The airline industry is experiencing strong financial performance — Delta Air Lines recently hit a record stock price, and United Airline Holdings grew profits in its latest earnings as the U.S. economy continues its decade-long run.
In fact, airline industry conditions are so good, longtime airline-stock hater Warren Buffett of Berkshire Hathaway became one of the sector's biggest investors in recent years after a wave of consolidation brought the fleets closer to the almost monopoly conditions he looks for in businesses.
But other recent highs in air travel are not so positive: Airports all over the country are setting new records in monthly passenger levels, making the airport experience one of the worst "legs" in a traveler's journey. As a result, major airlines flush with money for reinvestment are making the on-the-ground experience a greater focus of their efforts to out-compete rival carriers.
"I think the next area of competition in air travel is in the airport," Paul Jacobson, executive vice president and CFO of Delta said at the CNBC @Work Human Capital + Finance conference in Chicago last Tuesday. "How do you continue to streamline the on-the-ground experience. It is a big part of how passengers rate the experience."
In major metro areas the two biggest issues in airport satisfaction are access to the airport (with so many major airports far from city centers) and the terminal itself, at No. 1, according to J.D. Power.
"The most common PR headline from any airport any month is 'X airport sets new monthly passenger record,'" said Mike Taylor, J.D. Power's travel practice leader.
But that does not necessarily mean it is good PR with so many airports so dated.
There are some aspects of the airport experience that airlines can't do anything about. Only 6% more airports have been built in the U.S. since 1980, despite 181% more domestic passengers.
"They can't build another four-lane highway to the airport," Taylor said. "Most of the airports are shoehorned into areas never meant to handle this much traffic."
Those problems don't end once at the airport, either: Many parking lots closest to terminals at some of the busiest U.S. airports are now completely full and closed on multiple days per week. This is the type of on-the-ground frustration that leads to missed flights, and missed flights lead to the blame being placed all around.
"People are more stressed on the airport and airlines side of things, and they blame both," Taylor said.
For the airlines like Delta, it does not matter that some of the terminal experience is beyond their control. Taylor said that when an aircraft closes and sits on the ground because the FAA is holding them there, passengers do not complain about the FAA. "They paid the airline, and they pick up the cocktail napkin and swear at it."
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Scott Mayerowitz, executive editorial director of travel information site The Points Guy, said the airport experience is unique in the travel journey as being so bad, and it is an important part of the journey that is underexamined. "Until my head hits the pillow in a hotel room, I am on the go, and it all matters," Mayerowitz said.
Delta is collecting as much data as it can from passengers to improve the travel experience. "We survey everything," Jacobson told those attending the CNBC event in Chicago. "A lot of that comes down to the psychology of the customer and understanding what each leg in the journey makes the customer feel like."
Wall Street is focusing more on the airport experience in its analysis of airline stocks. Hunter Keay, a Wolfe Research analyst who covers Delta, wrote that the Delta CFO is correct in his focus on the airport as a competitive key. Keay wrote in a late 2018 research note that Delta's major investment in "investment-starved airports" like New York City's LaGuardia "are not so much an act of generosity but a strategic decision that we believe will further widen DAL's competitive advantage to peers by driving up costs for marginal competitors there that lack scale, pricing power, or both. ... This is literally a 20-year competitive advantage DAL is building today, arguably the hardest one yet for competitors to copy."
Delta is investing $12 billion over a five-year period investing in its airport infrastructure, primarily at New York City's LaGuardia, Los Angeles International, Seattle-Tacoma International Airport, Salt Lake City International Airport and Hartsfield-Jackson Atlanta International Airport.
"Airports have always been a challenge for airlines who haven't been able to crack that code due to more pressing capital needs internally, fear of committing to longer-term, big dollar projects due to business cycle risk with questionable balance sheets, or the challenges of driving buy-in or consensus with the government agencies that run these airports. But it seems to us that DAL is figuring this thing out," Keay wrote.
One of the terminal chokepoints where Delta made an investment is through a stake it owns in biometric screening company Clear. Jacobson pointed to the Clear investment as part of its efforts to streamline the passenger experience through investments in technology. "We've made big bets in technology in the past few years thinking we can turn it around into revenue generation," the Delta CFO said at the CNBC event. Jacobson said technology like Clear should ultimately improve the experience beyond the security checkpoint.
"I think ultimately the technology around identification, whether facial recognition or fingerprints, is coming to all transactions," Jacobson said.
"Delta has recognized that security is a horrible headache for people," Mayerowitz said. "Clear is at many more airports than before because of the Delta investment, and they've done saturation at their key hubs."
Mayerowitz, who is a Clear member, added, "In two to three minutes at LGA or JFK, I can make it from the curb to the other side of security. Clear gets me to the front of the precheck line, and I just put my bag in and walk through and I'm done."
A focus on future revenue is one of the reasons why Delta is making the investments now, before a recession hits and operating conditions weaken.
Yael Taqqu, a senior partner at management consultant McKinsey, who spoke on a panel with Jacobson at CNBC's @Work Human Capital + Finance conference, said investments like the ones Delta is making now are designed to be "revenue enhancements" out ahead of the next downturn. "In a downturn, the wedge between digital haves and have nots, which is already wide, will get wider," said Taqqu.
Taylor said the timing is right from an airline industry perspective too. "You have to have three things happen to really expand airports. The economy has to be good, the airline has to be making money, and policies have to be right. These days, we have all three of them working in the airlines favor. ... When they are not making money, those things get put on hold. They would like to have everything set up for the passenger to be happy before getting on the craft."
Airlines also are running out of ways to improve and "disaggregate" — price-tier — the in-cabin experience.
"Right now airlines have healthy profits and are reinvesting," Mayerowitz said. "Delta likes to brag that they have the most inflight seatback TVs of any airline, and they've built a business around what they say is a superior product in the sky, and it commands a revenue premium, people willing to spend $10-$15 extra. But at the end of the day, there is only so much you can do to increase costs in the sky." He added of Delta's focus on the terminal, "They are right, especially as airlines cram more seats into planes and come up with hideous slim-line bathrooms just so they can get an extra row of seats in."
Delta is among the airlines that have cut down bathroom size in some cabins to add an extra back row.
Some of the on-the-ground improvements won't be available to all passengers — in fact, they are designed to find ways within the terminal to extract greater revenue and reward elite levels of passengers.
"Space dedicated to lounges will continue to grow," Taylor said. "They are looking for more space in which to hand out perks and do the same thing as they are doing in the cabin ... and trying to monetize some of it."
Mayerowitz, who holds 19 credit cards offering access to many different terminal lounges, said that frequent flyers need better club options because classic lounges at big city terminals can often be "packed."
Lounge investment is not limited to the airlines. American Express has its own series of luxury lounges for elite car holders, the Centurion Lounge. "Centurion has really upped the game in design and food offering," Mayerowitz said.
Airlines including American Airlines and United (Polaris Lounge) have added multiple-tiers of lounges in addition to the classic options (e.g. AA's Admirals Club).
"The lounge is crowded for most of these airlines and they are trying to differentiate it. ... If you're paying $10,000 for a one-way flight, you better be getting something better than a $450 traveler on the same trip. That's why they have separate entrances for check in," Mayerowitz said. He added that international travel already features some of these perks, but a passenger flying domestic will has not historically seen this level of service except to limited cross-country routes.
Luxury perks also have extended to travel between terminals. United offers Mercedes Benz cars for elite passengers that need to transfer between terminals for ground connections, a perk that Mayerowitz says can make quite an impression. "Elite members are whisked in these luxury cars around big planes to their next flights."
Delta offers Porsches; American Airlines uses Cadillacs.
All the airlines will spend "multi billions of dollars," in all, Taylor said.
Better food offerings and private dining on demand for top-tier travelers is coming. "Why have cheese cubes and crackers at the lounge when you can pay for fresh made?" Mayerowitz said. His credit card collections makes sure he always has options and he is seeing more of the benefits as lounges improve.
"I was just in Las Vegas and went to a lounge, got in thanks to my Chase Sapphire Reserve card, and it was great. Nice views and good snacks and a perfect place to unwind before heading out on the next part of my journey."
But there are limits to how far the airport improvement era can take the passenger.
Mayerowitz is not getting his hopes up too much. "Airports are just pretty bus terminals. There is only so much you can do."