Airline Fare Structures

Jan 19 2009 Airline Fare Structures BY sgf-admin TAGS Airlines


Charles has posted this response to a blog entry from June of last year:


"I fly to Austin and Dallas on a regular basis. On very rare occasions I fly out of Springfield. Typically I can fly out of Fayettebille-Bentonville (XNA) for an average $700 less. I just booked a flight to Austin from XNA at $422 for next week; the cost out of Springfield would have been $1373. Driving time is an extra 3.5 to 4 hours. The question of lack of demand and lack of competition have both been raised as reasons for high fares out of Springfield. Has anyone investigated how many people would fly out of Springfield instead of surrounding airports if we had competitive prices? Maybe a market study could show that we are a much better market than current travel patterns show. Springfield businesses can not be as competitive as companies out of Tulsa and Northwest Arkansas because of higher ticket prices."


I understand your point Charles, but we don't need an investigation to figure out that more people would use the airport if fares were cheaper. It's a given. After all, our passenger high watermark was in 2005—the very year that fares were at historical lows (when adjusted for inflation). There was just one problem: the airlines weren't making much money. They responded In the second quarter of 2006 by cutting capacity across the country (seats in the air). They've been doing it ever since. Here's the deal...


We know that more people would fly if fares were cheaper. And from the airport's point-of-view, and from your point-of-view, that would be a good thing. Problem is, it doesn't work for the airlines. It doesn't fit their business model and/or their fare structures. When the airlines set capacity and fares they are balancing a multitude of factors. Here's one example: let's suppose that Airline XYZ decides to provide us with three flights a day to Denver. Each airplane has 50 seats. So that's 150 seats a day to Denver. The airline then has to set the fare. But before it does, it has to figure out the following: 1) how much will fuel cost for the three flights? 2) How much will labor cost for the three flights? 3) What is the maintenance cost for the three flights? This list is longer, but you get the idea. The airline will set a fare that will pay all the operating costs, plus make a profit (at least that's what it wants to do!).


Now think about this: what's going to happen if the airline lowers the fare and causes demand to go up? It will have to add a flight. And what does that do? It drives operating costs up. Here's the question for the airline: if we add a flight, thereby causing costs to go up, will we still make money? Capacity and fare. The airline is trying to find that fine balancing point where the combination of capacity and fare will cover operating costs, and make a profit. One more thing: the airline is performing this balancing act in every market it serves—not just ours. It gets very complicated. When the balancing point is found in one market, it may cause the scales to tip in another. Airline math gives me a headache. Hope all this makes sense. It's not easy to explain.


January 20 


Bill follows up with questions: "I read your response. My question is, why can the airline fly so much cheaper from another airport and not SGF? And I recall you saying that in the past. Flying out of XNA as mentioned in the original post is $800+ cheaper, the airline has almost the same cost for that flight as they would out of Springfield? Please elaborate more, as many of us feel that SGF fares are just unreasonable."


As I mentioned yesterday, airlines try to balance capacity and fare so that they can cover operating expenses and make a profit. What I didn't talk about is the proverbial monkey wrench that throws the scales out of balance: competition. Competition is the difference between XNA and SGF for flights to Texas. That's why there's a disparity in Texas fares. At XNA, American and Continental provide direct flights to Texas. At SGF we only have American providing direct flights to Texas. To put it bluntly, American charges more here because it can; it has a monopoly on Texas service.


0 Comment(s)