Friday, March 21, 2008

The Case for Higher Airfares

Why do travelers feel entitled to cheap airfares? If gasoline prices go up 100 percent over the course of a few years, we can choose to drive less or put up with the price increases. If lattes cost $4.50, we still keep drinking them. Yet raise airfares 50 bucks, and let the screaming begin. The airlines are publicly traded companies (albeit poorly run and generally unprofitable ones), and for some odd reason (their shareholders, for example) feel they should make a profit. The chart at the bottom of this entry shows how unsuccessful that’s been, detailing the two-year price performance of various airline stocks, compared to the S&P 500 (the tan line at 0% on the right-hand scale).

The airlines have set up price expectations in consumers’ minds that equates cheap with good – even if that means service and schedules suffer. I can’t think of another industry that makes nickel-and-dime changes so frequently, nor an industry where every other business follows the herd so quickly. United raises fares $50 (as it recently did) and every other airline follows suit. What a bizarre business model.

A long time ago (until 1978), before most of today’s travelers remember, airlines were federally regulated. You could sometimes fly coast-to-coast with a full row all to yourself – and a “stewardess” who might sit and chat with you because she (they were always women) had little else to do. (This was pretty darn exciting when you were a male in your twenties.) In 1978, a first-class ticket cost 130% the price of a coach seat. (But then, first class wasn’t what it is now. Just a better meal and a bigger seat. Note, too, that it’s now “economy” – meaning cheap – and not “coach,” which to us carried at least a tiny cachet of pleasure.) All tickets were fully refundable. (We found this interesting 2005 article offering one person’s opinion of deregulation.)

Now, thanks quite a bit to Southwest (and to literally dozens of other now-bankrupt discount airlines), air travel has become a commodity. Every sophisticated traveler doing an airfare search uses Southwest as a baseline, even if they won’t travel on Southwest. (Note the gray line on the stock-price chart. Southwest’s share price has also been underwater for two years.) As we’ve said before, ticket price should be only one part of the air travel picture, but somehow Americans (and the rest of the world, judging by Ryanair and easyJet) think that it’s their right to have dirt-cheap air travel. Make your product cheaper and crappier and more folks want it. The airlines are their own worst enemy.

The new Open Skies agreement might begin to re-shape the airfare landscape. Or maybe shareholders of United, American, Continental, et al will begin to clamor for profits instead of bankruptcies. Let the cattle classes have the short-haul discount carriers. In some way, it’s already happening, as the Dinosaur carriers are decreasing domestic (competitive, cheap) capacity and adding more overseas (more profitable) service. Which will put the squeeze on Southwest, as they won’t be able to fulfill all the demand for those cheap domestic tickets (nor will any other discount carrier). So even their prices will have to go up.

And maybe if carriers made money and thus returned to decent customer service, there’d be far less need for a Passengers Bill of Rights, as is now being batted around by legislatures and the media. If tickets cost more, and passenger volume was even slightly reduced, there would probably be fewer (maybe none) flights sitting on the tarmac waiting for a gate, or flights running out of food and water because the airline needed to save 48 cents per passenger (and still not make a dent in their profit picture). Airlines aren’t going to become profitable – and therefore provide better services – by adding $25 to check a bag, or by removing blankets and pillows. The only way will be to substantially increase revenues – and that means higher fares.

Flyers, just remember, if “cheap” is what you want, “cheap” is probably what you’ll get – in all aspects of air travel: fares, service, food, baggage handling, routes, schedules, seats, everything. Personally, we don’t want to pay more for air tickets either (or for anything! ever!), but we think increased airfares are inevitable, and we would actually be willing to pay a bit more for a better product.

Two years: Black = USAir, Gray = Southwest, Green = Alaska, Dark gray = Northwest, Yellow = Delta, Orange = American, Purple = Continental, Blue = United, Brown = S&P 500.