Why Don't Airlines Just Raise Their Fares to Meet Fuel Costs?
Nov 27, 2007, 2:26 pm
#31
Original Poster
Join Date: Mar 2000
Location: Santa Cruz, CA USA
Programs: AA, UA, WN, HH, Marriott
Posts: 7,290
OK - some excellent points made. The issue of whether a fare raise is called a fuel surcharge or incorporated into the fare seems irrelevant to the main issue. Bottom line is the cost to the consumer.
I remember Economics 101, the MPC equation - marginal propensity to consume. If you raise cost, fewer consumers buy. If you lower cost, more consumers buy. But there is a parameter called elasticity - related to the slope of the curve. As was pointed out above, airlines want to maximize revenue. How elastic is the fare curve? Sometimes you make more money by raising the cost because the increased revenue per widget (i.e. airline seat) more than makes up for the lost number of widgets sold. But sometimes it's the other way around - increase cost per widget is not enough to make up fordecrease in the number of widgets sold. It's all in the elasticity, or shape of the curve, which is very difficult to calculate in some cases.
Let's consider other phases of the travel industry. There is a huge difference in room rates in different hotels - but in that case, there is also a huge difference in the quality of the product you get. So that's probably not a good comparison.
But there is also a tremendous range in what car rental companies charge. Hertz or Avis can often be 3-4 times as expensive as Thrifty or Dollar or Enterprise. Is the Hertz or Avis product really that much better? But in this case, Avis and Hertz distinguish themselves from the others really by a relatively few number of parameters and services they offer.
Maybe there really are too many airlines. If there were only 5 or 6, they could all distinguish themselves from each other by different levels of service, they could charge what they need to provide those services, and people would be free to choose which airline they want based on those services. Just like the car rental companies.
Again, thanks for all the thoughtful answers.
I remember Economics 101, the MPC equation - marginal propensity to consume. If you raise cost, fewer consumers buy. If you lower cost, more consumers buy. But there is a parameter called elasticity - related to the slope of the curve. As was pointed out above, airlines want to maximize revenue. How elastic is the fare curve? Sometimes you make more money by raising the cost because the increased revenue per widget (i.e. airline seat) more than makes up for the lost number of widgets sold. But sometimes it's the other way around - increase cost per widget is not enough to make up fordecrease in the number of widgets sold. It's all in the elasticity, or shape of the curve, which is very difficult to calculate in some cases.
Let's consider other phases of the travel industry. There is a huge difference in room rates in different hotels - but in that case, there is also a huge difference in the quality of the product you get. So that's probably not a good comparison.
But there is also a tremendous range in what car rental companies charge. Hertz or Avis can often be 3-4 times as expensive as Thrifty or Dollar or Enterprise. Is the Hertz or Avis product really that much better? But in this case, Avis and Hertz distinguish themselves from the others really by a relatively few number of parameters and services they offer.
Maybe there really are too many airlines. If there were only 5 or 6, they could all distinguish themselves from each other by different levels of service, they could charge what they need to provide those services, and people would be free to choose which airline they want based on those services. Just like the car rental companies.
Again, thanks for all the thoughtful answers.
Nov 27, 2007, 7:34 pm
#32
Join Date: Apr 2005
Location: FL400
Programs: AA 5MM EXP, UA 2MM 1K, HH LT DIA, MR Plat, NRAC EEV, AMEX Plat
Posts: 682
Europeans differentiate on many factors, including quality... the average American, NASCAR-watching, gun-toting Joe Sixpack differentiates on price and price alone.
Nov 27, 2007, 7:44 pm
#33
Join Date: Jan 2005
Location: Pennsylvania
Programs: AA Platinum Pro, AC *S, Marriott Gold Elite, Hyatt Explorist
Posts: 9,692
OK - some excellent points made. The issue of whether a fare raise is called a fuel surcharge or incorporated into the fare seems irrelevant to the main issue. Bottom line is the cost to the consumer.
I remember Economics 101, the MPC equation - marginal propensity to consume. If you raise cost, fewer consumers buy. If you lower cost, more consumers buy. But there is a parameter called elasticity - related to the slope of the curve. As was pointed out above, airlines want to maximize revenue. How elastic is the fare curve? Sometimes you make more money by raising the cost because the increased revenue per widget (i.e. airline seat) more than makes up for the lost number of widgets sold. But sometimes it's the other way around - increase cost per widget is not enough to make up fordecrease in the number of widgets sold. It's all in the elasticity, or shape of the curve, which is very difficult to calculate in some cases.
I remember Economics 101, the MPC equation - marginal propensity to consume. If you raise cost, fewer consumers buy. If you lower cost, more consumers buy. But there is a parameter called elasticity - related to the slope of the curve. As was pointed out above, airlines want to maximize revenue. How elastic is the fare curve? Sometimes you make more money by raising the cost because the increased revenue per widget (i.e. airline seat) more than makes up for the lost number of widgets sold. But sometimes it's the other way around - increase cost per widget is not enough to make up fordecrease in the number of widgets sold. It's all in the elasticity, or shape of the curve, which is very difficult to calculate in some cases.
Cheers,
Nov 27, 2007, 8:12 pm
#34
FlyerTalk Evangelist
Join Date: Dec 2003
Posts: 13,145
Delta is
NEW YORK (Reuters) - Delta Air Lines Inc (DAL.N: Quote, Profile, Research), the third-largest U.S. carrier, said on Tuesday that it increased fares by $10 one way in most domestic U.S. markets to offset rising fuel costs.
Source: http://www.reuters.com/article/marke...0071127?rpc=44
Source: http://www.reuters.com/article/marke...0071127?rpc=44