graraps

This is just wrong. Despite the massive increase in LCC traffic throughout Europe, full-service airlines like LH, AF/KL, BA, OK, AY and even RO (!!) have no problems charging higher prices for a superior product. Little things like flying to accessible airports, not charging for checked luggage, offering a sandwich, a drink, and some miles, and providing a bit of assistance when there is an irrops problem (as opposed to leaving you stranded and telling you to start a court claim against them) mean that many pax often do choose to pay more for being treated like a human. Similarly, Egyptair business class is markedly cheaper than Singapore Airlines business class, yet there's no shortage of people flying on the latter (many of whom are paying out of their own pocket, I may add). Premium Economy is also appearing on an increasing number of airlines, and you can bet that airlines will be charging a premium for it over WHY.
The fact that AA can't market a differentiated product doesn't mean that there is no demand for a differentiated product.

suranyi

It's more complicated than that, and the reason is that every business DOESN'T pass on the cost of doing business to its customers in a straight line fashion. It depends on what the business's competitors, if any, are doing.

In the examples you gave, if the local mover, say, started charging a lot more than other movers in his area, he'd start losing business. That might happen if the other companies used more fuel-efficient vehicles, and were able to absorb the higher fuel pricies more easily. Then your company would be forced to keep his prices down in order to keep his market share. Yes, it would be bad for his bottom line, but so would losing his customers. Which would be better would be a business decision made based on the exact circumstances.

Ed

thegeneral

In terms of hedging, lets not forget that many companies have been in Chapter 11 protection which limits their ability to hedge against future fuel prices.

"So why don't the airlines just do the same thing? Please don't say it's competition. Other businesses compete - why can't the airlines?"

They do compete. Quite vigorously. They have a fickle clientelle, a very complicated international business, high labor costs and highly variable costs. To say that airlines don't compete is just not true. There's a reason why you see mergers and bankruptcies. They compete quite vigorously. That's one of the reasons why each airline can't raise prices as they see fit without taking into account the competition and the market. Raising prices too much can mean half empty planes or a lower overall ticket price.

"Similarly, Egyptair business class is markedly cheaper than Singapore Airlines business class, yet there's no shortage of people flying on the latter (many of whom are paying out of their own pocket, I may add). Premium Economy is also appearing on an increasing number of airlines, and you can bet that airlines will be charging a premium for it over WHY."

While this might be true for international first class, try any heavily travelled route that includes discount carriers. People's primary purchase choice is price. As someone noted, AA tried a more room throughout coach promotion where they gave more legroom to everyone on the flight. In the end it failed because people weren't interested in paying for a higher level of service. Service might be a huge issue for those who don't see the flight price as an issue, but that is not most people.

graraps

Sure. Let's try London to Amsterdam. Heavily travelled route. Short haul, little to no premium seating available. Many different types of traveller (bankers going to meetings, students going to coffeeshops, families connecting to longhaul...the lot). There are 5 carriers plying it, using all 5 terminals corresponding to the LON code. Around 20 flights each way every weekday. Oh, and train connections are reasonably convenient as well.
Care to guess how many are operated by LCCs? Six. That means 14/20 flights are carried out by full-service airlines, which most of the time do charge quite a bit more than the one lowcost that hasn't been run off the route.
Or MAD-BCN. 4.5 million pax per year.
3 out of 4 carriers flying it are FSCs. There is massive competition, and they had to do away with free catering and full miles for the cheap fares, but they still offer a FSC service (assigned seats, elite benefits, business class option). And they are (a bit) more expensive than the LCC.
One of the carriers flying on this flagship route is having serious financial problems. Can you guess who?

stupidhead

The market won't have it.

MiamiAirport Formerly NY George

Most leisure air travel and even much of business air travel is discretionary in nature. Raise individual airfares to cover operating costs (which would be the norm in any other business) and load factors would plummet. So instead the airlines try to eek out a profit by charging extremely high fares on last minute purchases, fully refundable tickets, and premium seats. This has basically been their business models for quite a number of years.

The problem is, and has demonstated with the "tech crash" and the subsequent fall out for 9/11, when the high end fares ebb due to economic or other reasons, airlines start to suffer and a number of them have gone out of business. The question becomes is this a sustainable business model over the long run. Also, this business model forces airlines to operate by the skin of their teeth which is why the system can go into total disray so easily.

Carolinian

Add-ons like fuel surcharges are just dishonest marketing. Fuel happens to be part of the product, not something extra.

Its like some countries where currency exchange houses charge both a differential between buying and selling rates AND a commission. Trying to compare rates when you have to compare two variables is extremely difficult for a consumer. I have been known to tell those operating currency exchange booths which double dip in that fashion that it is a dishonest practice. Fortunately, in the country where I now work, almost no exchange houses charge a commission.

I also like the more honest European hotel pricing. When you are quoted a price by a hotel in the United States, there will ALWAYS be add-ons. In Europe, the price you are quoted is the final price, with taxes and everything included.

Jenbel

If they add it as a surcharge, they get to charge us for it when we get our 'free' award tickets. Last BA 'free' redemption cost me $450 dollars. $160 of that is for the UK taxes - most of the rest is from fuel and security surcharges

LarryJ

The airline's yield management programs are already pushing the fares as high as the market will bear. Increasing fuel prices do not increase the amount that the passengers are willing to pay for air travel. If anything, they decrease the amount the passengers are willing to pay because the higher fuel prices are also effecting them in other areas.

Gargoyle

Makes sense. If the unhedged airlines raised their prices and the hedgers didn't, those with the higher price would be at a competitive disadvantage. And if both sets of airlines raised their prices equally, the hedgers would make a significantly higher profit, putting them in an even better position. A no-win situation for the unhedged.

Still, when load factors are as high as we've seen lately, the airlines need to charge more; off season I can fly TATL for the same price that I paid in 1974(about $500). What other product costs the same now as it did then?

Seems like some airlines follow the philosophy to "lose money on every transaction and make it up on volume".

FWAAA

The airlines have raised fares dozens of times since fuel prices began spiraling upward. In many cases, however, the much ballyhooed (sp?) fare increases haven't stuck, because of competition. Airlines have tremendous fixed costs and all too often, they're willing to accept below-cost fares just to minimize the amount of money they lose.

Just this morning, WN announced its regular $49 to $99 one-way fare sale. Like it periodically has done for years and years. Gotta try to fill those seats in the slow season.

Why don't airlines just raise fares? LarryJ hinted on the teachings of Econ 101 which suggests that sometimes fare hikes don't maximize revenue - and occasionally, max revenue is what they airlines need (or think they need). Cash flow is sometimes more important than GAAP profits. Cash keeps you in biz to fight another day for those much hoped-for profits.

As for fuel surcharges: Many corporate discount contracts don't discount fuel surcharges. If airlines raised the base business-traveler fares by $x, the typical corporate discount would mean the airlines would only get 50% - 75% of $x. Increasing the fuel surcharges mean that the airline gets all of the $x increase, assuming that demand for those full fares doesn't drop off as a result of the increase.

Some of us believe that those record high load factors we're currently seeing are due to 1) the massive fleet and schedule cutbacks by the legacies (most of the bankrupt shrunk during their Ch 11 stays and AA has shrunk by hundreds of mainline planes in the past six years) AND 2) the assumption that higher fares (high enough to bring load factors back to the 65% to 75% historical average) would mean less revenue than the current "pack 'em in at any price" mentality that seems to be the mantra at most of the legacies.

Mainline Yields (average fares paid per mile) at the US-based legacy airlines fell off a cliff after September 11, 2001 and still have not recovered to their levels of 2000. At most airlines, yields dropped 25% to 40% below their 2000 levels. Maybe they'll get back there someday, but probably not for 2007. Maybe in 2008 or 2009. Passengers need to pay more, but everyone likes the $200 plan in advance transcon fare. When fuel was $0.55/gal (1998-99), those fares weren't a problem. The spot price for fuel is now bumping up near $3.00/gal. Fares gotta go up. Only problem is whether enough people will pay those higher fares.

Kiwi Flyer

Similar arguments could be made on other routes also. Eg SYD-MEL, HKG-LHR, SYD-HNL.

supermasterphil

I haven't read the entire thread but I am quite happy they don't.

So plenty of tickets that have a fare of let's say 10 EUR and the rest (another 90 EUR) are fees and taxes are basically fully refundable. All you loose are 10EUR. Let's assume that fuel would be added to the fare... We would loose way more money with nonrefundable tickets!

Efrem

Yes, it does. Some reasons are in posts #6, #11, #23 and #26 above.

It's not just airlines. When the University of Massachusetts campuses were told to hold their tuition constant, they did - but raised "fees" to collect what the tuition increase would have been. Ditto for a bazillion other examples in many different fields. Perception isn't reality. Sometimes perception matters more.

graraps

Some airlines (I know about KL and JQ) have already started a policy of not refunding fuel surcharges on nonrefundable tickets, and others (e.g. BA) simply charge prohibitively high administration charges to do so. Some legal action on this would be fun.