It’s common for a variety of friends and family to ask me about obtaining a “cheap” fare to some destination throughout the year.  It’s a frequent request as we approach spring but this year what I’m hearing most is the comment that fares are “way up” compared to what they usually are.

Yes, they are.  Air fares have been rising steadily over the past several weeks with one airline bidding up the fare(s) and the others following with increases of their own.  Typical fares are much higher and often as much as 25% higher than this time last year. 

In addition, airlines are returning to the fee game and several have recently tweaked their fees to get more revenue in the door especially in advance of leisure travel that usually finds people checking more luggage.  JetBlue just raised its 2nd bag checked fee to $35 and American Airlines has added a “booking fee”. 

And now we’re hearing about fuel surcharges.  These are, in some ways, the most irritating fees attached to base fares around.  While they must be specified prior to booking, these fuel surcharges aren’t necessarily advertised as a part of the base fare.  In addition, they’re often a one fuel surcharge fits all flights approach.  That means a $20 fuel surcharge is supposedly covering fuel costs on both that 500 mile flight as well as that 2300 mile trans-continental flight.

Is this about fuel?  Yes, it is.  When oil prices rise such as they have over the past 2 months, jet fuel prices actually rise faster and higher.  They are not proportionate to the cost of a barrel of fuel and that has to do with how a barrel of oil is refined into various types of fuels and other products.  Fuel prices are skyrocketing and they threaten the airlines in two ways:  in demand as well as costs. 

The airlines well know that rising fares can cost them passengers and that is evident in the fact that airlines are already announcing reductions in their plans to grow capacity over this calendar year.  American Airlines announced it was going to bring back several hundred flight attendants as well as hire new flight attendants (with special skills for international flights) just a few months ago.  Now it is announcing that it will offer several hundred flight attendants the opportunity of a leave of absence because it will not grow its capacity quite as much as planned.

Cuts in capacity are designed to improve how much someone is willing to pay for a seat.   It’s simple economics:  if there are 100 seats but 110 potential customers, the airline is liable to get a premium price for its seats.  If there are 100 seats and just 90 customers available at a particular price, those seats will either fly empty or the airline has to cut prices to get them filled.  It’s a difficult balancing act because those seats fly every day whether there is a body in the or not.  If you cut your prices too much, you’re liable to fly that aircraft (even full) at a loss.  If you raise your prices too much, you’re liable to fly that aircraft at a loss as well due to empty seats. 

The various fees that legacy airlines charge are designed to boost the average fare and maintain profitability.  It’s notable that US Airways has said that but for their additional revenue from these ancillary fees, they would be unprofitable.  For an industry that has seen exceptional losses over the past 20 years, those fees represent a new era of profitability and survival.

Are they fair?  Reasonable?  In many cases, I think not.  I think the approach to fees has been poorly executed and has potentially driven away customers because of airline clumsiness in instituting them.  Airlines are rather new at the game of marketing value added to their business.  The entire industry was founded on and run by the maxim of providing the best value added product for over 70 years.  Now, they’re expected to figure out how to earn more profit by charging for value added items and their novice approach is very noticeable.

The notable exception to this is two airlines:  Southwest Airlines and jetBlue.  These airlines haven’t ignored fees but they have paid attention to the game better than most.  When you pay a fee on one of these airlines, there is added value and the customer perceives added value.  The profitability and increased revenues that Southwest has experienced is firm proof of that.

Tomorrow:  What to shop for when it comes to fares

Filed under: Airline Fees, Travel Hints by ajax