of more than three hours between May and December 2010, compared to 589 for the same period a year earlier.
To lawmakers and regulators, that dramatic reversal signals one thing: the effectiveness of stricter requirements — and the potential of hefty fines — to encourage airlines to boost their operational efficiency. The May-December 2010 timeframe is important because it reflects how carriers responded to a new regulation prohibiting U.S. airlines from allowing a domestic flight to remain on the tarmac for more than three hours without deplaning passengers.
The Department of Transportation began investigating such cases and levying fines of $27,500 per passenger on the airlines responsible. Airlines responded to these new requirements often by canceling flights before forecast storms even hit in December.
Expect more “consumer-friendly” regulations this year — including an expansion of the existing tarmac rules to foreign carriers and smaller airports, as well as enhanced disclosure rules for baggage fees and other “add-ons”.
