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Shocker: The key to low airfares is competition


Bill McGee, Special for USA TODAY on October 11, 2017

Airfares are lower than ever in the recent past. Right?

It’s a mantra that’s repeated constantly by airline executives, analysts and even journalists. But it’s based on data that — like all data — can reflect lies, damn lies and statistics. Actually, fares are far from low for many Americans, thanks to numerous factors, including rampant industry consolidation, a lack of competition and the endless introduction of new and higher “optional” fees.

Challenging assumptions

Sometimes, accepted wisdom isn’t so wise. For example, the lobbying group Airlines for America states “relative to most consumer goods and services, air travel is a bargain,” citing statistics indicating U.S. inflation has outpaced domestic airfares. And last year the DOT stated average airfares were at their lowest since 2010.

But the U.S. Government Accountability Office just issued a report entitled “Information on Airline Fees for Optional Services” that effectively refuted such claims. (Note: I participated in this GAO investigation on behalf of Consumers Union.) The report included this nugget: “Data compiled by [DOT] indicate that the average domestic airfare decreased from $370 in 2010 to $349 in 2016 in constant 2016 dollars, a decrease of 5.6%. But, the fares include only base fares plus applicable government taxes and do not include all optional service fees. As a result, they do not represent the total amount that some customers may be paying to travel.”

This omission of how fares have been radically transformed by all optional fees may seem obvious, but it’s continually overlooked. Up until a few years ago, domestic airline passengers weren’t nickel-and-dimed due to industry “unbundling” of fares and the rampant escalation of “ancillary” fees, so apples-to-apples comparisons with years past are impossible. For perspective, a new report just released by IdeaWorksCompany found 66 of the world’s largest airlines notched $44.6 billion in ancillary revenue in 2016.

The report cited Denver-based Frontier as an example, noting its revenue per passenger was a “modest” $114.75 last year, but $49 — or 43% — of that total came from “optional extras” such as bags, seat assignments and snacks. Perhaps not surprisingly, the three largest generators of ancillary fees worldwide were the U.S. Big Three: United ($6.2 billion), Delta ($5.2 billion) and American ($4.9 billion).

And naturally the fees just keep coming. Not only new fees for more services, but escalation of existing fees. This applies to everything from seat selection to itinerary changes to checked baggage and even carry-on baggage in some cases (the American and United basic economy products include restrictions on using overhead bins for some passengers).

Other factors

Fees aren’t the only thing muddying the fare picture. The GAO report also noted: “[It] is difficult to determine all the factors that could have caused this decrease in airfare, as several economy-wide changes, including those in energy prices, affect fares.” Kevin Mitchell, chairman of the Business Travel Coalition, echoes such concerns: “During this recent period most household incomes stagnated or declined, and airfare was anything but flat — especially at mid-sized airports and Fortress Hubs.”

Mitchell further notes that comparisons fail not just because of fees, but because domestic airline offerings themselves have so radically changed in recent years: “What was once a BMW-quality airline product and experience is now an inferior sub-compact one.”

Again, such degradations have been documented, here and elsewhere. For example, in 2014 I noted how both legroom and width have been reduced in economy class with “Think airline seats have gotten smaller? They have”.

Last month, at the American Bar Association’s Forum on Air and Space Law in Montreal, falling airfares was presented as a given to the panel on which I represented consumers. But I noted the accepted wisdom that airfares have fallen — in conjunction with the standard airline boilerplate “when adjusted for inflation” — obscures several mitigating factors. And I argued the most important consideration is how there’s nothing average about average fares.

Math doesn’t lie

The under-explored word in that phrase “average airfares” is AVERAGE. The bandwidth of average fares has never been greater, and the disparity between lowest and highest has never been wider. Simply put, competition effectively exists in the domestic airline market only on those routes that are served by low-cost carriers, where fares overall are below average. But when a market is dominated by one or more of the majors, there is virtually no competition, and ticket prices usually are significantly higher than average. This is particularly true in the wake of the recent mega-mergers and dramatic industry consolidation.

To be clear, this isn’t opinion or conjecture, but facts borne out every three months by the U.S. Department of Transportation’s Domestic Airline Consumer Airfare Report. These quarterly reports offer a highly detailed breakdown of prices charged on the 1,000 largest “city-pair” routes in the U.S., and reflect one-way fares actually paid by passengers, not just posted airfares.

I crunched the numbers from the DOT’s latest report, which reflects fares in the fourth quarter of 2016. The average one-way fare for this time period was $241. But the differential between the lowest average one-way fare of $85 and the highest of $375 comes to $290, or nearly 4.5 times higher. That tremendous spread speaks to the fallacy of the “average airfares are falling” proposition.

Geographically speaking, higher fares abound in much of the United States. To clarify just how critical an effect LCCs have on airfares, the DOT defines a “low fare market” as any in which one or more of six LCCs — Allegiant, Frontier, JetBlue, Southwest, Spirit or Virgin America — have a combined market share of at least 5%.

My findings underscore why this differential exists. Consider the following list of the highest average fares, where all five routes are dominated by either American or United. Even the presence of Southwest doesn’t always significantly offset these higher fares.

 

HIGHEST AVERAGE DOMESTIC FARES, 4Q 2016
Average fare City pair Dominant airline/% marketshare
$375 Los Angeles-New York City United/26%
$364 New York City-San Francisco United/34%
$359 San Francisco-Washington United/44%
$358 Fort Myers-Los Angeles American/38%
$350 El Paso-New York City American/44%

 

Conversely, consider the following list of the lowest average domestic fares; all five routes are dominated by LCCs. In fact, four of the five are serviced by only one LCC, Allegiant.

 

LOWEST AVERAGE DOMESTIC FARES, 4Q 2016
Average fare City pair Dominant airline/% marketshare
$85 Las Vegas-Stockton Allegiant/100%
$89 Knoxville-Sanford Allegiant/100%
$91 Colorado Springs-Las Vegas Frontier/76%
$92 Cincinnati-Sanford Allegiant/100%
$94 Allentown-Sanford Allegiant/100%

 

Fluctuations abound

There were no surprises here. In fact, these results are nearly always the same, quarter after quarter and year after year. Those routes that experience significant airfare decreases do so because of the presence of LCCs. Conversely, significant airfare increases are due to a lack of LCCs on routes served by one or more majors.

It is worth noting that LCCs are notorious for high ancillary fees, but even factoring those in, the overall fare difference generated by competition is stark.

For the fourth quarter of 2016, 41 city pairs experienced “significant” fare increases, up to 38%. Meanwhile, nine city pairs experienced significant fare decreases, ranging up to 45.4%. Here are the greatest fluctuations from the most recent report:

 

LARGEST DOMESTIC FARE INCREASES, 4Q 2016 VS. 4Q 2015
(+) %/$ City pair Dominant airline/% marketshare
38%/$90 Houston-Philadelphia United/41%
28.7%/$59 Dallas-Fort Myers American/82%
27.4%/$43 Dallas-Miami American/71%

 

In all three cases, the dominant carrier is either American or United. Worth noting: Spirit previously served Dallas-Fort Myers before scrapping that non-stop route. But relief is on the way: This year Frontier announced service from Houston to Philadelphia.

 

LARGEST DOMESTIC FARE DECREASES, 4Q 2016 VS. 4Q 2015
(-) %/($) City pair Dominant airline/% marketshare
(45.4%)/($152) Detroit-Philadelphia Delta/45%
(43.4%)/($109) Chicago-Dayton United/37%
(42.5%)/($113) Charlotte-Nashville American/75%

 

Once again, LCCs changed the fare structure, such as Spirit entering the Detroit-Philadelphia market and Southwest serving Charlotte-Nashville.

Remember ...

As with real estate, finding low airfares is dependent upon location, location, location. Keep in mind:

• LCCs affect your fare even if you don’t book them; whenever possible, consider flying to and from airports served by LCCs.

• Be flexible! This means looking at alternative airports. The added ground time and cost can be more than offset by the airfare savings.

• In some cases, you may even want to consider a different vacation venue — say, Tampa rather than Fort Lauderdale — if your region is served by an LCC.

• Flexibility also applies to days and times of travel. Use online search tools to broaden your departure and arrival times to maximize savings. In some cases, fares may fluctuate wildly from hour to hour, depending on when LCCs depart.

• Always calculate a final price that includes all optional services and fees you’d like included in your itinerary before making a final price comparison.

Bill McGee, a contributing editor to Consumer Reports and the former editor of Consumer Reports Travel Letter, is an FAA-licensed aircraft dispatcher who worked in airline operations and management for several years. Tell him what you think of his latest column by sending him an email at travel@usatoday.com. Include your name, hometown and daytime phone number, and he may use your feedback in a future column.

https://www.usatoday.com/story/travel/columnist/mcgee/2017/10/06/low-airfares-competition/735678001/