Fair airfare

I’m interning at an airline this summer, which has been called by some the "cushiest sounding job evah." I admit, it’s a pretty cool gig. Today, I learned about pricing airfare, which, especially now, is a very tricky topic.

It’s widely understood that airfare is under priced, given the rising fuel prices. The obvious answer is that airlines should adjust their fares accordingly.

It’s not that simple though.

What’s surprising is that raising fares doesn’t yield equal returns in revenue. Price increases have been modest to keep people buying, but it has encouraged flyers to redeem their earned miles, go after discounted fares, etc. Higher prices does increase revenue, just not at the magnitude airlines would expect.

The more predictable barrier is competition. Low-cost carriers are still fighting each other for territory. For many airlines, the game plan is to run their competition out of business, no matter the short-term losses. You don’t have to outrun the bear; you just have to outrun the other hiker. (Plus it’s a bear market... this pun is too good.)

Online travel services have also kept prices low. Many travelers don’t care when they fly out or what carrier they’re on and, understandably, go for the absolute cheapest fare. I know I do.

Sites like Expedia have made the pricing more transparent, which is both a blessing and a curse. On one hand, it encourages competition, and for the consumer, there’s nothing better; given the economic landscape, it’s forcing airlines to price aggressively when they should all be raising fares.

The end result? If airlines keep selling tickets that don’t cover their costs for long enough, we’ll see more of them go out of business. I’m predicting an industry-wide meltdown within the next year or two, and unless the government can support airlines with substantial subsidies (I’m not sure how possible that is), then we’re going to see major shrinkage in the flight.

And with fewer carriers and fewer routes, that’s going to mean a huge hike in prices—far greater than we’ve seen in decades. If we don’t start paying more now, we may not be able to fly as frequently in the future.