Analyst Breaks Down Airfares
MIKE PESCA, host:
When you go on vacation or a business trip, you have a few choices. What kind of hotel would you like to stay at? At the low end, there are a lot of fleabags. Upper level, there's the Motel 6 on through the Marriott, ending at the Ritz Carlton, featuring a choice of up to seven pillows, including amber waves of grain. You get to choose what kind of char - car you'd like to drive.
A Ford Probe is cheap and will get you there. A Chrysler Sebring will get you there in a bit more style. A Cadillac will announce that you've arrived. From the quality of the shirt you wear while you're traveling, to the amount of meal - the amount you spend on meals, there are all these offerings, at all these different price points, except for your flight.
There is first class, which is ridiculously expensive. Then, there is cattle class, which is ridiculously frustrating. We've seen so many stories about airlines nickel and diming customers, customers growing to hate the experience. We got to wondering why it has to be this way. Well, luckily, John Ash is here. He's the president of an aviation consulting company. Hello, John.
Mr. JOHN ASH (President, InterVistas-GA2): Good morning.
Mr. ASH: Yes.
PESCA: All right. What's that mean?
Mr. ASH: That's just the name of the company.
PESCA: OK. Cool. So, with all your expertise with an interestingly-named company, am I totally off base here? Can you explain why there are really just two ways for me to fly, and one's prohibitively expensive and the other one leads to so much frustration?
Mr. ASH: Well, you're only partially off base. There tend to be different product lines developing out there, and in fact, you do have a few more choices. The frustration level is certainly understandable. It's attributable to a lot of factors, but at the bottom line, you know, you can fly cattle car, you can fly business class, in some cases, or you can fly a premium-coach service, in some cases, or then you have a choice of first class. Alternatively, a number of businessmen are starting to opt for situations such as at NetJets, where they're taking private-jet services, and finding that that's more reliable, and in some cases, depending on the size of the group, reasonably economic.
PESCA: Right. So that's at the very high end, people who can afford that. But with my example, with all these different kind of hotels, it's not just the very rich that get to choose better than a Motel 6. It's kind of middle-class and upper-middle-class people making the choice, hey, for a couple hundred more dollars, I'll enjoy myself that much more on vacation. Do the airlines think people aren't willing to spend 100, 150 more dollars, to ease the checkout lines, to ease the restrictions on the amount of bags you can have?
Mr. ASH: Well, I mean, as you become a frequent flyer, and as you tend to pay, let's say, a little bit more, you do have some options, and one of which is you don't pay for the excess bags. Maybe you have access to the clubs to wait in while you're waiting for your flight to depart. So there are amenities, and the airlines are doing a lot of work to develop amenities, particularly for the high-end flyer. Now, for the guy who - the Motel 6 guy analogy...
Mr. ASH: There aren't a lot of options, but the fact is that the prices are incredibly low, given the value that that passenger pays. So, you - they're not going to get a lot of options.
PESCA: So, in other words, the guy who is just spending the lowest price they offer, they're making very little on that guy.
Mr. ASH: That's correct. And the businessman, even if he's in the same cabin, getting relatively the same amount of service, but flying, let's say, on a Tuesday coming back on a Wednesday, he may be paying two or three times the amount that's being paid by the guy who's taking his couple of kids and staying for a week.
PESCA: Yeah. So it doesn't make any sense for them to offer something in between? Like, not twice as much, but, you know, 30 percent more for some extra...
Mr. ASH: Well, I would - United Airlines, as an example, does have a - what they call Economy Plus, which has more leg room. So, in many cases with United, you do get three, let's say, configurations and price points on any given airplane. And in a number of cases in major, long-haul international services, you do still have three options, let's say, of service level on a single airplane.
PESCA: How many of United's flights offer that option?
Mr. ASH: Quite a few.
Mr. ASH: Quite a few have the Economy Plus.
PESCA: And how much more is it?
Mr. ASH: Well, you know, it may only be - again, it depends, because in terms of price points in the airline business, you may have 15 different price buckets on an - on a single airplane, so it could be in a range of 10 to 20 percent, maybe a little more.
PESCA: How about speedier check-ins via the TSA? Why isn't - aren't the airlines, knowing how frustrated this makes people, thinking of a way to make some money off of this, to get people through those check-ins a little faster? Private companies outside the airlines are thinking of this.
Mr. ASH: Well, the airlines are tending to work with TSA and with private companies, like, it's - I think it's called FlyClear...
Mr. ASH: Or ClearFly.
Mr. ASH: And again, as an example, a number of airports, in conjunction with airlines and TSA, have streamlined security lines for the frequent flyer.
Mr. ASH: So again, the per - the guy who is paying the premium will get into a line that is substantially shorter, moves a lot quicker, than the guy who's paying 99 dollars.
PESCA: But the airline - the airline industry itself opposes this, Steve Brill's idea, which is this FlyClear thing, where you pay 128 bucks a year, you - they have your information on file, and you zip through the lines. The industry itself is opposed to this. That doesn't make any sense to me.
Mr. ASH: Well, I mean, there are issues that the industry has with certain types of processing, but as a practical matter, the industry generally is very supportive of any vehicles that'll allow people to move through the security process more rapidly, because, as you pointed out at the beginning of the show, it is not fun to fly anymore. This is a - really a hassled experience and people don't enjoy it anymore.
PESCA: Does it make sense to you how they actually tell the public what their fees are going to be? In other words, here's the ticket, and for an extra bag, it'll be 15. For a bottle of Diet Pepsi, it'll be two dollars. I mean, if a hotel said the room's100 bucks, but we're going to charge two dollars for a towel, and three dollars for a pillow, consumers would hate that hotel. But if you just say the room's 150 bucks, and of course, you get your towel and pillow, everything would be happy about that. Does the way the airlines are communicating their prices make that much sense to you?
Mr. ASH: Well, no, it doesn't make any sense. One of the real - one of the problems at the core of the pricing at this stage in the airline industry is the fuel prices have shot up about 60 percent in the last year, and when fuel is a cost component that, let's say, a third to 40 percent of your total costs, and that goes up by 60 percent, then you need to generate 20 percent more revenue, just to offset that spike in fuel.
PESCA: Right, so, I know why they're raising the prices.
Mr. ASH: Which we're all feeling at the pump...
Mr. ASH: And while the logic tells what you ought to do is just raise the price by 20 percent...
Mr. ASH: That gets difficult in such a competitive industry where may be two or three carriers will raise the price, two others will say no, I don't think I want to do that. Then the price sinks back down. So airlines are looking for any vehicle they can find to generate revenue.
PESCA: All right. Well, John Ash is the president of Intervistas-GA2, an aviation consulting company. Thank you, John.
Mr. ASH: You bet. Take care.
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