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.
True, the poor business traveler racing in at the last minute may pay $1,250 coach for the same flight one way, thus financing the difference for up to 10 passengers paying below cost. And it's true that if the airline guesses right and there are enough such full-fare passengers versus low-fare fliers -- and they overbook by about as many high-fare passengers as fail to show up -- they may actually turn a profit. But it's a gamble, and lately it hasn't been paying off.
Figuring out how many seats will be sold at the last minute versus how many seats can safely be sold below cost (and at every price in between) is a black art widely called "yield management" and pioneered by American Airlines in the late 1980s. It's practiced with increasingly complex computer programs and minute-to-minute pricing decisions, and while it usually works on individual flights, as a system in a downturn market it has too often left airlines with full seats and too few profitable flights.
Under airline deregulation passed way back in 1978, it is perfectly legal for airlines to give away their product until they have to either file for bankruptcy or shut the doors. But since the airline industry is an extremely vital part of our lives and economy (read: public utility), there are those, including myself, who wonder if providing airlines the freedom to price below cost in the first place isn't as foolish as giving an unlimited credit card to a child.
It's very likely that future airline bankruptcies, mergers and shutdowns will force us as consumers to be willing to pay at least the minimum cost for the safe and reliable airline seat we rely on.
This work is the opinion of the columnist and in no way reflects the opinion of ABC News.
John J. Nance, ABC News' aviation analyst, is a veteran 13,000-flight-hour airline captain, a former U.S. Air Force pilot and a lieutenant colonel in the Air Force Reserves. He is also a New York Times best-selling author of 17 books, a licensed attorney, a professional speaker, and a founding board member of the National Patient Safety Foundation. A native Texan, he now lives in Tacoma, Wash.