6 ways that airlines are hiding price increases
With increased consolidation in the US airline industry, there was considerable concern that fares would rise significantly but not as you might think, writes Tom Bacon
While in many cases fares aren’t higher, there have been many ‘hidden’ fare increases. In fact, there are a variety of ways for airlines to increase passenger revenue without raising the ‘list’ fare.
1. Fewer discounts, fewer sales
First, of course, there can be fewer or more confined sales periods, or less aggressive discounting of sale fares. Southwest used to have a sale most of the time and the industry would follow. Southwest is offering both fewer and also less aggressive sales in many markets.
2. Decreased availability of lower fares
Similarly, airlines can make their lowest fares less available by controlling inventory. If demand exceeds capacity in certain markets, RM systems automatically close out the lower fares to ensure there is room for the higher fare demand. This is a natural outcome from ‘capacity discipline’ or the industry’s relatively small capacity growth over the past few years.
3. Unbundling/ancillary fees
Yes, new or higher ancillary fees have received a lot of publicity. jetBlue just joined the list of airlines in the US charging a fee for checked bags. Spirit tracks its ancillary relative to its base fare and has the corporate goal to increase the percentage of total revenue from ancillary. In the first quarter Spirit reached 45% ancillary as a percent of total revenue.
4. Packing in the seats
Consumer products companies sometimes implement a hidden price increase by decreasing the size of their packaging (an 8oz drink versus 10 oz). Airlines’ equivalent is less pitch – packing more seats into a plane. Many airlines have announced increased density – an A320 used to be configured with 150 seats, but can now hold 178 seats.
5. New restrictions
In another parallel to the consumer products companies, airlines can adjust certain rules, indirectly driving more revenue. For example, earlier this year IATA recommended carriers adopt a new, smaller carry-on bag size – which would have driven more bags to be checked and therefore resulted in more checked-bag revenue. No US airline has adopted this new standard but it would form the basis for another hidden fare increase. If 10% more bags were checked, this could drive more than $300,000 in additional revenue annually for US carriers alone.
6. Deterioration in service quality
Finally, another form of ‘hidden’ price increase is simply by degrading the service. Worse on-time performance, longer lines, challenges stuffing carry-on bags in the overhead bins – travellers’ complaints fall into many different categories but they all can represent ‘less bang for the buck’. In a sense, any of these could qualify as a ‘hidden’ price increase if they represent a material deterioration in service.
The fall in the price of fuel
In the US ‘list’ prices have not generally declined with the dramatic fuel cost reduction. In many markets, in fact, ‘list’ prices continued to increase last year when fuel prices began dropping.
However, recent government reports show that average fares are down.
- As reported by the government, a fare reduction could result from lower ‘list’ prices (very transparent) or due to more sales (#1 above) or less aggressive inventory management (#2 above). Lower reported fares, generally, disprove the hypothesis that consolidation has led to higher fares.
- Reported fares, however, do not normally incorporate the other four ‘hidden’ factors (#3 - #6). It is much more difficult to adjust for these other factors.
‘List’ prices – airline’s published fares – can stay flat, or even go down, while ‘hidden’ price increases drive lower and lower value per dollar spent. Increasingly, the industry is relying more on such ‘hidden’ increases than across-the-board published fare increases.