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Gouging the Friendly Skies
A month ago, I flew to Austin to give a brief talk at the Texas Public Policy Foundation. When I contacted the folks at TPPF to make travel arrangements, I suggested direct flights on Delta from the Detroit airport to Austin and back, and they got back to me a day later to say that the cost was excessive. So, being accommodating, I flew down via Houston on one airline (I forget which) and back on Delta through Atlanta.
There was one problem — the weather — and it was compounded by the need to change planes in Atlanta. I finally got home at 4:30 a.m. — which reminded me why I prefer direct flights.
I thought little about this episode until yesterday. I am slated to give a talk at Villanova University on Constitution Day in mid-September. I went to Orbitz to check out the flights and found that the American, US Airways, and Delta are all charging $1204. For $1300, I learned, I could fly first class.
Of course, if I was willing to go through Chicago or Atlanta, the price would be $350-$500. If I could figure out how to get to O’Hare by car, it would be $119-$134. From South Bend through Detroit, it would be $357.70. Think about that one. It shows that the issue is not a lack of seats on flights running from Detroit to Philadelphia.
Eventually, I got in touch with the folks at Villanova, and I bought a ticket on Frontier from Detroit to Trenton, New Jersey for $144. The driver they send to pick me up will have to go an extra 20 miles, and the airfare for which they will have to reimburse me will go down by $1060.
This got me to thinking, “What is going on?” So I looked into direct flights in mid-September to Austin. From Detroit? $1102. From O’Hare? $199-$353. From South Bend through Detroit on Delta? $714. From South Bend on another carrier through Chicago, $528.
There is a pattern here that would bear further exploration. Something there is that does not like eastern Michigan.
If I were Governor of Michigan or a Senator from Michigan, I would make a stink. US Airways and American are, for all intents and purposes, one airline. Before long their merger will be complete, and US Airways will disappear.
The real question is whether there is collusion between American and Delta to gouge passengers flying out of Detroit.
Am I missing something? Is there another explanation? Is this sort of thing going on elsewhere? Is this what airline consolidation will bring throughout the country?
Published in Culture
I’ve decided to quit reading any thread that AIG is commenting on.
Don’t worry, I said it. It’s how Southwest manages to beat everyone.
It’s hard to claim “gouging” or anything else, when the most successful airline is the one that operates precisely on having the absolute lowest cost structure and offering the lowest prices.
The only way the others have managed to survive is by lowering their prices to match Southwest, even though it’s mostly bleeding them red (because they can’t cost structures as low as Southwest)
That says squat about airline costs. Not passenger ticket costs. The costs of the airline to run an airline. They compensate for the costs of airplanes by demanding A)more fuel efficient airplanes and B) more seats per airplane (at the price of passenger comfort). And they’re getting them. But since deregulation, they have to have some low advertised fares, so they can’t just jack up ticket prices to regulation era levels again. So even fuel efficiency doesn’t make up for that. So they compensate further by flying the aircraft more per day, cutting time between flights (often by brining in the cleaning crew through the back door while pushing passengers out the front… Delta got an extra domestic flight per day to selected airports via this method, they tell me). But they also admit that this wears out aircraft faster, not to mention the crew pressures and extra costs. It’s still a vicious cycle. America and US’s merger resulted in a merger and reduction of station crews, and they still complain about costs.
As for Southwest, bigger airlines have route pressures that Southwest doesn’t have. Southwest won’t even touch an airport that doesn’t have at least a million passengers per annum. Other carriers don’t have that luxury. They could fight Washington, but they’ll lose. Eventually, Southwest will too. Their ops costs are going up, too, especially labor.
Why do we care about airline costs?
That’s their choice to remain in unprofitable routes.
You’re making an argument of why being an airline is a terrible business. I agree. Everyone agrees. But this doesn’t say anything about ticket prices for the consumer.
The consumers want low profit margins, firms want high profit margins. Who’s winning in this game?
No, they are not lower. I put in 9/16/2015 for the trip out and 9/17/2015 for the trip back, and I got precisely the same prices I got yesterday — $1204.19 on all three airlines.
You were looking at prices a couple of days out — when, given supply and demand pressures, they might well be lower . . . or higher.
I am talking about prices at a time when they do not yet know the demand, and the prices I found for Austin were calculated in precisely the same fashion.
Let me add that I used precisely the same scheme to price flights from South Bend and O’Hare.
One thing that has puzzled me: Tickets purchased at the last minute should be cheap, because if they are not sold that is lost revenue. Instead, they are very expensive. This can only mean that the airline expects to sell them, or at least most of them.
It’s the opposite in the cruise ship business. There, tickets get cheaper as the departure date approaches.
By the way, has anyone ever explained why the planes that were hijacked on 9/11/01 were so sparsely occupied?
I don’t know where you’re looking. American, September 16th outgoing 17th coming back: $312. Google Flights.
$240 from South Bend, $99 from Chicago.
Another thing to consider is that these are not necessarily the same planes, or even the same airlines. I.e., South Bend to Detroit is flown by a different airline with a different airplane, under Delta’s contract. But it’s a different airline.
They know the demand. They have years of flight data to predict what demand will be like at those times. Prices fluctuate a little of course, but I don’t know know where you’re getting your prices.
If you don’t want Air Amtrak, you should probably be concerned about them. I use the passenger rail metaphor purposely; air travel is probably headed in the same direction. Passenger rail only exists today as a subsidized activity in a government monopoly, while cargo rail… almost totally grounded in reality… is plentiful, cheap, and profitable. In air as was in rail, cargo is the future, people are going to have to be subsidized. We may not end up with a nationalized airline, but we’ll probably end up with one or two defacto nationalized airlines. Some form of airline re-regulation is probably coming down the road. There’s no magic technology coming that’s going to change this.
Most of our flights are either at capacity or overbooked. Not a lot of seats that have to be sold here. Don’t know how representative that is of domestic flights as a whole, though.
No you’re looking at yearly costs. I said they invested billions in creating OR departments. Those costs are not yearly costs.
OR costs probably don’t fall into salaries category. The biggest costs there is in computing power and data. People build it, but once build, it doesn’t take a lot of people to keep it going. Obviously, they got people creating new algorithms and such, but it’s mostly fixed costs.
Amtrak exists because no one wants to use the train. There’s no comparison with airlines.
Southwest or Spirit etc didn’t invent a new technology. They invented a new business model.
I am looking at http://www.orbitz.com, and I am looking at direct flights (nonstop), and it is now $1210 on American, USAir, and Delta. You must be looking at one-stop flights. Right now, the price for such a flight on American is $370.19.
It’s still all optimization on their part. How it works, as I said, we’re not going to figure it out here. That’s why they have OR departments in their companies to figure it out. But its not collusion since they’re telling you “don’t take a direct flight, it’s cheaper for us to take you here first then there directly.
They may be saying that we’d rather fill up the South Bend-Detroit flight first, then fill up the Detroit-Philly flight. Why? Maybe the South Bend-Detroit flight is usually empty, so it’s a big money loser for them. Who knows.
But that’s why looking at one flight at one time is next to impossible to figure out the reasons.
If the overall argument is whether airlines “price gouge” consumers, the answer is no. They get miserable profit margins.
My understanding is the one gets the best prices 3-6 weeks out.
To be fair to Paul, though, I did enter the flights for DTW-PHL on the dates he mentioned. For non-stop round trips thru AA.com, without layovers/plane changes, it’s $1183!
Good thing I live in Denver, with its number of choices for direct flights.
To review the bidding: A direct flight from DTW-PHL is about 1 hour, 44 minutes each way. The flights on Southwest via MDW can be upwards of a total of 5 hours, 45 minutes each way. By my math, and I’m not trying to be snarky, Paul’s time is worth about $214/hour. So yeah, I’d be trying to raise a stink as well.
Then again, when it comes to flight booking, we Denver residents have something of the opposite issue that Paul is facing. When I try to get flight pricing for a hypothetical trip to Detroit (!), I get a direct-flight round trip price on Southwest of $234 (for dates 9/16 with return on 9/17). If I try to get a more…favorable departure time that gets me a changeover at Chicago Midway, that round trip jumps up to $446!
Oh, did I mention that DEN is a hub/focus city for 3 airlines (Southwest, United, and Frontier)? When it appears DTW is a hub for just Delta.
Everyone is trying to leave Detroit. No one is trying to go there.
Anyway, if one looks at Google flights, one finds out that these direct flight prices fluctuate hugely depending on two factors: the day of the week, and the duration of the stay. Sunday is the most expensive days, and longer duration reduces the flight cost substantially.
All algorithms.
Anyway, Detroit-Trenton non-stop flight at those dates…$105 round trip with Frontier :)
Capitalism at work. Ain’t it great!
PS: Since I reduced your price of flight by 10 fold, I expect a commission fee Dr.Rahe ;)
My daughter started working for Delta last year in reservations. She, along with all other Delta employees, gets a percentage of her salary in profit sharing every year. I hope Delta charges lots of money for their tickets so they can make lots of profit so my daughter can get a bigger bonus.
Full disclosure: my wife and I get to fly free on Delta now via standby seating, so I’m not exactly an objective observer.
I may regret saying this, but I agree with 98% of what AIG has said here. Yup, I already regret it.
Assume for the sake of analysis that the business operator knows his craft. Assume likewise that a system which persists is sustainable. Movie theaters charge so much for nearly cost-free items as sugar water and popcorn because a movie with drink and snacks is a different product aimed at a different consumer than a movie no frills. It’s not because they don’t understand supply and demand, and it’s not because they hate people.
One question unasked so far is Detroit’s terminal fees etc, but that should show up more regularly than it sounds like what we’re seeing.
A specific example: prices do not fall as time grows scarce because to the airline, the ability to accurately predict the demand for a flight some time before it rolls out is far more valuable than some number of seats filled. A flight over capacity can be augmented by upgrading or adding equipment, and underdemand flights can be combined or shifted to smaller hardware. But this can only be accomplished with real hardware that is correctly positioned with enough lead time. If rates went down predictably, we would all wait til the last minute as much as possible. The airlines must discourage this behavior at “all costs”, figuratively and very nearly literally. An unsustainable business model will not last. Airline operators know this.
I would suspect that cruises work differently because that is a vastly different product sought by a different consumer. I think that customers with enough money and schedule flexibility to fill rooms on short notice are probably more valuable to cruise operators than empty rooms, which after all come in no frills as well as “drink and snacks” variety. You can’t upsell to an empty room.
Heaven knows the amenities in supercoach, or business, or first class hardly justify the differential in price. No matter how great the seat is, it’s still nothing you would put in your house. Proof of this conjecture is that nobody has this in his house. The experience of not flying coach is precious indeed, however.
My overall argument is not that airlines “price gouge” consumers. Competition prevents that. My argument is that something fishy is going on in the Detroit market (which is clear from the data) and that it may have to do with an emerging lack of competition and a collusion between the two remaining airlines who fly this route nonstop.
I mentioned that deal in my post and bought the ticket yesterday morning.
Not sure that’s quite true. Flying to/from San Juan, PR and either Boston or Manchester, jetBlue and USAir have consistently lately been less expensive than Southwest, in some cases MUCH less expensive, which is a change from the past couple of years. Last month it was well north of $400 one-way SJU-BOS on Southwest (through BWI), low $200s on jetBlue (nonstop!), high $200s/low $300s on USAir (through PHL or CLT).
It’s not that at all. As he said, he’s not looking at the big picture (e.g. “the stock market”), he’s looking at specific routes (e.g. “one stock”) that he’s familiar with. And after following that one stock closely, he’s suddenly seeing wild price fluctuations that aren’t easily explained, that he’s trying to understand. He’s not trying to understand the pricing machinations of the entire industry.
Not always. On a Friday in late December (after Xmas) last year we bought 2 tickets (Southwest) from San Juan, PR to Manchester, NH for the following Monday, and the prices were as inexpensive (maybe more so; I don’t remember) as they were two months earlier, when we toyed with going but didn’t pull the trigger. As the dates approached we figured if the prices came down, we’d go. We didn’t really expect them to (because of the last-minute warnings we all hear), but they did.
Just anecdotal, yes, but when you’re flexible (as with last-minute cruise purchases), last-minute fares aren’t always sky-high. I’ve even found good fares inside the “two week” window.
I live in another Delta hub here in Minneapolis, Paul, and we see the same thing with airfares – some routes always seem to be very expensive. It’s the price we pay for being able to fly direct to most destinations.
The point illustrates EXACTLY why planned markets fail, and competition works. The market delivers results in ways that nobody could have ever foreseen – and often come into existence as more of a by-product than as a plan.
Airlines basically break even (though they are in a profitable time right now). They are capacity-driven businesses, and for years the AVERAGE profit for a narrow body flight was about $100. Total.
How do they get there? A very strange brew – precisely the combination of things that help explain why planned airlines (flag carriers around the world) almost always lose money, and competing airlines (like Low Cost Carriers) tend to make money.
AIG, Southwest’s prices are no longer the lowest. Nor are their costs. They, for example, always use their own unionized staff for ground services instead of using the lowest-cost provider.
There was a time… but that time is gone.
Nonsense. Airlines fundamentally do not make money, but that does not stop people from owning and running them anyway.
Right now capacity in the US is constrained. Newer and hungrier airlines will grow and compete, and the cycle will continue.
You are demonstrating that your time is worth money. Airlines know it. You have the choice either way.