Behind Fare Increases

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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 dozen 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.

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