31-Pricing in today’s airline industry – Part1
I am surprised and confused by the airline industry today. All the legacy airlines have announced substantial capacity reductions, in some cases by more than 20% of capacity. For example, United Airlines plans to ground 100 of its 460 planes in the foreseeable future. Some smaller cities will lose airline service completely. The legacies’ hub and spoke system is about to have fewer spokes.
Here is what confuses me. These capacity reductions come before the airlines try a last ditch effort to simply raise the basic fares. The airlines are grounding planes that can not produce cash at today’s price levels. Fine. Makes sense if you can’t generate cash with the plane. But before doing that, why not raise prices at least to a level that gives the airline enough cash to operate the about-to-be-abandoned route? If customers won’t pay that price, then O.K., ground the planes and refund the advanced-purchased tickets. (See “Costs: The Last Consideration” in StrategyStreet.com/Tools/Perspectives)
The airlines have learned well over the last thirty years that they can not charge premium prices and expect that customers will remain loyal. The airline industry today may be the fastest industry on earth to match prices, but I think there is an opportunity here.
An airline ticket to most locations is still a relative travel bargain. The cost per passenger mile traveled is still well below that of an automobile or rail equivalent. When faced with a choice of no service, the majority of customers would pay more.
How big is that majority? It’s big enough to be worth the attempt to raise prices to levels that the airlines consider reasonable to keep the current fleet flying. Why not try?
The answer to “why not try” is that competitors will not go along. That may not be true today. Even discounters, such as Jet Blue and Air Tran, are suffering in this marketplace. It would be worth a gamble to test their willingness to go along.
By 1983, all airlines were free of domestic CAB regulation, which meant they could set their own prices and effectively compete with other carriers. Inflation adjusted prices for flying today in 2022 are much lower than they were before deregulation. This price decline has resulted in a huge increase in airline traffic. Pre Covid, with four carriers controlling over 80% of the US domestic market, prices were high enough to afford the larger players in the airline industry reasonable profits.
United Airlines earnings were negative in 2009 and creeped into positive territory in 2010. The airline industry remained unattractive for the next several years.
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