Fare-tracking experts say the big U.S. airlines have raised prices 11 times this year. So how come I got an email last week from United Airlines offering to sell me one-way tickets for as low as $37?
The six big network carriers—American, United, Delta, Northwest, Continental, and US Airways—said they paid $2.9 billion more for jet fuel during the first quarter of 2008. So why does Delta want to give me a $50 American Express card if I book a transcontinental flight?
The mainstream media is chockablock with stories claiming airfares are skyrocketing. Yet a typically alarmist tale in the New York Times last week was accompanied by a chart showing prices on five of 10 listed routes were the same or even lower than last year.
Stung by rising oil costs, airlines are raising fares with uncharacteristic gusto. But travelers may actually be paying less to fly because carriers are also discounting lustily to offset falling traffic and passenger resistance to the run-up in prices.
Sound insane? Of course it is. This is Fareland, a through-the-looking-glass world where computers change prices millions of times a day; no two customers ever pay the same amount for seats on the same flight; airlines have no idea how much a ticket should cost; and the industry can’t successfully increase prices even when its largest manufacturing cost (fuel) has doubled in the last year.
It’s difficult to rationally explain the insanity of the current Big Six fare structure, but let’s start here: Airline pricing is a form of socialism totally divorced from market forces.
The traditional business norms—fixed and variable costs, profit margins, etc.—have no place in Big Six pricing policies. What it actually costs an airline to manufacture and sell a seat on a flight has almost no bearing on what the carrier charges you. Instead, airline pricing honchos and their yield-management computers engage in a not-so-subtle guessing game. They try to divine the maximum each and every customer is willing to pay for a ticket to fly.
The socialism part comes in when airlines decide that there are essentially two kinds of customers: price-insensitive business travelers who have the corporate need and the financial wherewithal to pay almost anything and price-conscious leisure customers who will only buy seats when the price fits their vacation budgets.
That results in a maddening cacophony of ever-shifting prices on each flight. Airlines force business flyers to pay more by saddling all but the most expensive fares with advance-purchase requirements and stay-over restrictions. On the other hand, leisure travelers can get lower and lower prices as long as they are flexible about when they book, how many days they stay, and what days and times they fly.
Take tomorrow’s United Flight 23, a crack-of-dawn departure between New York’s Kennedy Airport and Los Angeles International. In the coach cabin, the one-way fares for identical seats can be as low as $159 (the price I was offered in last week’s email) or as high as $975.50 just before departure. There are dozens of fares in between, and the only differences in them are the rules about when I buy, if I purchase a return flight, whether I want to buy the seat on a nonrefundable or flexible basis, or if I have a corporate discount.
Even in the best of times, this pricing crapshoot has never been particularly profitable for airlines. And it always infuriates customers, who never know if they can find the lowest fares in the hedge maze of public and private distribution channels that airlines now use to sell tickets.
But pricing without regard to the actual cost of supplying the product really comes back to bite the airlines when there is a sharp downturn in the economy, a drastic change in the cost of commodities, or, like now, a combination of both.
Consider that $2.9 billion upswing in the industry’s first-quarter fuel expenses. It translated into 2 cents of additional fuel cost for every mile it carried a paying customer. Based on the distance of an average flight (about 721 miles), that’s $14.42 a person. On the 2,470-mile flight between New York and Los Angeles, it’s closer to $50 a passenger.
But since airlines don’t traditionally price based on actual manufacturing cost, customers are never sympathetic when airlines claim they need to raise fares based on fuel prices. After all, business travelers who pay nearly $1,000 to go coast-to-coast are already paying far more than they should. And leisure flyers, trained to look for bargains, refuse to book seats if they are asked to pay more than they expect. Besides, business flyers are cutting back their travel as the economy slows, and leisure travelers are even more cost conscious when they are paying more for groceries, gasoline, and other day-to-day essentials.
And that’s how it goes in Fareland. The airlines will keep raising fares in a desperate attempt to pass on rising costs. Then you’ll find amazing bargains as they make an equally desperate attempt to sell empty seats. How it all plays out on balance sheets remains to be seen.
The fine print …
Ever wonder why airlines sometimes raise base airfares and other times impose fuel surcharges? That’s one of the few easy things to explain. Airfare increases are subject to corporate discounts and sale pricing. Fuel surcharges are added after discounts are applied.