Posted by Seth on April 14, 2011 under News | 
It seems lately that all the discussion fees and airlines involves how annoying they are and how there is no end in sight to what the airlines will think of to charge for. While that is mostly true, there is the occasional positive development on the fee front, where things get better rather than worse. Frontier Airlines announced this week that they are reducing a number of their fees.
Fees covering flight changes ($100->$50), checked baggage ($25->$20 if paid online) and name changes ($100->$50) will all be reduced under the new scheme. So will same-day flight changes at the airport ($50->$25, plus fare difference). And excess bag fees will be standardized across the carrier’s route network ($50).
Definitely still a lot of things customers will be paying fees on, even with the new rules, but in a business market that doesn’t seem keen to remove the fees any time soon, lower is a step in the right direction.
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Posted by Seth on April 7, 2011 under News |
Yesterday had a bit of a buzz on the internet regarding a piece about airfare pricing from Nate Silver that was published on his NY Times politics blog. The post, filled with mathematical analysis, attempts to use statistics to determine which airports have unfairly high fares relative to others providing comparable service. And I’m sure the math involved is accurate. I have no doubt that someone as statistically gifted as Silver got the regression analysis correct when he ran the numbers. But the findings are still miserably flawed.
Why? Because several of the assumptions made simply do not apply to air travel.
Silver acknowledges that most the other folks who have tackled this topic have made specific flaws in their assumptions. He aims to correct these but instead makes some tragic assumptions of his own.
Let’s take a look at the factors he considers:
The first factor is the distance traveled — we use the distance from the origin airport to the destination as though it were a nonstop flight, whether or not there was a layover along the way….
The first factor cited – distance traveled – is probably one of the last things that actually comes into play when airlines are figuring domestic market pricing. Should they? I can see that argument being made, but it ignores the general concept of market pricing and supply/demand dictating the going rate for a ticket. If the airlines wanted to price everything based on distance they could, but they’d be leaving a lot of money on the table for the shorter flights and they’d never sell the longer ones. Even just using the average costs to operate a flight as a price basis you’d be looking at $600+ on average for a round-trip transcontinental flight. They seem to sell a lot better in the $300 range, at least in major markets.
Silver chose to ignore whether there is a connection or not. While that is reasonable for calculating the distance traveled, it ignores perhaps the single greatest factor that drives travel bookings for business travelers, the folks paying the higher fares: schedule. When you’re a business traveler hopping between cities and trying to get to that next appointment on time and then home as quickly as possible you pay more for a non-stop flight. Should you? Maybe, maybe not. But you do. This pricing function is probably more directly traceable in cargo numbers and there is a ton of data available on that, including in Greg Lindsey’s Aerotropolis, a pretty good read. But the same concept absolutely applies to passenger travel as well. There is a very real value in speed out in the real world; there apparently isn’t one in Silver’s.
Silver found that Newark was about 25% more expensive than JFK based on his data. And there is no doubt that is the case on some routes. But when you also consider that Newark has quite a few more domestic destinations available as a non-stop flight than JFK does that price premium isn’t nearly as surprising. After all, folks pay for speed.
Certainly demand factors into the pricing as well:
Second is a variable representing the demand for travel at both the origin and destination airports. Demand is assumed to be a function of the number of origin-and-departure passengers that an airport handled (not counting passengers who passed through the airport on a layover), but with a modification for average ticket prices. In other words, if the average fare at an airport was high, the model assumed that more people would have wanted to fly there but were deterred by the cost, and if the average fare was low, that some passengers would not have flown if the fares had not been such a bargain.
Indeed, one can expect that fares to smaller destinations will be higher. And they generally are. But assuming that more people really want to be traveling to smaller cities but choose not to because the airfare is too high misses the point. They are smaller cities with lower demand for travel because they have fewer businesses, fewer residents traveling (or being visited) and generally less volume. They aren’t seeing lower air traffic because they are too expensive, they are seeing lower traffic because they are small. Lowering fares may translate to a small increase in volume but it most certainly is not a linear path.
Moreover, the ability for a new entrant to operate in a market requires a certain base level of demand. No matter how cheap the fares, you aren’t going to survive long as a startup carrier if your hubs are in Columbus, Ohio and Greensboro, North Carolina, for example; just ask SkyBus. This means major metropolitan areas see the up-starts, and those up-starts bring lower fares because that’s how they attract customers. Their fares go up over time – JetBlue and Southwest have proven this – but that’s where it begins. And that explains a lot of the pricing trends that are seen today.
Finally, Silver looks at the most important factor, competition:
The regression analysis also accounts for three other factors that have significant effects on pricing. These are, respectively, the market share at the origin and destination airports held collectively by the five “legacy carriers” (United, American, Delta, Continental and US Air); the market share held by Southwest Airlines; and the market share held by the largest single carrier at that airport (for instance, Delta and its affiliates are responsible for about 66 percent of all traffic at Atlanta).
…
Passengers at Newark paid an average of 12 percent more than those at J.F.K. for their trips to Los Angeles, 49 percent more for those to Chicago, 65 percent more to Dallas, and 118 percent more to Washington, D.C.
Given those numbers, it is probably useful to take a look at the competition in those markets. There is zero competition between Newark and Washington, DC. National airport is only served by Continental and Dulles is served only by Continental and merger partner United Airlines. Plus, those routes are not generally reasonable to fly with a connection. The travel time is so short that when you add the connection it is silly to fly when total travel time is important, as it often is. The Dallas route sees a bit of competition from American Airlines, as does the Chicago route. Los Angeles has a tiny bit of competition but it also has the advantage of being a long enough trip that making the schlep over to JFK to save some money on airfare doesn’t actually completely ruin the speed=value margins. Ditto for connecting flights that add a smaller percentage of time to the travel experience.
Somewhat ironically based on the first factor Silver names, longer distances traveled can actually drive down prices as the impact of connections or less desirable departure or arrival airports is decreased as the total travel time increases.
It is actually surprising that Silver didn’t note the disparity on pricing in the Newark/JFK – Boston market. For quite some time now Continental has held a monopoly on that route. Similar to the DC runs, it rarely makes sense to connect for such a short trip and Continental exploited that price disparity. Right up until JetBlue announced their entry into the market. The fares dropped quite quickly at that point. Hardly a surprise, really. Competition, not the airport, drove the pricing.
Here’s a much more simple way to figure out if an airport is expensive or not:
- Is it a mostly leisure destination? If the answer is yes then it is almost certainly not going to be as expensive on average. Atlantic City, Las Vegas, Ft. Lauderdale, Orlando and most the rest of Florida all come to mind, and not surprisingly they’re all on Silver’s list of good value airports.
- Is it dominated (60%+) by a single carrier?
- If that carrier is United, Continental, US Airways, Delta, American or Southwest then odds are it will be a more expensive airport.
- If that carrier is AirTran, Spirit Air, JetBlue or Allegiant (and, to a lesser extent, Frontier) then odds are it will be a less expensive airport.
- Is it a particularly large metropolitan area? If not, fares are going to be higher because demand is lower.
Three easy questions that don’t take statistical regression or misguided assumptions. Silver actually gets some of these, particularly regarding the competition factor. But he also has a couple huge misses, especially around distance traveled and the price/demand curve.
It would also be interesting to compare the actual costs of travel versus just the base fare data. Spirit has a pretty incredible ancillary revenues per passenger – to the tune of an extra $35/head on average – so those "cheap" airports can come with significant surprises once the customer gets to the airport. Indeed, the airlines are quite keen to sell these ancillary bits to their customers and many are now stating explicitly that these fees are where their profits are. The airlines even want to control the way those fees are marketed to the customer by cutting the GDSes out of the pricing loop. Not a good deal for consumers.
Oh, and the suggestion he links to about searching for the best airfares on weekends is horribly wrong, too. Tuesday or Wednesday mid-afternoon is the time you’re most likely to find deals. On the weekends the airlines are raising fares and limiting the cheaper inventory in an effort to cash in on folks shopping for their vacations while their home with their family.
Silver should stick to baseball and politics, two things that he appears to understand a lot better than air travel.
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Tags: AirTran, American Airlines, Atlanta, Boston, Chicago, Continental, Delta, fees, Florida, Flying, Frontier, JetBlue, Las Vegas, Los Angeles, Southwest Airline, Spirit Air, United, Washington DC
Posted by Seth on May 14, 2010 under frequent flyer, News, points |
AirTran is no stranger to poking fun at other airlines and doing what they can to poach frequent flyers from those carriers. They basically have no shame in that regard. And why should they? Marketing is all about going after the customers, right? Being able to do so with a sense of humor is an added bonus. In the case of their latest promotion, they’re going after the Midwest/Frontier combination in Milwaukee, and once again they’re being creative about it.
For starters, they are offering a status match to anyone who holds Midwest Miles Aspire or Executive status. Those customers can become AirTran A+ Elite simply by submitting a request. Considering the reciprocity between the AirTran and Frontier programs that is now coming to an end this makes sense as an effort to hold on to those customers.
And then there is the creative part. AirTran is also offering Midwest Miles members the opportunity to earn AirTran A+ credits simply by redeeming their Midwest miles. Yes, there are some restrictions. Midwest Miles members must redeem their miles for a charity donation through the Midwest program. Credit in the A+ program will only be earned at the 50,000 and 100,000 levels of donations/redemptions. But if someone chooses to redeem their miles that way they essentially can convert the reward miles from one program to the other – causing a donation to be made in the process – and the devaluation of the points isn’t all that horrible.
Like I said, quite a creative way to gain customers. And now that the new Midwest/Frontier is no longer Milwaukee’s hometown airline there is decent motivation for those customers to go looking.
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Posted by Seth on October 1, 2008 under Uncategorized |
Southwest has announced plans to start service to Minneapolis – St. Paul International Airport (MSP) in March ‘09. The only route that has been announced so far is to Chicago Midway, but this is clearly an attack on Northwest and a pretty big bet on Delta scaling back MSP service in the coming months after the Delta/Northwest merger closes.
Considering the success Southwest has had in Denver going after United and Frontier, I am going to bet on them succeeding rather well on this bet. The biggest risk they face is Northwest/Delta getting into a pricing war and trying to undercut the fares and beat them out of the market. Prior to the merger Northwest would have never let it happen without a serious fight. But with Delta taking over this will just be a good excuse to show “lower demand for flights” and make “appropriate adjustments in the service frequencies” in Minneapolis.
This will be great for passengers there as long as Southwest ramps up service commensurate with demand, which I think they will do. They certainly have the fleet and route network available to do so.
Posted by Seth on June 4, 2008 under News |
United Airlines is planning severe cuts to their fleet, their route capacity and their staff, according to sources; the formal announcement could come as soon as today.
Most domestic US airlines are planning some sort of capacity reduction these days; AA announced similar 10-20% reductions in capacity and an evisceration of their San Juan hub. Still, United’s plan looks to ground 94 of the 460 planes the company operates (all the 737-300 and 737-500s) and also reduce their 747 fleet. These cuts are expected to take place over the next 12-18 months, but things are looking pretty grim.
As part of the cuts, United will be (finally) retiring their Ted product. Initially crafted as a low-cost carrier within a carrier, the concept of all-coach seating and reduced meal service never was really able to reduce costs sufficiently to compete with other LCCs in the market. And it turned off a lot of business travelers since their upgrades went away. Those planes are now expected to be refit with F cabins and the Ted brand retired.
The biggest loser in this whole deal may be the company’s Denver hub. With SouthWest nipping at the edges and pushing Frontier – another Denver-based carrier to the edge – United may suffer a similar fate at that airport. I hope the flights don’t disappear from DEN too quickly; I have EWR-DEN-HNL booked for this fall and I want to cross Denver off on my airports list, but I’ll definitely be keeping an eye on that one.
This is also pretty much an admission of defeat for the United CEO, Glenn Tilton. He was brought in during the bankruptcy to help form the company into an attractive merger target. Continental walked away earlier in the year, and even US Airways, generally considered to be the red-headed step child in the US aviation market, couldn’t come up with an agreement to merge with United. So Tilton failed at his job and is now actually being put in a position where he has to run the company rather than apply lipstick onto his pretty pig.
Posted by Seth on April 11, 2008 under Uncategorized |
Yet another airline struggling with cash-flow issues, Frontier Airlines, based in Denver, has filed for Chapter 11 bankruptcy protection this week. Unlike the last few, Frontier plans to continue operations for the immediate future, so things aren’t all bad, but it is still a bad sign for the company’s shareholders and somewhat worrisome for passengers.
Frontier used to be profitable and is pretty well established, unlike ATA and SkyBus. Plus, the reason they cited for the filing is an interesting one. It isn’t that their expenses have spiraled out of control or other similar issues. The problem is from one of the credit card merchants. Every time an airline shuts down you hear everyone say to just go to the CC company and get the charge refunded. The reason that works is that the CC companies basically hold a sizable amount of the payments due to the airline in escrow; they don’t actually pay the airline all the money. So if the airline shuts down then the CC company has the money still and can pay the consumers back, without it hurting the CC company’s bottom line. In the case of Frontier, apparently one of the CC companies is getting a bit nervous and had asked to increase the amount held in escrow, effectively hedging their bets on Frontier ceasing operations. And that triggered the bankruptcy filing. And the filing will trigger concern from many passengers about the stability of the carrier and slow down bookings. Fewer bookings will result in less revenue and profit, and that has the potential to actually put the carrier out of business. In other words, the CC company must be right, because their actions will actually cause the effect that they were trying to act to protect themselves from. Sure, that is a bit of an over-simplification, but it is similar to runs on banks back in the Depression of the ’30s, where banks were put out of business because of rumors that they might go out of business. Watch Sneakers (a fun movie in its own right) for an entertaining conversation about the effect if you want more.
Anyways, this is certainly worrisome for a number of people, and time will tell how it plays out. I sure hope they keep operating, but competing against SouthWest and one of United’s hubs can’t be easy.
