Thursday, October 06, 2011

Even with Fees, The Miracle of Flight Still a Bargain

WALL STREET JOURNAL -- "Structurally, the airline business is capital-intensive, labor-intensive, highly leveraged and fiercely competitive. It is also vulnerable to external shocks, including terrorism, oil-price spikes, waning consumer confidence and high taxes. Even though the industry generates billions of dollars in annual revenue, it rarely is able to cover its huge expenses, much less show a decent return on invested capital. 

Passengers love to accuse the airlines of gouging, and a dizzying array of fares adds to the outrage. A new raft of fees for better seats, expedited security lines and meals on board only makes passengers angrier. But airlines, caught between a steady decline in fares and rising costs, have no choice but to look for every nickel they can find. Passenger tickets now account for just 71% of U.S. airlines' total passenger revenue, down from 88% in 1990, according to the DOT. The rest comes from fees it charges for, among other things, reservation changes, standby service, checked luggage, in-flight food service and transporting pets."

MP: The chart above shows average annual U.S. airfares for domestic travel back to 1979 (data here), both with fees (blue line) and without fees (red line).  Even with fees that averaged $21.66 last year for baggage ($13.78) and reservation charges ($7.88), the average total fare of $337.97 in 2010 was 43% below the 1980 peak of $592.55, and 16% below the $401.27 average fare in 2000.  Without fees, the average fare of $292.25 in 2009 was the lowest average annual airfare in history. In 2010, the average airfare without fees of $316.31 was below the 2008 average of $323.32 and about the same as the average in the years from 2004-2007, so inflation-adjusted airfares have been basically flat for the last 7 years or so.

As much as consumers complain about rising fees for baggage and other services, the "miracle of flight" is still close to the lowest cost in history, and travelers today are getting a great bargain, especially when compared to the fares of the 1980s and 1990s.  Considering that the average flier today is saving about $200 per flight compared to the average cost during the 1980s, those average baggage fees of $14 don't seem so bad.

Update: As Jet Beagle pointed out in the comments, the average miles flown per round-trip journey has increased by more than 20% over the last 30 years (data here), from 1,947 miles in 1980 to an all-time high of 2,345 miles in 2010. Therefore, the cost-per-mile traveled has gone down even more than the 43% reduction in the average air fare since 1980.   The chart below shows the downward trend in real cost per mile traveled, and compared to 1980 ($0.2878 per mile), the cost in 2010 was 50% cheaper ($0.1441 per mile).



29 Comments:

At 10/06/2011 8:19 AM, OpenID American Delight said...

It's true! But we like to bitch, moan, & complain. If we're not complaining about the cost & inconveniences of flight, we're complaining about the cost for a gallon of gas to drive somewhere.

 
At 10/06/2011 8:24 AM, Blogger W.C. Varones said...

Prices are great.

It's the TSA goons that keep me from flying. I won't be nudie-scanned or groped in violation of the 4th Amendment.

 
At 10/06/2011 8:40 AM, Blogger morganovich said...

on the other hand, they have now been trending up for 6 years and you get a great deal less than you used to.

seats are smaller. coach rarely gets a meal. time to get through an airport (and thus total travel time) is way up. (through no fault of the airlines, but it does degrade the service)

it's also interesting to note that the huge drops in price in the 80's and 2000's coincided with a large number of airline bankruptcies.

the causality is arguable in 2000, but the big BK's in the 80's that let the airlines restructure union contracts were a huge driver of price declines in the 80's.

i also wonder to what extent this is affected by the spread of shorter routes.

you'd really need to adjust this for flight distance. if the % of short "commuter" flights like san fran LA has gone up (and it has) that would drive this number down considerably.

 
At 10/06/2011 9:11 AM, Blogger Jet Beagle said...

morganovich,

You are correct that airlines have added many short-haul flights since 1976. But my industry has added even more capacity on the longer U.S. flights. Furthermore, most of the passengers on those short-haul trips are connecting with other longer fligts, and their round-trip miles are much greater.

The data Mark provided shows that the average round trip miles has increased from 1,947 to 2,345 over the 31 years covered by this analysis. So the cost per mile traveled has gone down even more than the 43% reduction in round trip fare.

 
At 10/06/2011 9:31 AM, Blogger Jet Beagle said...

Although airline bankruptcies - and shedding of legacy pension costs - have allowed some of the reduction in airfares, that's really a small part of the story. Operating efficiencies are the much bigger contributor. Aircraft today are extremely fuel efficient relative to the fuel guzzlers of 30 and 40 years ago. Avionics advances eliminated the need for a third cockpit crew member. Southwest and others demonstrated the efficiency inherent in keeping aircraft and crews in the air more hours per day. Sophisticated forecasting and scheduling software enabled all carriers to more closely match capacity to demand. I've been a part of these changes for 25 years, but I still remain amazed at how much we've improved.

 
At 10/06/2011 9:47 AM, Blogger morganovich said...

jet-

thanks. i had missed that.

interesting to see how bag fees have spiked.

i suspect that has everything to do with seeking to be first on travelocity.

i suspect fares trend up from here. they have squeezed out about all the things they can.

(food, free movies, etc)

there seem to be lots of places they can increase revenues (wifi, entertainment etc) and that may help.

i have long thought that international flights should run in flight casinos one they get outside the 3 mile line.

 
At 10/06/2011 9:54 AM, Blogger Jet Beagle said...

morganovich: "interesting to see how bag fees have spiked."

I believe there is a strong correlation between bag fees and size of carry-on bags. Not at Southwest, of course.

morganovich: "i suspect that has everything to do with seeking to be first on travelocity."

I think you are correct.

morganovich: "I have long thought that international flights should run in flight casinos one they get outside the 3 mile line."

That would be fun!

 
At 10/06/2011 10:09 AM, Blogger Jet Beagle said...

morganovich: "they have squeezed out about all the things they can."

You may be right, but I hope not. My job is to squeeze operating costs. I foresee no giant opportunities, but thousands of tiny ones.

Consider weight reduction savings. A 40 pound reduction in weight per aircraft, for example, can save a large airline $1 million a year in fuel costs. The empty weight of a B757 is about 140,000 pounds, so opportunities exist.

 
At 10/06/2011 10:15 AM, Blogger morganovich said...

jet-

no question that operating efficiencies have gone way up.

however, that does degrade the passenger experience a bit, no?

gone are they days of finding 3 seats and stretching out. every seat is full and so is every overhead bin.

standby is much more difficult in my experience as well and overbooked flights seem more frequent (but there may be some selection bias in my impressions).

 
At 10/06/2011 10:20 AM, Blogger morganovich said...

mark/jet-

is there any way to parse this data for first class?

i'm just wondering if it might look different as the amenities and seat sizes have remained more constant.

has there been a drop in the % of 1st and biz class seats? it seems like a lot of planes no longer have business cabins at all and have expanded coach, and airlines like southwest do not have them at all.

a shift in class share toward coach would depress average ticket prices.

just wondering if and to what extent that might be a factor.

 
At 10/06/2011 10:36 AM, Blogger Jet Beagle said...

morganovich: "however, that does degrade the passenger experience a bit, no?"

Those operating efficiencies which increase load factor have probably degraded the passenger experience. We can compensate for some factors - larger overhead bins, for example - but not for others.

Most operating efficiencies did not impact passenger experiences. A few examples:

eliminating the navigator;

reducing the weight of the fuselage;

increasing engine efficiency;

reducing hub layover times through scheduling;

installing check-in kiosks;

improving aircraft reliability (maintenance delays are way, way down).

Operating efficiencies are very gradual but continuous improvements. Passengers do not notice most of them, and that's what we strive for.

Almost all of the negative changes about passenger experience were the result of experiments to determine what passengers wanted most. For example, American Airlines thought that passengers would pay more for a couple of inches additional leg room. They spent many millions reconfiguring aircraft. They were proven wrong, and spent millions undoing the changes.

We have a long way to go, morganovich. I admit that. But we have some very bright people working on the problems. (Not going to revert to empty seats, though. Our customers want lower prices more than stretch out room.)

 
At 10/06/2011 11:32 AM, Blogger morganovich said...

jet-

agreed on many of those efficiencies, but there is always going to be a trade off between load factors and customer experience.

going from 70% to 99% makes a cabin a very different experience and makes standby/same day change flight very different as well.

it's not a criticism, just an observation.

high load factors mean lower prices and and a more cramped in flight experience (especially with smaller seats/less leg room).

have first class prices trended down as much? i would guess not as the level of service has not declined in the same way, but i have no data on it.

 
At 10/06/2011 1:00 PM, Blogger Jet Beagle said...

morganovich: "high load factors mean lower prices and and a more cramped in flight experience"

The only response I can offer is that consumers have made their preferences very clear, and the industry has responded.

 
At 10/06/2011 1:57 PM, Blogger Mike said...

Just a thought, but I think the fees that airlines charge for things such as baggage actually save us money.
Factor baggage into the cost of the flight (weight, handling, etc) and the person with baggage obviously costs the airline more than the guy with no bag. If they just averaged the costs into the ticket price, that would be fine, but the ticket price comes with so many taxes, you can pay almost 30% more than the actual price. The bag fees aren't taxed like that.

 
At 10/06/2011 2:23 PM, Blogger morganovich said...

"The only response I can offer is that consumers have made their preferences very clear, and the industry has responded."

agreed. no question about it.

the consumer also buys far more honda accords than 911 turbos. the preference is very clear, just as more people buy men's warehouse suits than brioni.

this does not mean that going from a porsche to an accord is not a downgrade.

those assessing inflation seem to obsessively try to back out improvements in quality and try to call it lower inflation, but they never seem to look at the products whose quality drops, like an airline seat, and take into account that it is now smaller in a more crowded cabin with no meal.

that certainly seems to be what is in demand, but there is still a quality impact.

 
At 10/06/2011 2:43 PM, Blogger Benjamin said...

See that chart on costs? Inflation anyone?

And the new jetliners will use even less fuel.

 
At 10/06/2011 3:02 PM, Blogger Mike said...

Benjamin,

Are you saying that, even if all of my core costs are up.... as long as I eliminate services, squeeze in more customers, eliminate more than a 1/3 of my employee costs and improve efficiency through technology to make my end-price-tag cheaper, there is no inflation?

 
At 10/06/2011 3:49 PM, Blogger Jet Beagle said...

morganovich: "those assessing inflation seem to obsessively try to back out improvements in quality and try to call it lower inflation, but they never seem to look at the products whose quality drops, like an airline seat, and take into account that it is now smaller in a more crowded cabin with no meal."

OK. I understand your point.

My industry has also made some quality improvements over that time as well. A few to consider:

1. online reservations and access to flight schedules;

2. inflight WiFi access;

3. onboard defibrillators and employees trained to use them;

4. much improved overall safety record, if we exclude the 9/11 acts of terrorism;

5. smoke-free cabins.

IMO, the difference between then and now is not the difference between a Honda Accord and 911 Turbo. It's more a difference between a 2011 Accord sedan and a 1976 Buick Estate station wagon (largest station wagons ever made). A few features are gone, many more have been added. And the price has dropped 43%.

Of course, you may value empty seats and airline meals much higher than our typical customers value the features I listed above.

 
At 10/06/2011 3:54 PM, Blogger Jet Beagle said...

Mike: "even if all of my core costs are up.."

Are you referring to the airline industry? In real dollars, all core costs are not up since 1976.

 
At 10/06/2011 3:58 PM, Blogger Jet Beagle said...

Mike: "eliminate more than a 1/3 of my employee costs and improve efficiency through technology"

That is how airlines - and other industries - have reduced most of their core costs. And, yes, productivity increases and technology are the keys to holding the line on inflation for airlines - and for other industries as well.

 
At 10/06/2011 4:10 PM, Blogger Mike said...

Jet,
My point (while the numbers may not be 100% accurate) was to Benjamin, who believes that there is, and has been, no inflation occurring.
The point I was making is that if food and fuel costs go up, and an industry that relies on both makes other changes to offset those costs, your price may be better in some sectors, but that doesn't mean that inflation isn't occurring.

Since you seem to be the aviation expert, I'd like your take on my post (7 posts above this) about the bag fees.

 
At 10/06/2011 4:50 PM, Blogger Henry H said...

This comment has been removed by the author.

 
At 10/06/2011 4:51 PM, Blogger Henry H said...

Jet,

You mentioned seeing only small opportunities and no giant ones.

What about the efficiency gained from replacing the new lightweight carbon fiber planes replacing aluminum based planes, Boeing 787 Dreamliner and Airbus A350? Is the fuel savings from these new planes too small to make a large impact on operating efficiency for the next 10-15 years?

Thank you for any insight.

 
At 10/06/2011 4:55 PM, Blogger Jet Beagle said...

Mike: "the person with baggage obviously costs the airline more than the guy with no bag. ... the ticket price comes with so many taxes, you can pay almost 30% more than the actual price. The bag fees aren't taxed like that."

Good point about the lower costs for the customers with no bags. I suppose it's fair that customers only pay for what they use. If they do not use fuel for transporting bags, then perhaps they shouldn't have to pay for that fuel.

What I have observed is that people are cramming much more stuff into carryon bags. So the airline is still paying for the fuel, but the customer is not being charged for it. Also, the overfilled overhead bins cause delays in getting passengers boarded.

Your point about the air travel excise taxes has not been missed by the government. The GAO estimated that the federal government would receive about $200 million more in funding for the Airport and Airways Trust Fund if fees were bundled with fares.

 
At 10/06/2011 5:05 PM, Blogger Jet Beagle said...

Henry H: "Is the fuel savings from these new planes too small to make a large impact on operating efficiency for the next 10-15 years?"

No, that is huge opportunity if their projections of 20% fuel burn are accurate. It could eventually total a half billion dollars or more annually for each of the largest carriers. Of course, some of that savings will be offset by the depreciation expense due to the higher aircraft price.

I've not read an actual analysis of total savings for these aircraft, so I'm really just estimating based on public documents.

 
At 10/06/2011 5:08 PM, Blogger Jet Beagle said...

My last comment should have been:

if their projections of 20% fuel burn savings are accurate

 
At 10/06/2011 5:26 PM, Blogger sethstorm said...

For the level of service, no. Then again, if I can't buy an upgrade on the flight, I usually make it up on the ground transportation at the destination.



has there been a drop in the % of 1st and biz class seats? it seems like a lot of planes no longer have business cabins at all and have expanded coach, and airlines like southwest do not have them at all.

The problem with Southwest is that you're more or less gambling on where you're sitting, versus having a reserved seat. They don't have fees for bags or first-class section seating, just line-jumping fees.


It's more a difference between a 2011 Accord sedan and a 1976 Buick Estate station wagon (largest station wagons ever made). A few features are gone, many more have been added. And the price has dropped 43%.

Except that as far as the planes go, you're more likely to be in a Buick with a modern-day crate engine than an entirely new car.

 
At 10/09/2011 2:25 PM, Blogger Mike Smith said...

I believe the reason the average length of a flight has increased is because more and more people -- me included -- are driving to cities to which we used to fly. I live in Wichita. Used to always fly to Dallas, St. Louis, and Des Moines. Now, I always drive.

The hassles of the TSA and the horrible customer service of the airlines are responsible.

 
At 10/09/2011 5:20 PM, Blogger A. C. Mann said...

Trust me. You want airlines to make a profit. When I began airline flying in the early 90's, training for a new airplane was over a month. Recurrent training (yearly) was 6 days. Now if you change planes training may last 3 weeks and recurrent training is 3 days. The majority of the cutbacks have come after the bankruptcies. It's still the safest form of transportation, but the question is for how long?

 

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