On the news they were saying that the airlines were adding fees wherever they could in an effort to stop hemorrhaging money. How come they are all losing money hand over fist? What stops them (all of them!) from just raising fares high enough to be profitable? Folks will still fly. Maybe not as many, but they’ll still fly. Anyone know?
I meant to add that I would rather just pay an honest fare than have them tell me - oh it’s $100 and then add on another hundred in sneaky fees.
People shop online for lowest price. They often buy without regard to fees.
The transportation business (trucking, airfreight, etc.) does the same thing. The rates don’t change, but when fuel goes up, you’ll see “Fuel Surcharges.” If consumers didn’t fall for such things, they wouldn’t do it.
These things still don’t answer why they don’t raise fares (or fees) enough to be profitable. What’s the point of staying in business to lose money?
from here:
http://www.usatoday.com/travel/flights/2010-04-22-southwest-profit-q1-earnings_N.htm
“DALLAS — By the slimmest of margins, Southwest Airlines Co. made a profit in the first quarter while other big carriers were losing money.”
So the big carriers are losing money. I repeat - why not raise fares enough to make money?
The part I have put in bold is key. If you charge more but fewer people fly with you, you might end up making even less money than you were.
It’s illegal for the airlines to get together and talk about raising fees. So any raises have to be done independently. And the first one to raise fares gets enormously punished for doing so by people going to their cheaper competitors.
That means that while there may be an incentive for everyone to increase prices there’s disincentive for anyone to do so first. Hence the downward death spiral.
My guess would be that the industry is bigger than it should be in a perfect market.
Over time companies will go bankrupt or scale down, and overall profits will return to normal for the industry. In the meantime they’s trying not to be the ones going bankrupt or scaling down.
Simple competition. If one carrier raises fares and others don’t follow, they will still lose money because they won’t sell many tickets. So one airline will raise fares $10-$20 at a time. Sometimes other airlines will follow and sometimes they won’t.
As far as the surcharges for summer travel, Southwest and JetBlue aren’t instituting them. So on routes where there is competition with those airlines, there won’t be a surcharge.
Maybe what you’re forgetting is that travelers are not a single homogeneous group.
Business travelers, for example, usually need to fly on relatively short notice, pack few bags and are paying for the ticket out of company funds rather than personal funds. They pay higher ticket prices because all the cheap tickets have to be bought in advance… but they tend to pack lighter, so there are fewer bag charges. The main price concern with business travelers is to keep the price low enough that they don’t do video chat instead of in-personal travel, but the ones who need to travel really don’t have many options.
Vacation travelers are totally different. They plan ahead and buy tickets well in advance for the best deals The bring tons of bags, skis, pets, etc. with them and are not savvy enough to always compare total cost of travel rather than just ticket cost. If you raise fares too much, they’ll gladly look for options. They can always use a car and take a vacation closer to home.
Charging for bags, then, is one good way to manipulate prices so that you can target the increase to just a portion of your travelers.
I don’t know all of the calculations that go into this reasoning, but a simple fare raise across every ticket doesn’t let the airlines target the sub-markets that make up all air travelers.
After you fill enough seats to pay the costs of the flight, any remaining seats you can sell is almost pure profit. If your competitor keeps fares lower and fills those seats, and you don’t, you lose big.
I suspect anchoring also has something to do with it. When you see the fare you anchor to it, and don’t really appreciate the major extra cost of luggage fees. However, Southwest says it is taking market share from the other carriers thanks to not screwing their customers quite as much.
^^^This.
Since there are more airline seats in the supply than current demand, the market is over supplied. As a result prices will fall to compete for the limited demand. Eventually, the marginal supplier (typically the supplier, or in this case airline, with the highest cost) will go out of business and the amount of supply will shrink to meet or be closer to demand, this is typically where prices will be set at the optimimum point. Where suppliers can make enough profit to justify staying in business.
If demand goes up and supply stays constant, prices will rise, as consumers are willing to pay more for the limited number of seats on the planes. This will typically incentivize airlines to invest in more planes to add more seats. Or these market condititions may even incentivize a new airline to enter into the market to attract these high paying customers.
Invariably, the psychology of the market will result in eventual oversupply again, and prices will fall once more.
The last time I checked, the fees weren’t even listed online, unless you looked really hard for them.
They’re not hard to find with a bit of searching, but they certainly aren’t advertised very prominently. Orbitz has this page at their frequently asked questions section, for example.
But when you’re searching for a particular flight, you can only see the base price plus a subset of standard fees. So Airline A will sell you the flight you want for $200, while Airline B sells it for $220. Most people won’t do the research to find out that Airline A will charge an additional $50 in fees, so they’ll just pick the apparently cheaper flight.
Personally, I never check a bag if I can get away with it, so I ignore those fees as well.
I was going to say this. The answer to the OP’s question is “simple economics”.
The OP is assuming that if one airline raises its fares, that will make it more money. But that’s not true: if an airline unilaterally raises its fares, it’ll lose customers and make even less money. Even if every airline raises their fares by $100 right now, that just creates a massive incentive for one of them to renege, keep their fares cheaper and scoop up all the customers looking for the best deal. Plus it’s illegal for airlines to get together and collude to raise their fares anyway.
I really, really think we need something like Am-Air; The airlines have been losing money for a long time and it’s not going to stop. The government is good at running losing businesses, let them have it. See: Post Office, Am-Trak, General, err, Government Motors.
For the same reason no one lists prices “Including tax” when they quote you. I used to work in Chicago, and at the time the taxes on hotel rooms amounted to 18%. Every once in awhile I would get a customer that’d say, “how much is that with the tax” and I’d tell them.
If the room was $159.00 the total would be $187.62 and they’d be like “What??? Why so much??”
The thing is also by raising fees you don’t hurt your base either. For instance, in the same hotel where I worked we had preferred vendors and airlines. When you booked a flight for the hotel on business, you had to get three bids. You HAD to go with the lowest one.
So let’s say American was the lowest fare but with all the fees added in, it was now the most expensive. Well you guessed it, American would still get the business, because their fare was the lowest
Exactly. Travelocity (and its ilk) are killing the airlines. The luggage fees, for example, are perfect for this.
If I search for a flight, I get the cost with all applicable taxes and fees; so a “fuel surcharge” is just an extra cost/ However, I may check 2 bags, 1 bag, or no bags; so that number is not in the fees. I may or may not eat a meal or have a drink; so that is not in the price Travelocity shows either.
It’s worse in Canada, where airlines are not obliged to state “total price”. So a fuel surcharge (which is basically more cost for a ticket) is not included in the advertised ticket price.
OTOH, many of the fees are airport improvement fees, security fees (you pay extra for the privilege of being delayed frisked and xrayed), landing fees, customs fees, etc. The airlines will argue they are simply collecting these on behalf of others, why should they count as their cost? Plus, some only apply once, even if you transfer several times, so total cost calculation is not as simple as Flight A plus Flight B.
In Vancouver, for several years, they had someone stationed just before security to collect the $10 “airport improvement fee” from anyone starting a journey there.
But basically, the answe is simple - airlines cannot conspire to raise prices. The first one to do so gets crucified on Travelocity. Anything that puts your price lower on Travelocity but gets more money is a bonus. Plus, the competition is cutthroat because the seat has to make money - a seat not sold is gone forever; but if your customers discover “wait for X and you get a seat at 1/4 the price”, you cannibalize your existing service. While lower prices may generate a bit more sales, basically there are a limited number of people going from A to B and the trick is to lure them away from the other airlines.
(There was the famous airline exec memo leaked, where he said about a complaining customer: “We owe him nothing. He’s not a loyal customer. He’ll jump to the first airline that offers him $10 less, and he’ll be back when we offer our flight for $5 less than the competition.”)
I travelled on business to and from Vancouver a lot in those days, and I well remember that little Airport Improvement Fee Collection kiosk. Ten bucks for flights going to other Canadian destinations, cash only. It would have been much easier to just bundle the fee with the ticket cost.
I’m not sure I’d agree there are too many seats now. Here is a table of load factors- in March, it was 77% for the entire industry, higher for some airlines. I’m not sure what they count as a full load, but given the vagaries of routes 77% is pretty high, and anyone traveling on lots of fully loaded planes knows.
When the recession hit, the airlines took a lot of planes out of service and parked them in the desert. Yet they still lost money.
No cite, but an article in the Times said that most of the profit from a flight comes from the first class seats. Could be. But I think a big issue with the airlines is the decline in business travel and the desire of companies to get the same kind of prices breaks consumers do. 25 years ago I spent a lot of time traveling to meetings - today most of these are done on a conference call.
Given that most airlines now compete on schedule and price, there is going to be a downward pressure on what they can charge. Airlines have taught us that unless you are a frequent flier or are willing to pay a lot of money, you should expect service around the level of the Running Dog Bus Company. Southwest, who is more efficient, can invest some of that money in avoiding fees and grabbing market share. Their load factor is 81%.