Charging up to $25 to talk to a human reservations agent to book your flight.There’s nothing “win-win” about airfares. For all the marketing hype, it’s a zero-sum game. Either you pay more or the airline makes less. Call it market forces, but for the last 35 years there’s been a simmering battle for revenue between bargain-hunting passengers and profit-seeking airlines. Flying is still a bargain, relatively speaking, but at the end of the decade after 9/11, the momentum in the tug of war showed signs of shifting. By fits and starts, the airlines were beginning to gain the upper hand.
After years of cheap and stable prices—average domestic fares actually dropped nearly 16 percent between 1995 and 2011, adjusted for inflation—the cost of flying has recently been climbing. According to government figures, fares rose 8.3 percent between 2009 and 2010, and another 8.3 percent between 2010 and 2011, unadjusted. In 2012, fares climbed another 4.2 percent. Hidden in the averages were double-digit percentage hikes for increasingly scarce seats on some popular routes, and international fares, spurred by fuel costs, were rising even faster. For the next 20 years, FAA predicts, fares will continue to rise. Based on rosy assumptions that vigorous competition and lower operating costs will keep fares down, though, the agency anticipates that these increases will slightly trail inflation. Still, fares are only part of what we pay for a flight—don’t forget to add those annoying fees and surcharges.
Rising fares don’t mean that flying is overpriced, though, in any relative terms. Flying round-trip from New York to London almost a half century ago, in June 1969, cost $400 in Economy and $750 in First Class on Pan American (no Business Class then)—the equivalent of $2,500 and $4,400 in today’s dollars, even factoring in inflation. That’s more than double today’s economy fare (inflation-adjusted) and almost exactly what it costs today to travel between the two cities in Business Class—now with lie-flat bedlike seats that improve on old-style First Class. And as airlines like to remind us, in the entire decade from 2000 to 2010—albeit mostly before recent years’ fare hikes—the price of the average domestic ticket fell a few dollars—from $339 to $336—while inflation climbed 27 percent.
Recently rising fares don’t mean that airlines are getting rich, either. Lots of the new fortune has been going to oil companies. The 11 largest US airlines, members of the trade association Airlines for America, earned 12.6 percent more in 2011 than they did the year before, but they had to pay out 15.5 percent more in total operating expenses. That’s no way to make a financial killing. And for all that the airlines profited when fuel prices dipped in 2010 and 2011, they lost three times that much earlier in the decade. Of 53 principal US industries ranked by Fortune in 2009, airlines were dead last in profitability, about the same place they’d held for years. Even in the recent “good years,” airline profit margins have been nothing to write home about—just 2.2 percent in 2010 and a meager 0.3 percent in 2011, not much different for 2012, for the big US passenger carriers together. Excluding extraordinary losses by bankrupt American makes industry profit margins look better, but not that much better, still in the 2-to-3-percent range for 2011, marginally higher in 2012.
Still, US airlines haven’t been losing money like they used to. Even kiss-your-sister profits easily beat than the fiscal disaster of the mid-2000s when all but one major airline went bankrupt, some repeatedly, and the industry dropped a cool $62 billion over the decade. Today’s airlines expect to actually make money.
What triggered the turnaround, as much as anything, was financial fear—almost desperation—over wildly soaring fuel prices, the airlines’ biggest single operating expense. Carriers left no stone unturned to cut everything else. Not just removing one olive from every First Class salad—American Airlines famously saved $40,000 that way in the 1980s—but hacking away at their labor forces; deferring replacing, sometimes even deferring cleaning, old airplanes; and cutting salaries. But they couldn’t cut the price of jet fuel, which accounted for one-third of all their costs. As long as fuel expenses were out of control, so was the whole business. By the summer of 2008, rumors swirled on Wall Street that one, maybe two, of the largest US airlines could no longer get the financing needed to survive and might have to dissolve outright.
There was little left for the airlines to do but try to control the other side of their financial ledgers: revenues. Financial stability, even survival, depended on more cash coming in. In concept, boosting revenues was simple: extract more money from passengers in fares, fees, and other new charges. What largely saved the major airlines, what let them finally secure the control over fares they had long sought, seems almost perverse. It was the industry’s financial disaster that followed September 11. Scores of fare-cutting low-priced competitors were washed away in the tidal wave of red ink. Meanwhile, regulators suddenly worried about the fate of the entire aviation sector grew more comfortable with mergers among the desperate survivors—even if the combinations left fewer, bigger airlines with more market power, and the risk of higher fares. When the dust cleared, only a handful of large-scale competitors remained—all traumatized by fuel prices, recession, and demand-depressing disasters—and all equally desperate to raise money and fares.
Bargain hunters could search Expedia to their hearts’ content, but real “deals” on flights grew ever fewer. Even the Southwests and JetBlues—the perennial spoilers of airlines’ attempts to raise industry fare levels—were feeling the fuel price pinch and grew more willing to go along with fare hikes. Most important, airlines in the United States—less so for still-distressed carriers in Europe and elsewhere—rediscovered the forgotten law of supply and demand. Rather than try to out-expand their rivals and battle to control city-to-city routes, they focused on extracting the most they could get for the product they put on the shelf. Expansion could wait.
As airlines learned to flex their muscles, fares rose and revenue grew. Fuel prices remained a dangerous threat, but increasingly less a truly existential one. When the price of Jet A (the kind of jet-fuel mixture used in the United States) soared again in 2010 and 2012, the airline industry didn’t crater under massive losses as it had during the fuel spike of 2008. To the contrary, except for bankrupt American, major US airlines turned operating profits, or came close. A tougher, more focused airline industry had become a business that had learned to cope. Airlines were nothing close to money machines—they hardly covered the cost of invested capital, even over the short term—but Wall Street analysts stopped biting their nails every 90 days wondering who might not survive the next quarterly financial report.
That doesn’t make fare-paying fliers happier, but for many, the unhappiness is about more than the upward glide-path of fares, or even the new irritant of pervasive fees. It’s the whole context of the air-travel experience in which those irritants fit. Weird fares and novel “extras” feel like just another way of being jerked around, nickel-and-dimed, perceived as “marks” for airline schemes to lighten our wallets or give us less for more. As means of extracting passenger cash become ever more sophisticated, we feel taken, somehow victimized and manipulated, no matter how little or how much fare we really pay to fly.
The Black Art of Finding Your “Dammit” Price
Airline pricing rule number one: nobody is supposed to get a “deal.” The goal is to make you pay your top dollar for your airline seat—the price that just hits, but doesn’t exceed, your point of resistance. Call it the “dammit” price—as in, if the fare goes up just another few bucks, we’re cramming the kids in the backseat, dammit, and driving the ten hours to Grandma’s. Everyone’s got a dammit price—the airfare we will pay unhappily, but still pay—and the airline’s job is to find it. If you feel you actually got a good deal and would have paid an even higher fare if necessary, somebody in the airline’s revenue management department probably screwed up.
Airlines have gotten really good at finding our dammit price. About two years ago, I’m ashamed to say, I did something hardly any experienced air traveler ever does—I actually paid full advertised retail fare for a domestic First Class ticket. The plane—a midweek hub-to-hub flight—was completely full. Of the 34 front-cabin passengers, I was one of only four who had actually coughed up the full $1,120 one-way fare for the transcontinental flight. (A helpful flight attendant confirmed it.) The rest of them, presumably more “loyal” to the airline than I, had been able to upgrade or were flying on corporate discounts negotiated by their high-volume businesses. To be honest, for the $721 full-coach walk-up fare, I could have taken the one remaining coach seat way in the back next to the lavatory, wedged for six hours in the middle between a mom with her “lap infant” and a guy who could have played pro linebacker, but I was tired, hungry, and had to work on the laptop to prepare for an important meeting. So I paid the extra $399 to sit up front. If it were $500 more, I would have just sucked it up and sat in back, but the airline had found precisely my breaking point. Almost creepy.
Getting the price right for every seat on every flight—hitting just enough “dammit” points to fill every seat on the plane at the highest possible fare—is an incredibly complex job. It all starts, though, with a simple notion that was once unthinkable and, until deregulation, practically illegal: an airline can charge different fares for identical seats on the same flight. At first it seemed counterintuitive to charge different prices for the same product depending on what sort of passenger was buying it—lower for the plan-ahead tourist or retiree with time to burn (“service-flexible” folks in airline jargon), higher for the $900-an-hour Wall Street lawyer who absolutely, positively has to catch the eight a.m. flight to Washington and could hardly care less what the price is. As it turns out, those willing to pay the “nobody-in-his-right-mind” full coach fare (or close to it for tickets bought only shortly before the flight) make up 8 to 10 percent of passengers, industry veterans estimate—airlines jealously guard the exact number—but they contribute one-third to half of all airline fare revenues. Naturally, these customers are the airlines’ objects of deepest desire. (Another rough rule of thumb: about one-third of passengers contribute about two-thirds of the total revenue for a typical domestic flight, though that varies greatly by market and other factors.)
To make sure there’s always a seat for them, airlines hang astronomical price tags on some of those last-minute seats. The challenge is predicting how many “price-is-no-object” fliers will show up at the check-in desk 30 minutes before final boarding frantically waving their corporate gold cards. Save too few seats and those high rollers are stranded at the gate watching the guys with the backpacks and backward-facing baseball caps fill the plane. Save too many, though, by keeping the fare too high, and you face an even worse fate: a seat that flies empty.
Here’s why an empty seat is such a disaster: During June 2010 and again in June 2011, major US airlines filled an average of about 86.0 percent of their seats. They would have made a profit those months, not suffered a loss, if they had filled one more seat on each domestic flight (a typical 160-seat plane)—boosting the average load to 86.8 percent. Just that one more seat made the difference between the flight’s profit and loss, according to an Oliver Wyman consulting report for investment firm Raymond James. There is nothing more valueless than an empty airborne seat; airlines call them “spoilage,” just like rotten fruit.
Predicting precisely what fares will fill the plane while squeezing every last dollar for every seat has been the goal since the 1980s, but it took computing power a hundred times greater than available only a decade ago to hone the process known as “revenue management” to a fine art—sometimes known in the industry as “the black art.” It was worth the investment. Sophisticated fare management can grow airline revenues up to 7 percent, says a global airline consultant—more than most airlines’ entire profit margins. Oversimplified, here’s how the alchemy works:
Some 330 days before your flight, most airlines allocate all the seats on your plane into different so-called “fare buckets,” a dozen or so buckets in Economy Class alone. Each bucket reflects the class of service (First, Business, Economy), price, ticket restrictions (whether the ticket is refundable, upgradeable, changeable), and advance-purchase requirements. The cheapest Economy bucket holds the tickets that require the most hassle to use—you have to buy them three weeks in advance, you get no refunds if you miss the flight (yes, even if Granny dies), you leave at six a.m. on Sunday, make a connection or two, and land at the least convenient airport, all while risking a change fee larger than the price of your ticket.
For the airline, that extra hassle serves an important purpose: it keeps folks who are willing to pay a little more for a little more convenience from buying those lowest-bucket tickets. The airline wants these cheapest tickets to go only to the most penny-pinching travelers—tourists who can’t afford $499 to get to Disney World, but who can and will jump through any hoop, buy months in advance, and stay over the weekend, to fly there for $99. These least expensive tickets make little, if any, profit for the airline, but it’s better than flying an empty seat and earning nothing for it. There’s also a good chance these infrequent fliers will pay extra fees for checked bags and snack packs. Plus, these cheap fares let the airline advertise ultralow “starting at” fares. (“Take the kids to the Magic Kingdom—“starting at” $99! Restrictions apply.)
Everyone would like to nab the superlow $99 tourist fare, but it’s the last thing the airline wants to sell the business traveler, the sales exec who will readily (if not too happily) pay $149, maybe even $399, to get to the can’t-miss business meeting in downtown Orlando. To make the suit pay more, the airline erects “fences” around the cheap $99 fare buckets. Business travelers are welcome to buy these cheap tickets—as long as they, too, pay weeks in advance, forgo refunds if their schedules change, and, as used to be more common, commit to spending Saturday night in Orlando instead of at home watching the kids play soccer. What weary road warrior wants to scale those fences?
Once early buying leisure purchasers drain the $99 “bucket,” it’s closed (though it could later reopen, as noted below). For the next purchaser, the only seats left are in the next-highest fare bucket, with a price tag of $149. As weeks and months go by, buckets of cheaper tickets close, and the only seats left for sale are in the still-open higher-fare buckets. Just a day or two before takeoff, if the process worked right, only a handful of open seats are left on the plane, and they all carry a hefty price premium. These are the seats that are effectively being held for same-day walk-up business travelers who, the computers predict, will show up and pay whatever it takes. Their extra cash buys no more legroom or comfort; it just compensates the airline for “saving” that $399 seat until the last minute instead of selling it last month for $99 or last week for $249—in other words, for taking the risk that seat might never be sold and fly empty, worthless to the airline.
What’s amazing is how little is really left to guesswork by the airline. Predicting the precise number of expected last-minute purchasers is a science based on vast stores of historical sales information for similar flights. Crunched by high-speed computers using MIT-developed algorithms, that data is updated 24/7 as every new ticket is sold. The result is extremely—annoyingly—accurate in predicting just how much passengers are likely to be willing to shell out for each seat on each of thousands of flights.
It wasn’t always so sophisticated. Revenue management started as simple overbooking. Airlines sold more seats than the plane held because they knew there would be no-shows—even though predicting how many likely no-shows was more art than science before the mid-tolate-1980s. Nearly all airlines still “oversell” their domestic flights—5 to 10 percent is common—but some inexpensive “impulse” flights (think $60 midweek jaunts from L.A. to Vegas) reputedly can be oversold by as much as 45 percent. Much depends on the airport, flight time, day of the week, and cost—there are supposedly fewer no-shows among polite Midwesterners than hard-charging Manhattanites—but overbooking predictions have proven amazingly accurate. US airlines leave only about 12 of every 10,000 ticketed passengers at the gate, and more than 90 percent of those folks volunteer to give up their seats in return for compensation. (If the airline has to “involuntarily” bump, the passenger is entitled to a sizable payment from the airline, depending on how long she is delayed and the cost of the ticket.) That still means nearly 200 ticketed and bumped passengers on average will have a very bad travel day, but that’s out of more than 1.6 million daily fliers in the United States.
Simple overbooking worked well enough when every seat carried the same price tag and the goal was just to fill as many seats as possible. Today’s more ambitious goal—to earn the most from each and every seat on the plane—depends on supercomputers overseen by cadres of well-educated twentysomethings hidden away in cavernous rooms deep in airline headquarters—“revenue management analysts,” often hired out of business school and paid in the high five figures to manage seat “inventory” on thousands of flights. In row upon row of six-by-eight cubicles, they stare at double-wide computer displays that show for each flight the dozen-plus fare buckets and monitor how each flight is selling nearly “in real time.” The essence of what the inventory analyst handling next Thursday’s early morning flight from Tulsa to Denver sees on her screen boils down to a series of alphanumeric symbols (they differ somewhat by airline), something like this:
F2, Y9, B7, M4, Q3, T0
Translation: There are still at least 25 unsold seats on the 160-seat Boeing 737, spread among six fare buckets. Two of them are pricey First Class seats (“F2”). The airline will try to sell them rather than give them away as upgrades to “elite” frequent fliers, so it may well hold them for sale in the “F” fare bucket until the very day of the flight, hoping someone will pay top dollar.
The rest of the open seats are all physically identical, in Economy, but carry wildly different price tags. There are at least nine seats that remain in the most expensive, “full-fare” “Y” bucket and they cost five times the identical coach seats in the super-discount “T” bucket—which plan-ahead vacationers willing to forgo refunds eagerly emptied weeks ago. Why not put some of those slow-selling “Y” seats in a less-expensive bucket to make sure they sell? The airline is betting that some business travelers will have to get to Denver at the last minute, price be damned, and will pay the “full Y” fare. Fare buckets for B, M, and Q fares hold tickets whose restrictions vary inversely with their price.
As noted, history tells the analyst how the flight “should” be selling. The computer knows just how the same or similar flight sold out yesterday, a month ago, a year ago, even years in the past, but that’s just the start. It also knows how many days before the flight each fare bucket emptied, the price, class of service, whether it was sold online or through an agent, whether the purchaser was a frequent flier, and how many seats then remained. Meanwhile, the airline computers are keeping up with new purchases in real time—updating and recalibrating whenever anyone anywhere buys or cancels a ticket or makes a reservation, fine-tuning predictions for the same flight tomorrow or next week or next month. Staring at her screen, the analyst knows just how many seats at each fare level should be left to sell two weeks before takeoff; how many discount, advance-purchase coach seats should “normally” be left on an early morning flight between Tulsa and Denver on a Thursday in the third week of July; and just how many no-shows and frequent-flier award ticket passengers to expect.
If actual real-world sales (“booked loads” in analysts’ lexicon) aren’t up to what the computer predicts they should be—based on the history of that flight or similarly timed ones for that day, week, or season—the analyst can make adjustments. To juice up sales, for instance, she might move four of the eight pricey “Y” fare seats into the cheaper “M” fare bucket, or even reopen long-closed buckets of deeper-discount tickets. Real-world events can change the equation too, boosting or dampening demand. Shoe-bomb threats and reports of airborne pandemics are bad for business—and may force analysts to open more discount buckets to fill planes. Conversely, human analysts, but not the airline inventory computer system, know that on certain Saturdays in the fall, the demand for seats to South Bend Indiana (by Notre Dame football fans) will suddenly surge. And airline revenue managers are rumored to stand ready at the end of the NFL season to rush to close the low-fare buckets for flights between the two Super Bowl cities as soon as the whistle ends the conference playoff games that decide who’s playing in it.
Buy Now!
It’s not just the bucket magic that makes fares maddening. Walk across the hall from the revenue managers to the airline pricing department, where more geeks in more cubicles stare at more computers to decide basic fare levels—the price tags that get slapped on each fare bucket. Should the cheapest discount fare on your flight be $99, $199, or $599? They (and their computers) make lots of these decisions every day. Worldwide, estimates are there more than 100 million airfares and fare combinations at any given time, and hundreds of thousands of daily fare changes.
Two facts especially drive the airfare roller coaster. The first is that every airline knows almost instantly, to the penny, what every competing airline is charging for every kind of ticket on every route, and what those fares will be in the next few hours. An airline-owned electronic clearinghouse known as ATPCo (Airline Tariff Publishing Company) publishes everybody’s up-to-the-minute fares to all the other airlines and online fare systems four times every weekday and once every weekend day for domestic flights, almost every hour for international fares. That means fares may stay on the market for as little as three hours for domestic tickets and just one hour for international ones.
The second key fact is that no airline can bear to have its fares “out of line” with the competition for long; travelers buy tickets—and choose airlines—based, first and foremost, on what’s cheapest. Fliers may say they’ll pay more for better service, but they vote with their wallets, airlines lament. Charge just $1 less than your competition on the same route and your airline “ranks” higher on the online travel agency fare display that’s scoured by thousands of consumers hunting for the very lowest advertised fare. And a few dollars cheaper can make a difference. Two of the industry’s highest-margin players—bare-bones Spirit and Ryanair—offer little but low, low base fares, and that may be enough. There’s an old industry saying: “If you could save people five bucks, you could strap them to the wing.” (Don’t laugh—an enterprising Italian firm has designed a kind of half-standing airline seat separated only 23 inches from the seat ahead, eight crucial inches less than normal, and a European airline actually suggested “standing room” travel for short flights.)
Combine these two facts of fare setting and you get a never-ending game of speed chess. Take a seat at the computer screen. The flashing hieroglyphs warn that, overnight, your competitor cut its fares on one of your key routes, but only for advance-purchase tickets usually sold to leisure travelers. Should you match that cut to keep bargain-hunting passengers on your planes, or just ignore it, or maybe even “up the ante” by slashing your own fares even further, or broaden the fare sale to include the more expensive fares normally purchased by same-day business travelers? Heck, you could even “double down” and launch your own fare sale on other competing routes. Or let’s say your rival raises its fares. You may want to go along with the increase in hopes other airlines will follow suit and make the fare increase “stick.” But if others balk—traditionally Southwest or other low-cost airlines—everyone has to abandon the fare hike to stay competitive. Back to square one.
There’s a lot to consider and not much time to decide. Delay matching a competitor’s fare sale and he gets valuable extra time to offer the lowest fare in the market and steal your passengers. Timing is also key to raising fares. Hiking ticket prices on a Thursday night lets an airline hedge its bets, testing to see if competitors will follow. If they don’t, the airline can back down without losing much business since hardly anyone buys tickets over the weekend when the fare hike will mainly take effect. If other airlines don’t match your fare hike, you can quietly rescind it Sunday evening before fliers boot up their office desktops on Monday morning. For front-line pricing analysts, the fare game can be a rush—a demanding daily diet of strategy, transmission-and-response, moves and countermoves.
Sometimes it gets to be too much. Despite the impressive technology and arcane mathematics, maybe a dozen times a year there are fare mistakes that generate amazing short-lived fare bargains. These “fat-finger fares” are typically the result of human error. Somebody makes a typo in a fare transmission. A coder misplaces a decimal point, generating a €5 transatlantic fare. A programmer enters “40” instead of “41” in a key coding field, suddenly slashing Los Angeles–Fiji fares to $51, or San Jose–Paris tickets to $28. (No wonder that airlines tend to avoid using the letters o and i in their fare codes—they’re too easily confused with the numbers “0” and “1.”) A manager forgets to add a fuel surcharge and hundreds of domestic flights suddenly cost $130 less. Or, as occurred in July 2012, United Airlines gives away First Class round-trip US–Hong Kong seats in exchange for $43 and four frequent-flier miles, instead of the usual $11,000.
Airlines sometimes honor an “amazing” mistake deal if it was purchased in good faith—but usually only if it’s not too amazing. Some use a kind of “too-good-to-be-true” test. Not that they’re so worried about a few ultracheap tickets, but rather because of the potential massive revenue impact when the mistake hits Facebook and several other websites dedicated—believe it or not—to finding “mistake” fares, for a subscription fee.
Pity, though, the poor air traveler trying to score a bargain, or at least a well-priced ticket, under less unusual circumstances. Having finally found one, he hits “Select” or “Add to Cart” and by the time he hits “Purchase” ten minutes later, his fare bucket is empty or fare levels have risen, his low fare replaced by a higher one. It could all get more frustrating if, as predicted, the whole fare-setting system goes 24/7—an unending process where fares change continuously, anytime, any day, not just at defined clearinghouse deadlines. Surfing the web for cheap fares for Thanksgiving? Better have fast fingers.
Parsing the Fare Code
The mysteries don’t end when you do “Buy Now.” Your ticket (or e-ticket receipt) is laden with hidden meaning—especially the strange alphanumeric code, the half dozen characters near your name. This is what tells the airline’s entire staff just how much you are “worth” to the carrier in revenue. Not surprisingly, it has a lot to do with the way you’re treated and the service you get. Think of that code as a tattoo that follows you throughout your journey, advertising to everyone—from gate agent to flight attendant to rebooking agent (if the flight gets cancelled) to the folks in the lost-bag office—just where you stand in the airline’s pecking order. Whether you paid big money to sit up front, or merely snagged a mileage upgrade, whether you’re likely a once-a-year bargain flier, or a “regular” full-fare business traveler. Don’t you think they sneak a peek at your fare code when there’s a complaint or special request for a bulkhead or exit-row seat, or when a flight is cancelled and you need to be “reaccommodated” swiftly on another flight?
In First Class, your “status” may show up on the passenger manifest, a printout that lists passengers’ names. The airline’s ground staff hands it to the cabin crew just before the door closes for departure, and it’s typically taped up in the galley on longer flights. On some carriers, the list shows where everybody rates in airline priority—which precious few passengers actually paid the full fare (it says “FULL” next to their names) as well as the “eliteness” level of front-end fliers, paying or not. British Airways has gone one better—senior flight attendants in its customer “Know Me” program now get an iPad that instantly identifies the “high-value” passengers on board. In First Class, your priority on the manifest determines who gets to choose their dinner entrée first and, maybe, whether the nice flight attendant will cadge a few extra scotch whiskey miniatures for you to take with you. Full-fare fliers definitely get the steak, but expect the lasagna if you’re a non-elite award upgrade.
Booking codes aren’t exactly secret (they differ from airline to airline and change a little from year to year) but neither are they designed to be understood by mere mortals. Most of the letters and numbers indicate ticket restrictions—is it refundable, changeable, how long in advance you had to buy it, how long you must be willing to stay over at the destination to qualify for the fare, if it’s good for “high season” or only on weekends or slower travel days. A domestic fare basis code that reads QL7NR, for example, is a moderately discounted coach fare (Q) good only on certain days of the week (L) with a seven-day advance booking requirement (7), and the ticket is not refundable (NR) if you don’t use it.
The first letter of your code is most important, as it shows your fare class. Take a deep breath and try to follow: First Class should be “F,” but it isn’t always. “Full Fare First” is, but discount First is “A,” and some all-business flights are “P.” Actually, the most impressive codes start with “R,” a designation once reserved for supersonic fliers on the now-retired Concorde, currently used for the ultradeluxe First Class “suites” on some international superjumbos.
Business Class might logically be “B,” but it isn’t. For some reason its often “C” (sometimes “J”). Full-fare business is relatively uncommon. It’s for the senior executives who need to comply with their company’s “no-first-class” expense rules, but are happy to pay top dollar for a Business Class seat that might get upgraded to First Class. Actual business fliers can usually get much cheaper discounted Business Class fares (often “Z”).
The real opacity is behind the curtain in Economy Class, with its myriad levels of relative misery. The top end is the venerable “Y” fare—the fully refundable, always upgradeable fare normally purchased almost exclusively by the truly desperate, by wealthy foreign tourists with clueless travel agents, or by those trying to game an easier upgrade. Fewer than 10 percent of fliers buy “full Y.” (The less-known “Y-UP” fare buys a First Class seat for close to the “full coach” price, but the “Y” in the fare code sometimes fools corporate travel bean counters who won’t pay for First Class into thinking you’re in Economy.) Below Y are nearly a dozen Economy Class fare codes—like “B” or “M” (airlines differ)—that carry ever more restrictions, but still cost enough to qualify as “standard” fares that can be upgraded. Much less expensive and much more restrictive are “Q” and “V” and “W” fares (some carriers use “L” and “K”)—no change or cancellation without a hefty penalty, and a long advance purchase requirement. Lower still are the “You-want-to-pay-what?” fare classes like “S,” “T,” and sometimes “K”—ultracheap tickets (occasionally, forgotten remnants of past fare sales), sometimes called “junk fares,” that can carry almost punitive restrictions. No refunds, no changes, no upgrades, no frequent-flier miles, no online assigned seat. Just “use it or lose it.” And good news for taxpayers: the federal government uses its buying clout annually to negotiate super-cheap fares for federal official travel—feds pay at most $105 to fly from downtown Washington to New York’s LaGuardia, for instance, while same-day retail costs the general public more than $400.
All the complexity, the bucket magic, and the gaming can drive ordinary fliers a little batty looking for the best deal, and not without reason. According to MIT mathematician Carl de Marcken, finding the cheapest airfare between two cities is, in fact, an unsolvable mystery. A software genius who went on to start a major aviation software firm, de Marcken calculated in a 2003 academic paper that there could be 25,401,415 possible fare combinations for a passenger flying round-trip between Boston and San Francisco on American Airlines over a three-day period. Even using the world’s most powerful computers, the scientist found, it is theoretically impossible to answer the simple question: “What is the lowest fare between city A and city B?”
Can you blame the hapless flier for his frustration? Even if average fares are a screaming bargain, we expect them to reflect, at least vaguely, some objective measure of value—like the distance of the flight, or what we paid last year, or what it costs to take the train. How can it be cheaper to fly from New York to Boston via London, England, than to fly direct between the two East Coast cities? It’s a scenario that Stanford mathematician Keith Devlin says actually occurred.
The Resistance
Griping about airfares is nothing new. Twenty years ago, the iconic head of American Airlines, Robert Crandall, found “the whole fare system [had] become chaotic, inflexible, illogical, and unfair.” By the opening of the new millennium, that view was ever more widely shared. A prisoners’ revolt was brewing. The trigger for many, especially business travelers, were the hated “fare fences.” These mendacious obstacles seemed erected for the sole purpose of depriving road warriors of the cheap fares that were intended exclusively for what airlines unlovingly call “the VFR market”—for “visiting friends and relatives.” In the bizarre world of revenue management, fences were there to make sure that, to get the good fare, you had to suffer.
Plenty of business fliers saw fare fences as naked coercion, with no independent rationale or cost justification. After all, what more does it cost the airline to return the business traveler home on Saturday afternoon rather than on Sunday morning, or, for that matter, to refund an unused ticket for a seat that another passenger will almost certainly purchase to board an otherwise booked-solid flight? What’s the “realworld” reason for fares to double or triple if the ticket is bought 13 days, rather than 15 days, in advance, and what immutable law of commerce decrees “nonrefundability”? Just because an airline declares a ticket nonrefundable, it doesn’t make that edict sensible or fair or reasonable.
True, revenue-management fences are hardly unique to airlines. Restaurants offer an “Early Bird Special,” but only if you’re willing to eat it at five p.m. Your $89 motel room in Washington, DC, suddenly jumps to $299 the week the cherry blossoms pop. But those price discriminations somehow seemed more predictable and understandable, their rationale more obviously grounded in the “real world.” Then there was air travelers’ uncomfortable sense of constantly being managed and manipulated for maximum profit. Road warriors were ready to shoot themselves rather than face another “Saturday-night stay” weekend at the airport motel. For angry air travelers, fare fences were another reminder that the money-grubbing airline just wasn’t going to give them a break.
To the amazement (and horror) of much of the industry, some of the airlines’ best business customers started to balk. As dot-com boom became dot-com bust, they began to say no to Business Class, no to fare fences, no to “full” fares five times the cost of an advance purchase discount ticket. Even before the 9/11 attacks, the first quarter of 2001 witnessed a startling decline in the percentage of First Class and full-fare Economy tickets sold. The month before the 9/11 attack, fare yields had already plummeted 12.5 percent from year-before levels and revenue from the kinds of fares normally purchased by business travelers was down nearly a third. Forced by recession to downgrade, the road warriors’ new normal became “Premium Economy”—still a coach service, but a step up from steerage. As businesses flew less and flew cheaper, airline revenues tumbled.
The Big Mistake
If the recession of 2001 helped trigger the passenger rebellion, the Internet changed the whole passenger-carrier dynamic. It didn’t entirely level the field in the hunt for commercial advantage, but it gave passengers a potent weapon against the power of the airlines’ sophisticated revenue-management systems. Any would-be flier with a smart phone could go online to readily identify and compare travel options and make spending choices strategically. Southwest Airlines founder Herb Kelleher summarized it this way, as recounted in an article by noted aviation writer and journalist James Fallows: “Once it became painfully obvious, thanks to the Web, that there were $1000 seats and $150 seats in the same market, on the same planes, at the same time, business travelers wouldn’t accept it anymore. The high-fare, last-minute, walk-up business customers—that person is gone forever.” Even more succinctly, for folks in the airline revenue departments, the Internet was bad news.
The Internet’s effect on ticket distribution costs was dramatic. The airlines’ cost of selling an average ticket plummeted from $45.93 in 1999 using a traditional travel agent—and paying them the traditional 10 percent ticket commission—to only $25.12 for selling the same ticket online, using an Internet travel agent like Expedia, according to a GAO study. Selling a ticket on an airline’s own website was even cheaper—$11.75 by the end of 2002—when nearly a third of all tickets were being booked online. With half the US population using the Internet by then, the industry took the final step and eliminated traditional per-ticket sales commissions entirely. For airlines tired of legions of commission-hungry travel agents, it seemed like a cost-saving coup—but it soon became a classic case of “be careful what you wish for.”
The Internet created user-friendly shopping malls for air travel—online travel sites like Expedia and Travelocity in 1996 and the airline-owned Orbitz in 2001 that collected and compared available fares from most airlines, making comparison shopping easy. Everyone was his own travel agent. “Screen-scraper” sites made it easier still, collecting the cheapest of the cheap from across the digital universe. Consumers learned not only how to comparison-shop for fares, but now they could evaluate money-saving tradeoffs, too. How much extra was it really worth to fly Thursday if you could fly Saturday at half the price? Click the mouse. Is there a better deal if you take the earlier flight or a connecting flight or drive to another airport where competition from Southwest keeps fares down? Click the mouse. Where only 1 percent of Americans used the Internet in 1991, nearly 50 percent did just a decade later, as online ticketing got easier and faster. A few keystrokes told fliers—and their company budget expense hawks—how they could save by sucking up a little travel inconvenience.
This was not good for an industry banking on “managing” customer ticket choices to maximize revenue. Consider the Chicago road warrior with an unpredictable schedule of sales calls, the kind of flier dear to the airlines’ heart. He’s habituated to buying high-priced same-day tickets on his hub airline, hoards his frequent-flier miles, and occasionally gets a freebie upgrade from his full-fare coach ticket. As long as his ticket says “Y”—signifying Economy Class—his company doesn’t ask questions. The Internet changes the picture, though. Now his company expense monitors can easily see just how much the company is spending—and how much it could save—on the latest sales trip to L.A. If our warrior switches planes in Denver, his $837 walk-up “Y” fare drops to $500; if he could only plan ahead a couple of weeks, the flight would cost only $279. And if he drives to Milwaukee to catch a low-cost airline, it’s only $189. Suddenly, the warrior isn’t getting the upgrade, the airline’s not getting the $837, and videoconferencing sounds like a great idea.
Scores of websites devoted themselves to outstrategizing the airlines, and “experts” touted the “secrets” of getting deals (hint: fly on less-busy days, use more competitive airports, book early, and be nice to the gate agent). Airfare guru Rick Seaney of FareCompare.com, founded in 2004, even pinpointed the exact best hour to buy your ticket: Tuesday at three p.m. Eastern Daylight Time. (His theory: carriers tend to launch sales Monday night, the week’s busiest night for online bookings; competitors’ first practicable chance to match those sales is Tuesday morning’s uploading of fares to the industry’s electronic clearinghouse; and those lower fares take a few hours to filter through the system to online booking sites.) And how far in advance to buy? An Airlines Reporting Corporation study of more than a hundred million domestic ticket transactions, released in 2012, found the cheapest fares available six weeks before the flight—they were 5.8 percent cheaper than average.
Googling “how to get cheap flights” generates more than 150 million hits—an array of chat rooms, websites, and online “communities” dedicated to beating the airlines at their own game—when to buy, where to sit, what fare buckets are still open, what seat inventory is available, the chance of an upgrade. The Internet also helped with “creative” ways to leap or evade fare fences such as the old Saturday-night-stay requirement. A favorite tactic in the 1990s was so-called “back-to-back” ticketing: Buy two separate, highly discounted round-trip tickets (one starting from your home and one starting from your destination), both with Saturday-night stays, and simply discard the return portion of each ticket. The combined cost of the two restricted tickets was often far less than a full-fare ticket that did not require the weekend stay. (Competitive pressure has since killed the Saturday-night-stay penalty in all but a few markets.) “Hidden-city ticketing” is still a popular beat-the-system tactic that airlines condemn. An example: airlines may charge much more for a nonstop flight from New York to Chicago, a high-demand business route, than for a flight from New York to Denver that connects through Chicago, where passengers change planes. How hard is it for a smart New Yorker with a meeting in Chicago to simply buy the cheaper ticket all the way to Denver and hop off the plane at O’Hare?
Outraged airlines cried foul, threatening to sue or confiscate the frequent-flier miles of “wrongdoers.” American claimed the misdeeds “could be construed [as] common law fraud” and others insisted the stratagems were illegal or, at a minimum, violated the “contract” between airline and customer. Fliers must “agree to” this “contract of carriage”—typically dozens of pages of legalese drafted by the airline’s lawyers—before they can buy a ticket online.
A simpler and less risky form of customer resistance was just to switch to different airlines, especially low-cost carriers, with fewer hocus-pocus fares and convoluted ticket restrictions. It wasn’t that the low-cost competitors managed their seat inventories less carefully than traditional carriers; they just did it in a more intuitive, consumer-friendly, and less obviously manipulative way. Southwest, for instance, markets just three categories of fares—refundable, nonrefundable, and “wanna get away” discount fares (it actually uses multiple fare buckets, but customers see just the three fare labels) and erects no round-trip or “stay-over” fences or added bag fees. From 2000 to 2010, these low-cost airlines more than doubled their national market share. Today they carry one-third of all US passengers, control about 30 percent of the domestic travel market (up from 10 percent in 1999), and serve about 460 out of the 500 largest routes. And you can find plenty of nice briefcases on Southwest, JetBlue, and their low-cost cohorts.
The Empire Strikes Back
The industry’s annus horribilis in 2008 brought the low-energy conflict to a boil, as frightening fuel prices and a historic recession amplified the intense financial pressure on the industry. Airlines needed more than just new ideas for putting fliers in more expensive seats; they needed a whole new business model that didn’t depend solely on basic airfares. Their response, as we’ve seen, was nothing less audacious than a wholesale redefinition of what you got for the price of your ticket. In this new universe, paying just the basic fare normally gets you to your destination, but not without some extra inconvenience, discomfort, or stress. To avoid that, you had to pay extra.
Sure, it was a sharp break from decades-old flier expectations, but this shrewd redefinition—once passengers bought it—may well have saved the airline industry as we know it. The two most important fees are for checked bags and for “changing” a ticket—changing the time or date or routing, or even just the passenger’s name (mercifully, truly minor misspellings are generally, but not always, allowed). The two categories of charges added nearly $6 billion to US airline revenues in 2010, twice what they had just two years earlier. The next year, ancillary fees worldwide climbed to $22.6 billion. Carriers like Spirit were collecting on average more than $100 in add-ons from each round-trip passenger; fees constituted a full third of all its revenue.
Fees quickly became a deadly serious business, starting with what airline consultant IdeaWorks calls “the Holy Grail of revenue treasure”—checked-bag fees. American led the pack in 2008, charging a mere $15 to check the passenger’s first bag. (Other airlines had previously charged for checking additional bags beyond the first one.) In retrospect, that was a screaming bargain. At the extreme, United collected a cool $400 to check a single “overweight” suitcase (defined as more than 70 pounds) on a long overseas flight in 2012 and American charged $450 for flying that bag to Asia. But even at $25 for the first checked bag each way, taking the family—and four bags—to visit Grandma means paying nearly as much for bags as for one of the tickets.
How could there not be a big profit in bag fees? It’s hard to calculate precisely what it costs our airline to haul an individual bag, but bear with an oversimplified back-of-the-envelope stab at it. Boeing estimates (in its “767 Fun Facts”) that a loaded 767-400ER flying from New York to London burns about 45 gallons per passenger. Since the “standard” passenger weighs 190 pounds (five pounds more with winter clothing), a 71-pound suitcase—about 40 percent of that passenger’s weight—should burn about 18 gallons to haul across the Atlantic. At $3 per gallon of fuel, that’s $54. Even if we double that to account for the cost of extra labor and handling our extra-heavy suitcase, the airline is out something close to $100 to fly that bag to London. But it’s charging twice that amount—$200 is the going rate in 2013 on such bags for the big carriers—for a markup of nearly 100 percent! (Even assuming these cost numbers are off a bit—airlines don’t advertise internal cost figures, and fees change—you get the drift.)
Bag-fee profitability looks much the same on shorter, more typical, domestic flights, where big carriers mostly charged $25 to check your first standard bag in 2012 ($35 for the second one). A Wall Street Journal analysis in late 2008, albeit when fuel prices had dropped to around $2 a gallon, found that an airline’s “all-in” cost to fly that suitcase on an average three-hour domestic flight was only about $15, mostly for labor. Even accounting for today’s 50 percent higher fuel prices, hauling bags is plainly one heck of a good business for the industry.
Airlines accordingly take “enforcement” of bag-checking seriously. It even triggered a mini-riot in the Canary Islands in February 2011, when Ryanair bag police stationed at the aircraft door tried to extract an extra $47.50 “oversized gate bag fee” from a Belgian student boarding Flight 8175 home from vacation. The ensuing show of mass passenger resistance led Spanish police to bar 100 of the 168 “disruptive” passengers from flying. No more winking at the check-in agent as you try to carry on your mini-refrigerator.
Besides bag fees (and the slightly hoarier fuel “surcharge” we’ll get to in a moment), the next most lucrative—and annoying—charge is the so-called change fee. There’s nothing new about the concept of discounting fares for purchasers willing to take the risk they won’t make the flight, but the sheer extent of today’s fees for rebooking or changing a reservation, and the rapid escalation in the size of the penalties in recent years—change fees now net airlines six times what they did in 1999—have made these the ultimate “gotchas” for air travelers with uncertain schedules. Beyond the mystery of how a few keystrokes by the reservations agent to change your ticket merits a payment of $150 (domestic), or $250 (international), the penalties have become large enough that many unused short-haul tickets are rendered practically worthless once the change fee is offset. On the other hand, there’s a logic behind these fees. If you cancel your flight, the airline legitimately doesn’t want to be stuck holding an empty seat that loses all value when the plane takes off, or for passengers holding seats to “shop around” for a cheaper fare while simultaneously keeping the airline from “finally” selling the seat. Fair enough, but how many empty, unsold seats have you seen lately?
Airlines will gladly sell you a way around the change fee, of course—it’s called a “fully refundable” ticket, and it can cost three to five times the price of a discount coach ticket. If you risk it and don’t pay the extra, say some carriers, don’t go whining for a refund if you can’t make the flight. Vietnam veteran Jerry Meekins, age 76, tried that, initially to no avail, in April 2012, when doctors told him his esophageal cancer was too far advanced for him to use his $197 Spirit Airways ticket to visit his daughter. The airline’s initial response was—not to put too fine a point on it—cold: “We don’t do refunds,” declared the airline’s spokesman. A week or so later, under threat of mass boycotts by outraged veterans and others, the airline relented.
The industry’s embrace of fees is understandable. In several ways, money from fees is better than money from raising airfares. Fees don’t affect competition as much as base airfares; they’re largely insulated from competition. When airlines compete for passengers, it’s mainly over basic fares—passengers compare fare “sales” on Expedia or Orbitz or in the morning paper. Fare wars drive prices down, at least until a victor emerges to raise them again. But fees are different. Very few airlines compete vigorously on how much to charge to check a suitcase or change a reservation; with rare exceptions, traditional airlines all charge about the same. As Spirit’s CEO happily observed in a 2012 interview with FlightGlobal.com: “There [are] no bag fee war[s].” Plus, fees for checked bags, early boarding, seat selection, telephone reservations, and food, for instance, aren’t subject to the 7.5 percent federal excise tax on basic airfares. If bag fees were taxed, says GAO, it would generate near a quarter-billion dollars in tax receipts.
The new fee-for-all regime did more than unplug a rich new stream of cash for the airlines, though. In the ongoing tug-of-war with bargain-hunting passengers, nonnegotiable fees were almost an antidote to the passenger-empowering Internet. In effect, the new regime helped muddy the fare waters that the Internet had made dangerously transparent for consumers. Fliers could knock themselves out comparison-shopping on Orbitz, but until recently, hefty fees and surcharges—up to a third of the base fare on some tickets—were largely unseen by purchasers until late in the transaction process, and the panoply of extras and add-ons made it tougher to compare the full cost of their journeys, apples-to-apples.
Say you searched online for a flight from JFK to Paris at the start of 2012. American charged $870 in Economy, almost double the fare advertised by Air France. Who wouldn’t jump at the cheaper Air France ticket? But go to the “checkout” screen and look closer—the fare Air France showed on the first screen didn’t include a mandatory $400 fuel surcharge! Add back in the $400, and the “real” price for the Air France flight was (you guessed it) $870, just like American’s. Since then, a new regulation requires airline advertising to show shoppers the full cost of the flight, including mandatory surcharges. Then there are all those other extras and fees to consider. In the end, who knows which airline will really get you to Paris cheaper? And that’s the point.
Perhaps the toughest hurdle to establishing the new fee-based business model was getting fliers to accept it. The airlines’ world-class spinmeisters went to work, producing some focus-grouped classics. United’s explanation for eliminating meals in Economy Class in August 2008, even on long transatlantic flights? “We need to tailor products and services to what customers value and provide them more choice” as well as “test new options.” Like hunger. Or the airline trade association’s explanation for checked-bag fees: “Airlines [were] offering customers the option to pay for services they value”—little extras like not having to cram a vacation week’s worth of sneakers, sun dresses, baby toys, and snorkeling gear into an overnight bag.
In this line of thinking, new fees weren’t really quite new fees at all—just payment for new services. OK, maybe not exactly new services, but services airlines could have charged for separately before if they had just thought of it or wanted to. Then there was the appeal to our baser selves: Why should you pay for that slob in the next seat to check his bag when you managed to cram your own overstuffed roll-aboard into the overhead bin? Finally, there was the simple beg: airlines have lost piles of money, so they “needed” the extra fee revenue.
At first, the new fee approach sparked remarkably little consumer blowback—partly because the new fees started small, and partly because they were introduced gradually as the waters of public outrage were tested. When British Airways initiated its first fuel surcharge in May 2004, it was just $4 a flight. Competitors condemned it then as “gouging” and “counterproductive” but failed to rile consumers—maybe because fliers faced the same soaring gasoline prices while filling their cars and empathized with the embattled carrier’s need for a small and “temporary” add-on.
But seven years after this first modest fuel surcharge, British Airways was slapping a whopping $420 extra charge on longer transatlantic round-trips; US airlines followed suit. By then, even the concept of “surcharge” had undergone Orwellian revision. No longer was it an amount added to the usual charge to defray the extra burden of a sudden uptick in airline fuel costs; “surcharges” were paying for virtually all the fuel burned on a flight. There was little “sur-” about them. An October 2008, analysis of Boeing data in London’s Daily Telegraph showed that surcharges paid for 95 percent of all the fuel on a British Airways New York–London 777 flight. The total surcharge to be collected from passengers was just over £19,000; the total fueling cost for the flight—just over £20,000.
In fact, the surcharge might pay for even more than the cost of fuel as fuel prices dropped. Defying gravity, fuel surcharges almost never come down as fast as the market price of oil they’re supposed to offset. To the contrary: between April 2011 and May 2012, airline fuel surcharges rose twice as fast as oil prices themselves, according to a study by Carlson Wagonlit, a corporate travel manager, reported in the Los Angeles Times. DOT warned airlines in 2012 that fuel surcharges “must accurately reflect the actual costs of the service covered,” but airfare analyst Bob Harrell put the issue succinctly in the March 2012 Business Travel News: “As far as I’ve been able to tell, fuel surcharges have nothing to do with fuel.”
Were the fee floodgates opened when consumers largely acquiesced to big-dollar fuel fees? If these triggered no rebellion, why not implement other fees that also, truth be told, went beyond just “covering costs”? Personal favorites: the fee to cut to the front of the boarding line (airlines elegantly call it “preferential” boarding for those with “preferred status”); the $15 I had to pay to get assigned a “Choice Seat” next to my wife in Row 17 in the middle of Economy (I didn’t actually have a “choice”); a new fee under consideration for early exit from your flight. (How would that work—ask flight attendants to form a “flying wedge” around “preferred” exiters?) Another goodie is the surcharge—up to $30—to fly on “peak days.” The “peak” in 2010 included three-quarters of the summer; the day after the Super Bowl was a super-double-peak day, when the surcharge more than doubled.
Is there any limit to how far airline fees can go? Maybe only the limits of corporate imagination. IdeaWorks, a kind of think tank for the ancillary-revenue world, even offered a weekend “ancillary revenue training camp” in 2012 for airlines and vendors—at a mountaintop lodge along Virginia’s scenic Skyline Drive (early-bird airline price: $2,200). They promise to teach you the “seven steps to … ancillary revenue bliss at your airline.” Carriers have already been extraordinarily imaginative:
Charging up to $25 to talk to a human reservations agent to book your flight.
Charging extra to buy your ticket online. (The fee-free alternative to Spirit’s “passenger usage fee”: drive to the airport.) And if you don’t print out your boarding pass at home, there’s a $5 “passenger convenience fee” for the agent to press the printer button.
Charging for “preferred” seats. Airlines figured out how to sell the extra space that FAA requires for evacuation at exit rows, but only “elites” get to see all the open seats on some online seat maps; non-elite fliers see only less desirable ones (middle seats next to the lavatory)—an incentive to be “loyal” or pay extra for a “preferred” seat.
Charging passengers to put their carry-on bags in the overhead bin—up to $100 per bag on Spirit if you get caught at the boarding gate without paying the standard $45 carry-on charge earlier, a fee that netted the carrier $50 million in 2011.
Charging serious money to book “free” mileage-award tickets—up to $90 on one major carrier. And more to change those “free” tickets or “redeposit” your miles. And even more if you request your “award” more than a week or two before the flight. For some award tickets on foreign airlines, add fuel surcharges of hundreds of dollars.
The only real limit to fees is when regulators say no or customers balk.
Don’t count on either happening anytime soon. When it comes to fees, regulators see their job mainly as making sure airlines clearly disclose them to consumers, especially in advertising. Starting in 2012, when airlines advertise fares, they have to include in them those fees that all customers have to pay, such as fuel surcharges, but not fees for optional extras like checked bags or seat assignments which passengers can avoid, at least theoretically. The few times regulators invoked their broad legal authority against unfair or deceptive practices to question fees, it wasn’t because they found the fees themselves substantively unfair but because, however bizarre, they weren’t adequately disclosed by the airlines that conjured them. In 2009, for instance, DOT challenged Spirit Airways’ disclosure of its $2.50 “natural occurrence interruption fee”—a charge to pay for the airline’s cost of accommodating travelers disrupted by bad weather (the “natural occurrence”)—and its $8.50 “international service recovery fee” to recoup the airline’s extra operating costs of flying to foreign countries. Spirit dropped those two add-ons, but kept its “passenger usage fee”—a charge up to $16.99 just for the privilege of buying a ticket anywhere except at the airport.
DOT knows full well the cries of “re-regulation!” it would hear from the industry if it tried to adjudge the substantive fairness of particular consumer fees. When asked about fees for aisle or window seats that kept families from sitting together, for instance, the secretary of transportation told a Senate hearing in 2012 that he was not above “doing a little jawboning” of airline CEOs, but, bottom line: “We can’t tell airlines what fees they can charge.”
Even if US regulators get more aggressive about fees, with so much money at stake, don’t expect the airlines to back down. When DOT in July 2011 had the audacity to ask the industry merely to detail publicly how much it was raking in from 16 new categories of ancillary fees (not just for checked bags and ticket changes, but also for things like blankets, entertainment, Wi-Fi, and snacks), the airline trade association blasted the proposal as “excessive,” “unjustified,” “not legitimate,” and “inhibit[ing] the industry’s ability to generate jobs.” Not to mention that federal debt hawks were casting a longing eye on taxing some of those airline fee revenues—and it’s much easier to tax what you can see. Heated rhetoric aside, airlines—after all, private, deregulated businesses—can fairly question a requirement for such ultra-detailed financial reporting; neither is it clear what consumers stand to gain by knowing precisely how much each airline rakes in from selling lounge passes or snack packs.
Regulators are one thing, but what about consumers? What if passengers rebel, or start to refuse crazy fees? Airlines are trying to make sure that doesn’t happen, at least when it comes to their most lucrative frequent business fliers. This group gets a pass, or at least a break, on most fees. Bag fees in particular operate as a kind of regressive tax: only about one-fourth of air travelers—the least favored—actually paid them in 2011. Not First Class or Business Class fliers. Not international travelers with a first bag. Not most frequent fliers, who know better than to check bags and can likely get a waiver as “elite” fliers when they do. Not holders of credit cards that are co-branded with airlines—they get a free bag too. It’s disproportionately the poor souls who travel twice a year, back deep in Economy, without a clue, who pay those bag fees.
In one sense, though, checked-bag fees affect all fliers, not only those who get stuck paying them. They’re an incentive for folks to try to cram every nonliving thing into their overstuffed carry-on luggage to avoid the fee, and this generates other costs. Carry-on bags that required TSA screening reportedly increased some 50 percent since checked-bag fees started in 2008, according to a Huffington Post report of TSA statistics—some 59 million more bags in 2010 than in 2009. That means more taxpayer money for TSA staff, and longer security screening lines—not to mention the growing hassle of merely boarding the airplane, already a mad scramble for overhead-bin space that relegates slow-moving innocents to the dreaded “gate check.” Checked-bag fees rake in the dough for airlines but impose costs on every traveler one way or the other.
There’s a point at which fliers start to feel seriously ripped off. Could airlines end up killing the golden revenue goose? Empowered by social media, consumers slowed the fee craze in the banking and communications industries where, just as with the aviation industry, competition makes it hard to raise “base fares” and profits have waned. Consumers grudgingly swallowed an array of bank fees for services long assumed to be free, but when Bank of America tried charging $5 a month for the privilege of withdrawing one’s own money from one’s own account with one’s own debit card in late 2011, it was a step too far. An estimated 610,000 depositors switched their accounts—enough to capture the market’s attention and push the global financial behemoth to back down.
Could that happen in the airline industry? It did before, in 2001, when lots of business fliers “just said no” to premium fares that were way out of whack with discount coach prices. The reality, though, is that most fliers have far fewer competing options for their air travel than for their banking. And those options kept getting more limited as the industry’s hunt for elusive profits engendered a new approach to growth in the aftermath of the horrible year of 2008.
The Airlines’ Coup de Grace
The new fee-for-all business model blunted consumers’ best weapon in the fare wars—the Internet. But there was another, even more potent, weapon at the airlines’ disposal that would redress the bargaining power they had lost to consumers. It was a lever they had largely ignored until the existential threat of the 2008 fuel spike forced them to use it. The airlines rediscovered the law of supply and demand.
The idea that the price of almost anything desirable (even a coach seat on an airplane) goes up when there is less of it available is Econ 101, but it was a notion that airlines and their cowboy entrepreneurs had resisted for decades. Staunching growth, cutting flights or seats, went deeply against the industry’s hypercompetitive grain. When times got tough for airlines, they normally did just the opposite: they added flights, bought new planes, tried to “dominate” existing routes, and started new routes—all to grab their competitors’ market share or to keep competitors from grabbing theirs. The drive was to fly everywhere—“ubiquity.” United even launched a costly public-relations stunt to celebrate becoming the first to fly mainline (not regional subsidiary) flights to all 50 states in October 1984—a one-year free First Class pass for anyone who could hit all 50 states in 50 days. “Grow to profitability” was the zeitgeist; contraction meant defeat.
More sober heads in the industry had long and quietly understood that if everybody grew fast, all at the same time, there would soon be too many airline seats chasing too few passengers—leaving half-empty planes, razor-thin margins, and no leverage to raise fares much above breakeven levels. But nobody would be first to retreat—some leaner, meaner competitor might swoop in—and there was no real-world catalyst to reverse the time-honored grow-to-succeed worldview. Then the price of fuel hit an astounding $4 a gallon.
By the middle of 2008, respected Wall Street analysts were warning not just of ugly balance sheets or even multiple bankruptcies, but that one, maybe two, major US airlines might have to dissolve outright. The industry suddenly hit the brakes. By the end of the dreadful year, almost all new routes were frozen and the number of airline seats flown dropped to levels not seen for five years. As North American carriers parked 800 planes, curtailed schedules, and flew smaller planes with fewer seats, it was as if one of the nation’s largest airlines had simply vanished. Even indefatigable Southwest, an airline that had grown roughly 6 percent annually for decades, retrenched. By the middle of 2012, the number of domestic flights had dropped almost 14 percent from five years before.
But it wasn’t just fear that rewired the industry’s growth fixation. The other essential ingredient was confidence. Each major airline was convinced that the other major airline survivors would also restrain their own growth. All weakened in that grim environment, none had the stomach or the resources to exploit the others’ retrenchment. Facing the same soaring prices for fuel and the same souring economic environment, nobody worried about losing customers to some fast-expanding start-up, much less to another member of the industry’s Old Guard.
That confidence was bolstered by the fact there were only a handful of US competitors left standing to worry about. By 2011, there remained only four of the ten large-scale national airlines that were flying when the industry was deregulated 33 years earlier. The decade’s industry consolidation had tempered the competitive urgency. Each of the major players knew its place. At all but a few of the country’s dozen largest air-travel hubs, just a single big airline controlled most of the traffic. (At these “fortress hubs,” consumers typically faced the highest average airfares.) So when it came to cutting capacity to leverage the power of supply and demand, the survivors could play “follow the leader,” comfortable the rest would in turn stop or slow their own growth. As Airline Weekly succinctly observed, “the practice of pushing up prices by squeezing supply … only works when everyone’s playing the game.”
Wall Street had long pushed for airlines to “rationalize” their capacity, but now the effects were striking, and quick. “Load factors”—the percentage of seats filled on planes—soared to unheard-of levels, more than 80 percent on average, more than 90 percent on busy routes. (Before industry deregulation, government economists used 55 percent load factors as a presumed norm.) At those levels, practically speaking, almost every city-to-city flight at a decent hour was pretty much totally full. (For technical reasons, when average load factors across an airline approach 90 percent, there’s likely to be a body in every seat on flights at reasonably convenient times.) Planes had never been so crowded.
Basic economics kicked in. With fewer seats available and no let-up in the demand for them, airfares stabilized, then rose. Average fares climbed some 20 percent from their low in mid-2009 to mid-2012, even adjusted for inflation. As the economy slowly crawled out of deep recession, airlines found themselves on the right side of the supply-demand balance for the first time in recent memory. Consumers could comparison-shop the Internet to their hearts’ content, but it didn’t matter. By tightening the lid on capacity, the industry had found a way to stabilize airfares on an upward path. There was still plenty of worry that volatile fuel prices would erode airline financials or undermine consumer willingness to pay higher, fee-supplemented fares, but by the start of 2013, airlines seemed to have largely regained the upper hand. And absent some new catastrophe or massive fuel spike or economic swoon, it began to look like they would keep it.
The Tax Man
Strapped fliers looking for villains can’t fairly blame the rising cost of air travel solely on nasty, greedy airlines, though. About 15 to 18 percent of every ticket (estimates vary) goes not to the airlines but to nearly a dozen federal and local government agencies—figure $50 to $70 out of the average domestic ticket. Airlines don’t pay most of these taxes—they’re passed on to passengers—but high taxes make it more expensive for consumers to buy the product that airlines sell. The effective tax rate on flying has hardly changed over the last decade, according to MIT’s Airline Ticket Tax Project, but it’s still a lot of money. The industry argues vigorously that flying is taxed more heavily even than “sin” goods like tobacco and liquor.
Still, consider what’s in that portion of your domestic airfare the airlines don’t get. The biggest piece—a hefty 7.5 percent federal “ticket tax” on your basic fare—goes to a “trust fund.” The money, more than $10 billion a year in the last decade, is to be used only for aviation purposes, mostly to pay for the FAA and to modernize the air traffic system, not to pay off the national debt or build bridges or buy weapons systems. The idea is that fliers, rather than every member of the general public, ought to pay for the aviation system they use. The other big federal tax—a “segment fee” of $3–$4 you pay every time you take off and land—also finances the FAA.
The other major government add-ons go to two places—the Department of Homeland Security and the airports you use. DHS’s “September 11 fee” goes for screening. You currently pay $2.50 for each of those luggage rummages and pat-downs—no extra charge for the highly personal version, and no tipping allowed. Airlines have managed to beat back increases in these screening fees for the much-beloved TSA, but they’re likely to rise eventually as the airlines’ own checked-bag fees incentivize travelers to cram more and more carry-ons through TSA inspection lines. Your airport, too, gets to assess a local “passenger facility charge” of up to $4.50 for each leg of your round-trip (up to $18 if you have two flights connecting in each direction) to pay for runways, terminals, and capital projects—did you think the airport ambience was free? For flying internationally, add an international arrival and departure tax (near $20 each way), Customs and Immigration inspection fees (together, $12.50), and a fee for agricultural inspection ($5). It’s all built into the price of your ticket.
Practically all foreign countries impose their own various taxes on air travel—often only loosely related to any bona fide aviation service; some seem based primarily on the anachronistic assumption that anybody who can afford to climb aboard steerage in a jumbo jet must have deep pockets. The UK’s “air passenger duty,” for example, adds well over $100 to the price of an Economy ticket from the United States to London—double that tax for premium class. Germany’s Air Transport Tax (or “ecological air travel levy”) raises about $60 per long-haul passenger, and then there’s France’s “Solidarity Tax” (they call it an “air-ticket solidarity contribution”)—$5 for economy, $50 for premium fliers across the Atlantic—which is supposed to fund health care and treatment for pandemics in developing countries.
Airlines argue that they’re just being deputized as federal revenue agents to collect taxes that often have little to do with aviation just because they’re big, easy, unloved targets, and that added taxes threaten to stifle air travel and eventually suppress demand. In fairness, they’ve got a point. Heavy taxes raise the cost of flying, and that does eventually dampen demand. An extra $65 per passenger isn’t trivial for a working family of four trying to get to see the Grand Canyon. On the other hand, the tax angst isn’t all about losing passengers. In 2011, a congressional showdown over reauthorizing the FAA temporarily left the government without power to collect aviation taxes. During the tax holiday from July 23 to August 7, did airlines refund the taxes to passengers? Did they lower fares by the same amount as the uncollected tax to encourage more people to fly? Nope. Nearly all of the large airlines simply kept their fares the exact same as before the tax freeze, then pocketed the difference, a windfall worth millions of dollars.