Why Don't The Airlines Just Raise Fares?

[FWAAA]

Periodically, someone posts their view that the current tailspin trapping the entire industry could just be straightened out if the major airlines would raise fares. Of course, these posts seem to ignore the reality that various airlines have tried to raise fares multiple times in the past 3 years with limited success.

Several weeks ago, a fare increase finally stuck (meaning that everyone who mattered went along with the increase). Did it help? Hardly.

Revenue Gains Elude Airlines

By Ross Snel
TheStreet.com Staff Reporter
11/18/2004 11:29 AM EST

Airline stocks were mixed Thursday, after industry revenue data failed to meet Wall Street's expectations and indicated the tough pricing environment extended through October.

Wall Street analysts noted unit revenue at eight major network airlines fell 2.9% in October from a year before. The figure, from the Air Transport Association, an industry group, contrasted with better-than-expected unit revenue reported earlier this month by Continental Airlines (CAL:NYSE - commentary - research), the only U.S. airline that provides revenue data along with monthly traffic numbers. Continental's report that October mainline unit revenue rose between 0.5% and 1.5% stoked optimism that industry trends were improving.

"Given an increasingly steep booking curve, we would have expected early October fare increases to translate into improved October revenue," wrote Jamie Baker, a J.P. Morgan analyst, in a research note. "We were mistaken. We believe all reporting carriers witnessed significant yield declines in October. However, based on carrier feedback we remain optimistic that November results will show evidence of improved pricing traction."

http://www.thestreet.com/_yahoo/stocks/tra...=FREE&cm_ite=NA

"We were wrong about last month, but we think this month will show a breakout." Uh huh. "It's just around the corner. We missed this month, but wait til next month." Yep.

Unfortunately, buyers of airline tickets assign their own value to the trip. Regardless of the expenses of the airlines. Regardless of the price of fuel. Regardless of how much (or little) the airline pays its employees. And nearly every airline is filling those seats at the prices the customers are willing to pay, which aren't high enough to generate profits except at WN and B6. And even WN's profit margin is down substantially from where it once was.

 

[markkus757]

The biggest pressures on pricing are the LCCs. When Southwest is not able to hedge at $24 a barrel, they will have to raise ticket prices. The only other chance that the airlines will have to raise prices will be when one of the majors goes out of business. No airline can react quick enough to compensate for a lost major carrier these days.

 

[Bob Owens]

The biggest pressures on pricing are the LCCs. When Southwest is not able to hedge at $24 a barrel, they will have to raise ticket prices. The only other chance that the airlines will have to raise prices will be when one of the majors goes out of business. No airline can react quick enough to compensate for a lost major carrier these days.

[post="203516"][/post]​

I may just be a grease monkey but things just dont add up. Other than the employees though who is going to question it? Everyone else just loves cheap fares right? So explain to me how SWA keeps fares to Europe and Asia low. Explain how SWA even keep fares from BOS to NYC low. SWA does not fly those routes, and with their 737s it not likely that we will see a JFK to Tokyo route anytime soon.

FWAAA says that raising fares might not work. Well is what they are doing working? Obviously not.

If Jet Blue and the other LCCs are flying full, and AA is flying at 70 to 80% full, couldnt AA have charged those who could not get a seat on the LCCs pretty much whatever they want? Are the LCCs all of a sudden going to pop up with hundreds of new airplanes?

Too much capacity, when load factors are at or near historic highs.

Fuel, when its not much higher than it was twenty years ago when inflation is factored in plus the fact that todays aircraft are much more efficient than they were 20 years ago.

LCCs, well we have seen them come and go before.

The excuses never stop, but the overall trend is that the industry is still expanding, productivity is rising and our wages are going down. No something just does not add up. Usually a growing industry and rising productivity mean increased living standards, not lower ones.

 

[funguy2]

I've said for a while, its not the LCC's fault fares don't increase... It is, in my opinion, a macro economic issue. The costs of things people buy every day are rising, and rising dramatically. Gasoline is up over $1/gallon since the extremely low prices we saw in 1998 (under $1/gal). Natural gas and heating oil is up with the rest of petrolium. The cost of milk, and almost all dairy products is up, as are certain vegetables. People's income is coming down.

All this adds up to less dicretionary money for the average Joe to spend on taking the family to Florida or visiting Grandma in Scottsdale. If the airlines raise fares, lots of folks will forgo their discretionary trips this year.

Then, add to that the transparency of fares and expanded LCC availability for the business traveller, and you can no longer make it up by gouging the last-minute traveller, as the industry has become accustomed.

So, really, if it were as simple as raising fares, it would have been done by now.

And, lastly, as I always say, fare increase aren't all about a press release that says "Airline X now has higher fares". It also has to do with yield management... Making less Super Discount Fares available and forcing people to spend a little more... That isn't working for most airlines right now either...

 

[whlinder]

Perhaps since the fare increases took place in early October they weren't in time for a large enough number of October bookings to make a major effect? (I'm not sure how far in advance the average ticket is purchased)

 

[Bob Owens]

I've said for a while, its not the LCC's fault fares don't increase... It is, in my opinion, a macro economic issue. The costs of things people buy every day are rising, and rising dramatically. Gasoline is up over $1/gallon since the extremely low prices we saw in 1998 (under $1/gal). Natural gas and heating oil is up with the rest of petrolium. The cost of milk, and almost all dairy products is up, as are certain vegetables. People's income is coming down.

All this adds up to less dicretionary money for the average Joe to spend on taking the family to Florida or visiting Grandma in Scottsdale. If the airlines raise fares, lots of folks will forgo their discretionary trips this year.

Then, add to that the transparency of fares and expanded LCC availability for the business traveller, and you can no longer make it up by gouging the last-minute traveller, as the industry has become accustomed.

So, really, if it were as simple as raising fares, it would have been done by now.

And, lastly, as I always say, fare increase aren't all about a press release that says "Airline X now has higher fares". It also has to do with yield management... Making less Super Discount Fares available and forcing people to spend a little more... That isn't working for most airlines right now either...

[post="203526"][/post]​

If the planes are full then they are charging too little. $20 -to $30 dollars per ticket is not going to make anyone stay home but it could make the difference between a profit and a loss. In the Flagship news they had a little caption that compared flying from New York to LAX ($79) with filling up the gas tank of a small SUV ($67).Do you expect us to believe that if the airlines charged $99, instead of $79 that people would stay home? I doubt it.

 

[Winglet]

There's 25% too much capacity in the US airline system. The Chapter 11 airlines need to be allowed to fold, instead of propping them up to drive down prices and collapse the wage scale. Unfortunately, that's not going to happen because Bush wants cheap tickets and 3 world labor in US industry.

Everybody wants everything cheap now, and they don't care who they screw to get it. Look at the success of Walmart. How many American furniture makers are there now? Bush keeps talking about all these great future employment opportunities, but can't name any . . . . while he wants to open the floodgates for cheap labor for his CEO buddies. They won't be satisfied until executive compensation is 1000 times average worker compensation, instead of 400 times.

This country deserves what it will ultimately get from the greed and averice that it's business and political leaders promote.

 

[FWAAA]

Mr Owens and funguy2 both make good points. And I'm not even a grease monkey.

As I posted the other day in a different thread:

Fares are down, revenues are down, because of overcapacity.

Strictly speaking, the overcapacity is in the number of full-service airline seats available (at the legacy airlines), not the total number of airline seats available.

If half the full-service airline seats disappeared tomorrow, (or even 15-20% of them), the remaining full-service airline seats would command higher prices. Some of the cheapskates currently stuffing your planes would either have to pay more or stay home.

The flights are stuffed full because the overcapacity has caused a bidding down in price. And with break-even load factors approaching 95% (or higher, at some airlines), the seats have to be filled to keep cash coming in the door, no matter the price.

It's long past time for some consolidation in the full-service industry.

But since that means an airline or two needs to go out of business, it's a "taboo" subject. But it's still true. Time for somebody to liquidate. And the sooner, the better. We need to throw somebody out of the lifeboat so that the others can survive.

WN isn't depressing yields on international flights. Neither is B6. International yields are fine.

But WN is helping to depress AA's yields on BOS to NYC. How? WN's fares between MHT and ISP are cheap. Same with PVD-ISP. Yes, MHT and PVD are not BOS. And ISP is not JFK. But for leisure travelers, those cities are reasonable substitutes.

All in all, I don't see the current problems as entirely the fault of today's trendy LCCs. Nor do I think that high fuel prices (relative to the cheap 10 years 1993-2002) is the only cause. Unlike some, I don't blame every manager of the 6 legacy airlines. I don't blame the employees of the 6 legacy airlines - after all, they have given back billions. I don't blame the low fares, either.

What is the primary cause of the crisis? IMO, Too many full-service airlines chasing the ever-smaller pool of high-fare passengers. Without the protections of bankruptcy law and the ability of those in ch 11 to spend their creditors' cash, the remaining full service airlines would be stronger. Strong enough? Maybe not. But they would be stronger than they are now.

 

[JS]

If the planes are full then they are charging too little. $20 -to $30 dollars per ticket is not going to make anyone stay home but it could make the difference between a profit and a loss. In the Flagship news they had a little caption that compared flying from New York to LAX ($79) with filling up the gas tank of a small SUV ($67).Do you expect us to believe that if the airlines charged $99, instead of $79 that people would stay home? I doubt it.

[post="203572"][/post]​

Planes are not full. They are almost full. If you raise prices $20, you will lose passengers.

You might think that everyone willing to pay $79 is also willing to pay $99, but you would be wrong. Sure, some people are willing to pay more, but not everyone. If you have four available seats and have the choice between four $79 passengers and three $99 passengers, which would you choose?

The fact that driving an SUV 2,500 miles costs almost as much in fuel as an airline ticket is not relevant. Otherwise, we may as well get more absurd and compare the cost in food supplies of rowing from Los Angeles to Hawaii to the LAX-HNL air fares.

The cost of driving is relevant on short-haul routes.

 

[Buck]

Planes are not full. They are almost full. If you raise prices $20, you will lose passengers.

You might think that everyone willing to pay $79 is also willing to pay $99, but you would be wrong. Sure, some people are willing to pay more, but not everyone. If you have four available seats and have the choice between four $79 passengers and three $99 passengers, which would you choose?

The fact that driving an SUV 2,500 miles costs almost as much in fuel as an airline ticket is not relevant. Otherwise, we may as well get more absurd and compare the cost in food supplies of rowing from Los Angeles to Hawaii to the LAX-HNL air fares.

The cost of driving is relevant on short-haul routes.

[post="203596"][/post]​

How many passengers will you lose? and For how long?

 

[whlinder]

You get a family of 5 who wants to go on vacation, and raise their $79 fare to $99. An extra hundred might not seem like a lot, but to lots of discretionary customers it is. The leisure traveler likely has other options, and that extra $100 will send them to their alternatives.

Instead of raising fares I wonder what reducing the availability of the cheap inventory would do.

 

[flyboymd8]

The capacity situation will never change in this country, just look at what is happening with ATA in BK, airlines are jumping to fill that void, so dreaming of other airlines going out of business will not solve the problem. We have less industy wide seats now than in 2000, yet the price of tickets are dramatically lower. This is an issue of pricing discipline which the airline industry as a whole knows nothing about. Fedex, UPS, and DHL have all increased their prices in response to market changes, they refuse to price their product below cost, and have just as much competition with low cost cargo carriers such as Arrow, Southern, Kalitta, etc. I saw a very interesting bit of commentary from an airline analyst with the big 5 talk about the lack of pricing discipline within the pax carrying airlines. It seems that the pax airlines have this notion that every American has a God given right o travel on the airlines, and if they can't afford to, well, we'll just lower our fares to capture that market. If the bread and butter of AA, or any other legacy carrier is the business person, then why are they catering to the leisure traveller by lowing fares to historically low levels? Lets take an example of a city pair X that has mainline narrow body aircraft and there are 4 or 5 competing airlines, in this case if Brand A decides they will increase fares in the leisure market and adjust their capacity accordingly, then logic says the leisure pax will go to other carriers in that market, when the other carriers accept that capacity and fill up because their fares are low, they not only will lose money, but the remainder pax will have no choice but to pay higher fares to go to Brand A to complete their trip, if the pax decide not to go to Brand A, then Brand A has adjusted their capacity anyways(i.e. if the market carries a certain amount of business traffic, then adjust your aircraft to allow for the that traffic and price the rest of the seats left over at a price to make a profit, not just to fill seats), this will require a smaller Legacy airline, but a profitable one.
Perfect example of lack of pricing discipline is United and US Air, both have gone to their employees several times for concessions, and in response have lowered their fares to capture market share, the result has been that those concessions have given a temporary reprieve and instead of at least keeping the price of their product the same, they have lowered it and eliminated any advantage gained by the lower costs. Net result is that they have come back for more cost reduction because they lost all the advantage of the cost savings. Unless the airlines start to address both sides of the equation, i.e. cost and revenue, we will continue to spiral down until employees are working for peanuts and every American can fly for $39 to their choice of destination. Heck their are markets where Grey Hound fares are higher than airline fares.

 

[acmech]

It is far easier for the airlines to lay people for and cut benefits than it is for them to raise fares. We have all seen this already. The price of oil goes up, the airlines lay off more folks.

 

[JS]

... This is an issue of pricing discipline which the airline industry as a whole knows nothing about. Fedex, UPS, and DHL have all increased their prices in response to market changes, they refuse to price their product below cost, and have just as much competition with low cost cargo carriers such as Arrow, Southern, Kalitta, etc. ...

Cargo carriers are like a businessman's airline. Few people make a decision on whether to ship a box based on the price.

 

[IFLYA9]

Something is very wrong with the pricing of the airline business when it costs
more to park your car at the airport for 7 days than it does to fly half way
across the country. Even worse is that people will fork out $50 to take
a cab from downtown to the airport but complain about any airfare that's
above $99.
I have had enough of this nonsense, let'em drive!

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