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US airfares a bargain? Fares are down but total expense is up

9-Feb-2011

The US Bureau of Transportation Statistics has released Q3 2010 data on average airfares on domestic segments. In the release, there was an interesting 15-year chronicle of the domestic industry’s history.

3rd Quarter Average Fares 1995-2010 Compared to Inflation Rate

 

Average Domestic 3Q Fares ($)

Percent change from previous year

Percent change from 1995

Average Fares (3Q to 3Q)

Inflation (Sep from previous Sep)*

Cumulative Average Fares (3Q 1995 to 3Q of each year)

Cumulative inflation rate (Sep of each year from Sep 1995)*

Average Fare in 1995 dollars

1995

288

       

288

1996

269

-6.3

3.0

-6.3

3.0

262

1997

282

4.7

2.2

-1.8

5.2

268

1998

315

11.7

1.5

9.6

6.8

295

1999

317

0.6

2.6

10.3

9.6

289

2000

337

6.1

3.5

17.1

13.4

297

2001

303

-10.0

2.6

5.4

16.4

260

2002

303

0.1

1.5

5.5

18.1

257

2003

312

3.0

2.3

8.7

20.9

258

2004

297

-5.1

2.5

3.1

24.0

239

2005

306

3.2

4.7

6.4

29.8

236

2006

330

7.9

2.1

14.8

32.4

249

2007

328

-0.8

2.8

13.9

36.1

241

2008

359

9.6

4.9

24.8

42.8

251

2009

307

-14.5

-1.3

6.8

41.0

218

2010

340

10.7

1.1

18.2

42.6

238

Still a bargain, sort of

The first, and most striking piece of information is in the last column: based on adjusted 1995 dollars, the average price of a ticket was $50 lower 15 years later in 2010. And that is a rebound from 2009 when the differential was $70.

The caveat, of course, is that the airfare in 2010 no longer reflects the cost of the journey. In 1995, food was provided on most flights and baggage was carried for free. There was no cost for consulting an agent, either by phone or in person, and many of the other 2010 fees were either lower or non-existent.

Consequently, a 2010 passenger traveling with 2 bags could easily pay a trip cost equal to the 1995 level. Nonetheless, with the exception of perhaps electronics, few goods can be purchased in 2010 for 1995 equivalent amounts.

Fares mirror economic realities

Throughout the period covered, the economic meltdown of 2008 took the greatest toll on revenue. Though usually cited as the industry’s bleakest period, the post 9/11 slump resulted in a smaller decline in fares than did the recent recession.

In both cases, the fare reductions propelled the airlines to either reduce costs and/or institute new revenue streams. Following 9/11, the legacy carriers began the cutbacks that still continue, with the first casualty being meal service. In the intervening decade, there have been staff reductions and a steady imposition of fees and charges that have raised, if not the fares, the overall cost of travel.

Filling the gap

Given the need to reduce fares to avoid a collapse of demand, fees have been aggressively increased in the past few years. Even with the massive capacity cuts that occurred in conjunction with the 2007 run-up in fuel prices, there still was a slight decline in fare collections.

There is little relationship between the year-on-year rate of inflation and the variance in airfares. While there was a slight deflation in 2009, it is a small fraction of the airfare decline seen in the same period. This reinforces the extreme vulnerability of air travel to economic conditions—and the need for airlines to make significant fare cuts in difficult times. Both for individuals and corporations, travel is a discretionary expense and airlines are able to hold on only by cutting prices.

The significant increase in the base fares seen in the past year is a reflection of both capacity control on the part of the domestic carriers as well as the influence of increasing prices for fuel which has forced across-the-board fare hikes.

A few final observations:

  • Domestic air travel in the US remains relatively inexpensive for most consumers although the “fare” cost is now a much less reliable index of actual trip cost.
  • The ways in which most domestic airlines have reacted; by cutting staff and services, reducing capacity and adding fees, have had, as has been repeatedly shown, adverse effects on customer satisfaction.
  • Due to the discretionary nature of travel, continued increases in fuel costs, coupled with ever-increasing fees, may once again result in a point of diminishing returns where customers begin to cut back when faced with increased travel costs.
  • Airlines continue to remain vulnerable to cost factors over which they have little control.

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