Tom Bacon shares his opinion at a time when airlines are making record profits

US airlines are finally making money. During the decades after deregulation, the industry was famous for posting huge financial losses, leading to multiple bankruptcies and restructuring initiatives. Now, they are making record profits and most analysts believe, for the first time, this profitability performance may be sustainable.

Along with new profitability, however, comes new legal and political focus. This past year we saw at least three allegations of illegal – or at least questionable – activity with respect to airline pricing, none of which were highlighted when the industry was posting losses.  When the airline industry was losing money, industry pricing practices were generally considered highly competitive.

In 2015, US airlines were variously accused of the following activities:

• Price gouging

• Dynamic bag pricing

• Capacity discipline: high fares with low fuel prices, or collusive ancillary fees

Let’s take a close look at each of these.

Price-Gouging

In May, a passenger train went off the tracks in the busy northeast New York – Washington corridor. When disrupted passengers tried to rebook their trips on airlines, they found there was a dramatic spike in fares. Angry passengers complained to the US Department of Transportation. Airlines argued that they were simply practicing their normal revenue management and efficiently allocating scarce supply to the sudden increase in demand.

MY TAKE:  We have all grown accustomed to high fares during any such demand spike – including holiday travel and special events.  Was this really any different?

Dynamic bag pricing

Spirit Airlines, a ULCC (ultra low cost carrier), is among the few US airlines to charge for carry-on bags.  When they introduced this new fee in 2010, a prominent senator from New York, Charles Schumer, threatened tointroduce legislation that would prevent airlines from charging such a fee. Although nothing materialised out of that threat, concerns were raised again late in 2015 when Spirit announced that its bag fees would be higher for certain flights during the Christmas holiday. This time, another senator, Bill Nelson (D-FL), the top Democrat on the Senate Commerce Committee, called on the airline industry to halt their plans for increased checked-bag fees during the holidays.

MY TAKE:  We are all used to higher base fares during the holidays – and we can be a bit frustrated when carry-on bins are filled with other passenger’s winter gear and gifts so our normal luggage doesn’t fit. In contrast to Senator Nelson’s reaction, I applauded Spirit’s initiative.  In fact, I expect much more ‘dynamic pricing’ of ancillary fees going forward. 

Capacity discipline

A more general concern was raised in 2015 with respect to so-called ‘capacity discipline’. In July, the US Justice Department began a probe of the industry; the DOJ proposed that by collectively limiting growth the industry colluded to keep prices high. (Although most reports show that industry fares actually are down year-over-year, the allegation incorporates two other facets: 

1) with fuel prices down, fares should be down even more; and

2) new ancillary fees, charged by most carriers, more than offset any base fare reduction

MY TAKE:  Oversupply has been a recurring complaint of the industry post-deregulation. Rather than view ‘capacity discipline’ as a new, more fiscally responsible airline practice, the DOJ terms it possible collusion.  Certainly, the largest airlines’ slow capacity growth is their attempt to keep supply in sync with demand.  Greater growth by any of the four largest carriers – now representing 80% of total domestic industry – would potentially grow capacity more than demand, significantly reducing industry profitability (the industry has a history of increasing capacity more than demand, driving violent cycles).

All of these concerns relate to high prices. In fact, American’s aggressive matching of Spirit fares, potentially a focus in the past, is now not an issue. American may match – or even undercut – Spirit’s fares (despite offering more amenities and incurring much higher costs), lose money on the fares, and otherwise pursue their self-described goal of taking market share from Spirit.  Today, the concern is high prices – airlines that are lowering prices are immune from regulatory or political action.

To conclude then, let us just say again that for most of airline history, fares have not covered costs; airlines have lost money for decades. During that period, it was hard to argue that airlines were charging too much. With more satisfactory financial results, given the high profile of the industry, it is not surprising that the focus has turned to ‘too high prices’. Nevertheless, I regard the current profitability as an indicator of a much healthier industry than we’ve had for many years.

Tom Bacon has been in the airline business for 25 years. He is now an industry consultant in revenue optimisation. Questions? Email Tom or visit his website