Premium #254 – Holiday Travel: Fares, Bag Fees, and Heavy Loads

Air travel is a bargain, and is getting cheaper in real terms. At least that’s what we’re told by the A4A and other media outlets. But since the introduction of baggage fees, that story doesn’t hold water, as real total costs to consumers have actually risen in recent years. Airline baggage fees in the US domestic market skyrocketed in 2009, when the major airlines, except Southwest, decided to start charging for checked luggage. While this did not impact the airfare and yield statistics commonly quoted, it did impact the consumer's wallet. We took at look at airfare and baggage fees together, to determine if consolidation of airlines in the US has had a negative impact on the cost to fly. The following table shows US airline yields and baggage fees per RPM since 1995. Before airlines began charging for bags as auxiliary revenue, the only baggage fees were for additional bags over the limit and overweight bags. Today, many airlines charge for each bag checked by a passenger, moving from an all-inclusive fare to an a-la-carte model. While food service revenues have also increased with the elimination of meals on many flights, we did not include other ancillary revenues in our analysis. What we found is that the overall cost of flying began to increase just around that same time that industry consolidation began to take place, with Delta acquiring Northwest in April 2008. It is clear that from 2009-2014, passenger costs rose in real terms, until the fuel price reductions in 2015, countering a trend from the inception of the industry since 1920 of nearly continuous reduction of passenger costs in real term. Even with the adjustment in fuel costs, baggage fees continue to grow, as shown in the table below: When one looks at both fares and baggage fees, the story of declining airfares is no longer relevant, as baggage fees have taken off. Your wallet tells you the costs are higher, but while the fare may be similar, the $25 out and $25 back for baggage lightens it is now in three rather than one transaction. At the same time, load factors in the airline industry have risen considerably in recent years, as shown in the following chart: Over the last 67 years, the trend for load factors is quite telling. Load factors, on average fell during the time period in which the Civil Aeronautics Board regulated the industry, but rebounded post-deregulation (October 1978) with consistent growth. The question is whether the industry can push load factors further, past 85% or has it reached a feasible limit? This year, we’ve seen some incidents resulting from overbooking policies, with a notable incident in which a doctor was removed from a United Airlines regional flight because the seats were needed for other passengers (in this case a flight crew). During peak times, the industry is occasionally reaching its operational limitations. During my recent travels, I’ve experienced an oversold situation in which the airline was asking for volunteers to give up seats for a later flight on several occasions. In a deregulated environment, airlines can maximize loads utilizing yield management tools, which optimize revenues and load factors. This is fine, as long as operations remain normal. But throw in a snowstorm or delay, and things hit the fan with much longer periods to accommodate passengers. During the 1980s and 1990s, load factors ranged from 60-70%. If we assume an aircraft was two-thirds full, with one-third of the seats empty, it would take two flights to accommodate one canceled flight. Today, with load factors over 80%, it would take five to six flights to accommodate one canceled flight. That, in most markets, means a multi-day delay in getting a passenger to the destination one weather clears, which frustrates passengers and overcrowds airports, since airlines will not pay for hotels due to weather delays. The result is unhappy passengers. How high can load factors go? In good weather, to 100%, which is often the case on crowded routes in which capacity has been tightly managed to generate higher fares. But when things go wrong, problems can multiply. How airlines deal with problems impacts their reputation and preference. The Bottom Line: The real cost of travel has at best leveled off and at worst is slightly increasing in real terms. With airlines increasing seating density on many routes with tighter seat pitch, charging for baggage, and filling airplanes through aggressive yield management, passenger frustration is at an all-time high. Simply put, flying was once fun, when we were members of the Jet Set. It simply isn’t anymore.

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