What's up with that fare? » 

What's up with that fare?

Published: 07/02/2012 - Filed under: Home » Archive » February 2012 » Special Reports » Home » Features »

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The question is classic. Business travelers have been asking it since airlines deregulated back in the late 1970s: how can one person pay more for a seat in the same cabin on the same plane than another? 

You know the short answer. Airlines peg prices to when you fly, how far ahead you buy, and whether there’s competition on the route. It used to be called “yield management” – airlines “trying to make the most money they can from a perishable product,” says aviation consultant Mike Boyd, president of Boyd Group International. What perishes, of course, is the seat. Push back from the gate with an empty one and the chance to make an extra buck dies right then and there. Better to fill it while you can, at whatever the best price it will fetch. 

Once upon a time, before airlines woke up to the fact that they could make money in a recession by simply siphoning seats from the skies, it was easier for flyers to fight back. Enterprising entrepreneurs flying on their own nickel would book Tuesdays and Wednesdays, or early Saturday mornings and take advantage of lower rates. They still can, but the windows of opportunity are becoming “narrower and narrower,” says Boyd. Now, with seat supply shrinking as carriers cut capacity to compensate for sky-high petrol prices he maintains, “Resistance is futile. You can’t get around it. [Airlines] are going to get the most money they can out of every seat they have.” 

Yield is Out, Revenue is In 

Not just every seat, but every flight. Managing how much money each seat per se yields is passé. Now it’s all about aggregate revenue. Revenue management is predicated on a couple of things: a willingness to pay, and seat inventory. “It’s really that simple,” says consultant Darryl Jenkins, chairman of the American Aviation Institute. 

Simple conceptually, perhaps – but devilishly complex in the execution of all the intricacies. Jenkins says on any given flight there are about a half-dozen fare categories. On any one flight into a particular hub approximately half the passengers connect to “between 15 and 20 different destinations.” Those destinations are arrayed in rings emanating from the hub, in mileage bands. 

The first band is comprised of very short-haul routes, those under 300 miles, such as the 130-mile trip from Dallas/Fort Worth International to Wichita Falls, Texas. On such sojourns “there’s probably only one airline,” says Jenkins. In this case it’s American Eagle. “You basically have no competition. That’s where you’ll see the highest fares per mile.” 

The next band is between 300 and 1,000 miles out from the hub. DFW to Tampa is a 910-mile journey. You can fly nonstop from DFW to TPA on American - or connect via Delta over Atlanta, United via Houston Bush Intercontinental or US Airways over Charlotte. More competition, more connecting opportunities. 

The third ring is 1,000 miles out and more. “Let’s say you want to go from the East Coast to the West Coast,” says Jenkins. There are lots of ways to make the trip nonstop, and myriad connection opportunities. “As the mileage increases, competition increases.” 

But – and here’s where it can get interesting – fares don’t necessarily decrease, not if you book a nonstop. Business travelers have been “willing to pay a premium” for nonstops, says Jenkins. “So there’s more revenue on those flights.” As a case-in-point, take the example of United’s now defunct ‘Silicon Valley Shuttle,’ a wondrous 2,416-mile nonstop flight from Washington Dulles to San Jose. Born in the days before the dot-com bust, “it was a very lucrative flight for United,” says Jenkins. “You had lots of [IAD – SJC] connecting opportunities, but…these were in the days when everybody had a lot of money. They preferred the direct route, and they paid a premium for it.”

Fly Less to Get More 

In search of eternal truths in the quest to save money? There are precious few when it comes to airline pricing. Nonstops aren’t always pricier, nor are connecting flights necessarily cheaper. It all depends on the value of the seat to the airline says Boyd. “If Delta is running a 90 percent load factor on a feed route into Atlanta, they’re not going to give you a bargain just because you’re connecting on to Baton Rouge.” 

But, Boyd says, “If AirTran has an $89 fare to Atlanta…Delta’s going to match it [more readily] from Atlanta to, let’s say, Omaha.” It can do that because some of those folks on the ATL – OMA route flew Delta from London to Atlanta before making the connection on to Omaha. In effect, they helped subsidize the ATL – OMA leg. 

In the early days after deregulation, airlines worked to maximize yield per Revenue Passenger Mile. A paying passenger flying one mile creates a single RPM. 100 passengers flying 500 miles beget 50,000 RPMs, and so on. RPMs are the historic measure of production in the airline industry, a way of keeping score. But yield on a pure Revenue Passenger Mile basis can be deceptive. The cost of a walk-up fare from Binghamton, NY to Philadelphia International was $504 one-way at the time this issue of Business Traveler was printed. The distance is a mere 164 miles. The result is a really high-yield deal for the airline. By contrast, the price of an advance purchase 3,741-mile trip from Cleveland to London Heathrow was $1,347.40 when this story went to press, a comparatively low-yield affair. 

Seen that way, if an airline manages strictly for yield, it leaves a load of revenue on the table. “We learned that yield was not what we wanted to maximize,” says Jenkins. “What we wanted was revenue.” And you wonder why carriers are cutting shorter sojourns in favor of longer routes? 

Managing for revenue means knowing where to put scarce, expensive resources. In this case that means airplanes. 

Airfares rise in a robust economy. 2011 was rancid. Yet, Jenkins says virtually every US carrier with the exception of American made money. “And that’s the first time in history that has ever happened” – carriers remained in the black amidst bleak economic times. The oil spike of 2008 drove the point home: the only way to really weather the bad times was to cut seats. That cuts costs and ups pricing power. Combine those capacity cuts with other strategic moves – such as yanking versatile Boeing 757s from ostensibly “higher yield” domestic milk runs and putting them to work on longer-range “lower yield” trans-Atlantic routes. Then the aggregate revenue picture becomes rosier. But there’s far more to the new revenue management equation than that. 

Fees, fi, fo, fum 

Darryl Jenkins says on average, constant dollar airfares have actually dropped five percent since 2001. But the revenue derived from ballooning bag fees increased four-and-a-half percent, “almost making up for that differential.” Together with capacity constraints, this new ancillary fee-friendly unbundled pricing model contributes mightily to airlines’ ability to “make money in a downturn.” 

In every paradigm shift there are winners and losers. The good news for business travelers is that they’re in the former category. “As we’ve unbundled the fares, probably 80 percent of travelers are better off,” says Kevin Mitchell, chairman of the Business Travel Coalition. “It’s a function of how many bags you take and what type of corporate deal you have.” It’s leisure travelers who stand to lose the most. While some airlines may profess to love low-fare folks, Jenkins says the reality is that when seat capacity constraints came into play, “the fares [the airlines] wanted to get rid of were the bottom feeders. Because they were contributing so little to aggregate income.” 

The analyst says, “it’s not unreasonable” to argue that by eliminating some of the lowest fares (or at least tightly controlling them by squeezing capacity) airlines have been better able to control the rate of increase in those higher fare tiers, those employed most often by business travelers. 

As for ancillary revenue, even Southwest – which eschews change fees and touts that your first two belly bags fly free – rakes it in. Chief Marketing Officer Dave Ridley says things such as EarlyBird check-in, unaccompanied minor fees and the like contributed some $200 million in revenue last year. 

But Southwest refuses to embrace ancillaries with the pure passion some of its rivals do. “There’s no question the bulk of the industry has gravitated towards this ‘fee heroin,’” says Ridley. “Once they get it into their veins they’re so addicted to it they can’t go any other way.” Southwest’s CMO asserts, “We are committed, as long as we can, to avoid this abject pursuit of charging for services that heretofore have been part of the travel experience.”

No doubt, revenue management is a ravenous, complex critter. “More complex…than anyone could ever have envisioned,” Mitchell says. “The opportunity for travelers to know enough about it, to have the tools to find the best bargains, has – at least temporarily – eroded considerably.” 

It’s comparatively easy to comparison shop airline fares, especially since new Department of Transportation rules just went into effect that require mandatory taxes and user fees be included in the advertised price. But bag fees and change fees and all the rest are discretionary and so don’t fall under the DOT guidelines. Thus, says Mitchell, ancillary fees don’t readily lend themselves “to comparison shopping, and therefore remain undisciplined in the marketplace.” 

The BTC chief sees some light ahead, the possibility that eventually new DOT regs “will require the airlines to provide fee data in a transactable format, much like they provide airfares.”

The Calculus of Complexity 

Certainly cutting through the increasing complexity would be welcome. Add ancillary fees to an already data-rich array of price possibilities and the permutations are dizzying. Prior to 2008 Mitchell says fare searches “would yield maybe hundreds, maybe a couple of thousand alternatives.” Ancillary fees have upped the possibilities exponentially “where there are literally hundreds of thousands, into the millions, of combinations of carriers, itineraries, base fares and ancillary fees.” He says comparing searches four years ago to the way things are today is “like comparing the times table to calculus.”

So, just how do you manage the amount of revenue you fork over to the airlines, and keep your sanity at the same time? Forget trying to game the system on your own. As Mike Boyd says, “resistance is futile.” You need a friend. 

Kevin Mitchell says the best approach is to work with a savvy travel agent, a travel management company in possession of “the tools and the knowledge” to counter the increasingly complex revenue-seeking strategies airlines are employing. He says you don’t have to deal with a mega-agency to get that sort of expertise, not anymore. He asserts many entrepreneurially-driven regional travel management companies “have excellent technology, technology you probably couldn’t have afforded ten years ago.”

One thing fewer of us can afford anymore is to fly solo. Mitchell maintains fighting for the best fare out there “has moved way beyond the individual business traveler going to a web site.”   BT

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