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The death of cheap tickets? Four factors to watch!
Now, airlines are price-takers, not price-setters. What does this mean? They respond to what consumers are willing to pay ... they don't set the tone for the market (e.g., the way a luxury goods manufacturer would). So, if fares are shooting up year over year, a consumer willingness to pay is certainly implied.
Individual airline fare increases are pretty interesting, with United Airlines up 25 percent on average for is period and discounter Southwest adding 15 percent, on average, to every ticket.
According to USA Today, airfares are climbing for three reasons:
Airlines have been burned by market forces before when adding capacity too quickly. USA Today explains:
Having learned a bitter lesson by adding back too much capacity, airlines are exercising greater caution and restraint this time around. Additionally, bankruptcies and consolidations during the past few years helped contain capacity. Brands like Aloha, EOS, MAXjet, Midwest, Northwest, Skybus and ATA Airlines have disappeared as a result of consolidation or financial calamity and AirTran and Continental Airlines will soon follow suit.
2. Oil won't go down: oil has been on the rise for a decade, moving from below $20 a barrel to above $90 a barrel, some of which came from the 2008 market shock. Someone has to pay for this of course ... and it isn't necessarily you. That's the problem with being a price-taker: you can't pass along all your expected or unexpected price increases to consumers. Now that market pressures are being eased, airlines can start to recapture some of these expenses.
3. The business is changing: according to USA Today, "so called 'low-cost' airlines look more like network airlines every day" – as a result of carrier merger activity. And, the increase in maturity comes with higher expenses. For example, these airlines are "rapidly expanding into larger hub airports or building their own": that cost cash. It has to come from somewhere. It can also come with long-term costs that aren't always easy to forecast:
Hub airports are often plagued with congestion, resulting in increased flight delays which can wreak havoc on aircraft turnaround times and utilization schedules, further raising operating costs. In recent years, Southwest has expanded into some of the most congested airports in the country, like Boston Logan, New York LaGuardia and Washington Reagan National.
4. There's more to spend: the fact that there are expense pressures on airlines doesn't mean that you're going to have to foot the bill. The oil price factor, for example, has been around for a while, and it wasn't enough to protect carriers from price declines. The fact that you probably have more discretionary income – or at least less perceived employment risk – means that you aren't going to wince when you see a higher price. You'll book with less lead time. It's easier for you to spend.
What will be interesting to see is the extent to which consumers will be more willing to open their wallets. Even though having more cash comes with a bit of comfort in using it, memories may not be as short following this recession as they were in previous economic downturns. The recession kicked off by the global financial crisis in 2008 hurt. A lot. Unemployment was severe – and continues to be. People may not be as willing to pay big fares as they were in the past. Does this leave more market opportunities for online discounts – such as those offered by online travel agencies? That remains to be seen.
What do you think? Leave a comment to let us know! There's no crystal ball on this one, and I'd love to get your thoughts.
[photo by atomic taco via Flickr]