Higher fuel prices are motivating the airline industry to change the way it does business. Over the past several months, airlines have revamped their pricing structure. Now you buy a basic ticket and then pay separately for services—from schedule changes to the privilege of checking your bag.
In the future, “Airlines will not sell tickets anymore,” says Evergreen, Co.-based aviation consultant Mike Boyd. “They will sell a down payment.” In other words, airlines will offer a basic fare and a menu of add-ons.
“You will go to a Web site, and it will say, ‘Tell us where you want to fly from and to,’” says Henry Harteveldt of Forrester Research in San Francisco. “Then it will ask, ‘Would you like frequent-flier miles? Meals? More legroom? How much baggage do you want to carry?’ It will be almost like going to get a tailor-made suit.”
Many changes are under way. Airlines are charging for once-free services, such as cashing in frequent-flier miles. Rates are climbing for tasks, such as modifying a nonrefundable ticket. And of course, fares are rising.
The main culprit, airlines say, are spiraling fuel costs. Airlines spend as much as 50 percent of their operating costs on fuel. Air Transportation Association, the airline industry’s principal trade group, says the industry will pay about $60 billion for fuel this year, up $20 billion from 2007.
When oil costs $130 a barrel, as it did earlier this year, says Alaska Airlines CEO Bill Ayer, the fuel cost for a flight between Seattle and Los Angeles is $66 to $69 per passenger, depending on the aircraft type. Add an estimated $100 for nonfuel costs, and analysts say that for an airline to make money, its average revenue per seat in the Seattle-Los Angeles market must be around $175, not the $79 some carriers were charging earlier this year.
This is not curtains for the airline industry, a cyclical business with a history of crises. People will always need to fly. In 2007, about 770 million people—two and a half times the population—flew on U.S. commercial airlines. However, high fuel costs are leading to major changes in the airline industry. And you can expect many of these changes to become permanent.
EXTRA BAGGAGE. Today, about 28 percent of airline tickets are purchased through airline Web sites, according to Forrester Research. Another 4 percent to 5 percent are bought through online travel sites. The figure is higher at low-cost airlines: Southwest sells 80 percent of its tickets online. Internet travel sites typically list the cheapest fares first. “People sort by price,” says Travis Christ, formerly of US Airways, who has left the airline industry. “That is the way it is.”
Unfortunately, you don’t always see the ancillary fees—à la carte pricing—an airline strategy for squeezing extra cash out of you while appearing to keep fares low.
Perhaps the most obvious fee is for checked bags. In February, as oil prices soared, most carriers imposed a $25 fee for a second checked bag per passenger. The fee since has risen to $50 on some carriers. They also began to charge $75 to $250 for oversize bags and third bags. The weight standard for many carriers dropped to 50 pounds per bag on all flights.
But when several carriers decided in the summer to charge $15 for a first checked bag, it touched a nerve. Airlines estimate that although fewer than 20 percent of their passengers check two bags, around 50 percent check a single bag. The fee does not apply to passengers who pay premium fares or have premium-level frequent-flier cards.
“The second-bag fee, you could justify, because the vast majority of people can pack everything in one checked bag,” says Joe Brancatelli, editor of the business-travel Web site Joesentme.com. But he questioned the viability of the first-bag fee.
For one thing, the fee likely leads some passengers to stuff more bags into already-crowded overhead bins. This creates delays, because crews must transfer the bags to cargo holds. As the plane sits, airlines still pay for crew, fuel and lease costs. If passengers miss connections, they must be re-accommodated. This eats up agents’ time, and sometimes involves moving other passengers and making arrangements with hotels or other carriers.