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The holiday season is fast approaching and that means I’m about to be subjected to ritual misery. Namely, going home to see my family for the holidays.
Okay, that’s a bit misleading. My family is far from misery, that part’s always a blast. Roast beef dinner, It’s a Wonderful Life, Michigan beer, getting to tool around my old haunts, I’m one of a seemingly dying breed that continues to dearly love visiting home every year.
No, the miserable part will be the flight.
At 6’3”, I’m of the class of people for whom a government subsidized ticket to fly coach wouldn’t be constitutional, as cramming my long legs into what airlines call a seat these days for the duration of an (almost) cross-country flight may qualify as cruel and unusual punishment. Alas, as the tickets are not being funded by any branch of the government (it’s like they’re not even reading my letters), this is just a really awful 4-6 hours I get to sit through – by my own volition, no less.
As I dread another holiday travel season, I find myself asking: WHY is flying so awful? How much more money will Delta (DAL) or United (UAL) or America ($AAL) be making off my ticket by cramming in that extra row so that the allotted space between seats is actually less than the length of my femur?
So, I thought I might try and dig into the economics of some of the more controversial airline practices and see if we can figure out why it seems like these businesses hate their customers.
Greater Competition Has Brought Prices Down to Earth
I had always thought of airlines as being one example of how privatization isn’t always the best solution. Since the federal government pulled out its pricing controls in 1978, airlines have consistently offered a really, really awful product that everyone complains about constantly and that never seems to be all that profitable.
Well, I was dead wrong. See, while the quality of the product has plummeted, its cost has fallen even further. In short, this may actually be one of the best examples of privatization working brilliantly that you can find. Competition skyrocketed, costs plummeted, and airline travel became an economic possibility for a vast new class of people. This is one case where our free market benefitted the consumer tremendously while the big businesses out there have suffered.
However, one offshoot of shrinking margins and profits has been that airlines are scrambling to make ends meet. So, as awful as the act of flying is, the fact that it’s even remotely affordable to fly 2,000 miles home every year is part of why. As hard as I am on airlines, the service wouldn’t have even been something I could consider until after 1978.
All told, airlines have a profit margin of about 1% across the board, meaning they have to spend $10,000 to make $100. That’s the sort of situation that makes any consumer watchdog jump for joy and any airline CEO or shareholder hit the scotch pretty hard.
Packing Us Onto the Airplane Like So Many Sardines
I suppose it’s possible that this particular practice is less of a concern for the shorter folk out there, but it’s by far the most prominent part of my flying experience, so we’ll start there.
Thing is, airlines have very high fixed costs. That means that just getting the flight off the ground, regardless of how many people are on it, is pretty expensive. Fuel costs vary widely over time (as we've seen in recent years), so the extra weight of another row of passengers, their seats, and their bags, is going to cost a bit more during periods when oil is expensive and represent a less significant boost during low-oil periods, but it’s a pretty marginal amount regardless of oil prices when compared to the fixed costs of buying and maintaining airplanes, renting space in airports, and everything else.
What does that mean? It means that every single extra seat leads to a huge bump in profits. In the Wall Street Journal article linked to above, the numbers on margins indicate that every seat but one is sold just to cover the airline’s costs. But what if you can add seven more seats? Suddenly, you’ve hypothetically octupled your profits while only marginally increasing fuel and maintenance costs.
That’s why it’s estimated that one extra row squeezed onto an airplane can mean as much as $200 million in revenue over the course of the year for an airline. So, while it may make everything about the flying experience utterly and completely agonizing for me, it’s hard not understand why it’s happening for an industry operating on such tight margins.
Selling More Tickets Than They Have Seats
This is one practice that people in other industries have got to think would be pretty sweet. I’m sure concert promoters and professional sports franchises think to themselves, “Boy, if only I could sell 5,000 extra tickets and then issue vouchers for those people who can’t get in.” I’m pretty sure that would be illegal, and I’ve never completely understood why it isn’t for airlines.
However, the raw economics of the profit margins for airlines should make it pretty clear that squeezing every last possible ticket out of every last flight is an utter and absolute imperative. If your average flight only represents one seat worth of profit, selling additional seats wherever possible becomes more obvious. And that’s why overbooking, while utterly absurd on its surface, may also be unavoidable.
That gets even clearer when you consider the massive differences between the costs of seats. Airlines need to make dead sure they’re selling out their flights, so they offer a variety of deals for the savvy shopper. However, they also need to make sure that anyone willing to plop down huge money for a pricey walk-up ticket or late purchase won’t be dissuaded from doing so.
One need only look at CheapAir.com’s graph of flight costs based on how long before the departure you book to see how the cost of a ticket shoots up exponentially the closer you get to the departure date.
Right, Charge for Checked Bags and Then Act Shocked When the Overhead Bins are Overfilled
So, the fixed costs of flights make overbooking and cramming in as many seats as possible hard to avoid, since the cost of getting the flight in the air in the first place is pretty high. However, the variable costs are also pretty staggering. Airlines are subject to a lot of moving pieces that can whack them right in the gross profits without warning. And none of these are bigger than fuel costs.
If you’re like me, you can remember a time when gas was under $0.90 a gallon. You can then also remember a time when flying every which way across the country wasn’t totally cost-prohibitive. These two things are directly related. More than one-third of your ticket price went to fuel alone when oil was at $100 a barrel, up from closer to 15% of costs in 2001. Today, that's come back down considerably, but it's clear that that's far from a permanent shift.
Why does that affect bag fees? Well, conservation of energy dictates that moving heavier airplanes takes more energy and therefore more fuel. So your bags are an important consideration.
Travel blogger Max Wenneker did a great job crunching the numbers and coming to a cost of $0.59 per pound for a round-trip flight from New York to Phoenix based on spring 2013 fuel costs. Project that further and you get a cost of $0.014 per pound per 100 miles. That figure is, of course, entirely reliant on fuel costs, but it starts to make a bit more sense. So, at $0.59 per pound, your 40 lbs bag is going to cost an additional $22.60 in fuel costs alone when oil is expensive. That’s not factoring in the cost of organization and infrastructure necessary for getting your bag from point A to point B and not, say, Wichita by accident.
Sure, at the moment oil is trading at about half what it was back in 2013, but the airlines are whipsawed by volatility in those markets in a way that prevents them from being able to capitalize on lower oil prices. For starters, the airlines can't necessarily drop prices whenever oil goes down because they don't want prices to be volatile for consumers. They'll take a hit on margins when oil costs a lot because they can only boost prices so far before they start losing customers. What's more, they have to invest heavily in futures markets to protect themselves from volatility in the commodities markets, something that also eats into margins. So, if low oil prices persist for long enough, you might see changes, but with the possibility that they could swing back to $100 a barrel within a year or two, it's hard to see much room for prices to get significantly reduced.
So What About the Perks?
Airlines do a number of other things as well, even if these little extras seem to be chintzier every year. Even so, the cost of each is carefully folded into the costs of flying.
“How much cheaper would my ticket be if there weren’t free drinks?” Good question, those free pops and coffees only represent 2% of the cost of your ticket.
“What about first class?” Also a good question. Given the hard economic realities that tie profit margins to the number of seats on a plane, it seems like the cushy first class seats with oodles of extra room would be the first thing to go. Wrong. First class seats tend to produce 10-15% of ticket revenues while only representing about 1-3% of the seats. Those are staying.
“Can’t the Flight Attendants be Nicer?” Well, you may be getting closer there, but labor costs represent about 20% of the cost of your ticket, the next biggest cost after fuel. So spending a bit extra to really weed out anyone who you think it being rude is likely to affect the bottom line for these companies. And those labor costs are probably getting driven up more in other places. Pilots, for instance, are paid well. As they should be. I, for one, am in favor of not cutting corners on pilot salaries because, well, I like the idea of the person flying my place being is a really good place, financially and emotionally. This logic can just as easily be extended to mechanics.
Cutting the salaries of the executives who keep digging up new and diabolical ways to reduce the already nonexistent space available for my poor legs? That I could get on board with…
This article was originally published on Dec. 12, 2014.
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