The Planes Are Full -- So What's the Problem?

April 19, 2005 — -- There's a basic model in business that should be taught in elementary school: Buy low, sell high. After all, anyone who has ever run a lemonade stand or a newspaper route knows that consistently selling your product for less than the cost of producing it is a pretty effective way to end up out of business.

Yet pricing below cost seems to be a standard habit for airlines these days.

We all know that a host of economic problems bedevil the established, so-called legacy carriers like American, Delta, United, Northwest and US Airways, and that aside from the impact of 9/11, the worst problem is the soaring price of jet fuel. But how does it happen that airlines can be in such financial straits when so many of their flights depart full?

The short answer is that U.S. airlines have grown ruinously willing to sacrifice profits to keep the fickle loyalty of us bargain-seeking customers by keeping prices artificially low.

Artificially low?

We all love low-cost air travel despite the decline in amenities and service quality, and with frequent-flier programs and a Wild West approach to Internet pricing (that sometimes changes by the hour), we, as a people, tend to get irritated if we pay anything more than a rock-bottom fare. In fact, the industry has achieved the dubious honor of almost totally devaluing the perceived worth of its product.

But, consider that there is a very real cost to providing that airline seat you fly in (with or without leg room and a meal).

Take a flight from, say, Philadelphia to Seattle on a safe, fairly new, well-maintained jetliner flown by a thoroughly trained and safe crew. The direct operating cost alone (fuel, crew, landing fees, bags of pretzels and maintenance per flight hour) may amount to $300 or more per seat. Yet most of us can "buy" one of those seats on a round-trip, advance-purchase basis for fares as low as $165 each way.