Behind Fare Increases

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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.

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