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Sen. Chuck Schumer Misses the Mark on Airfares

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Sen. Chuck Schumer Misses the Mark on Airfares

Sen. Chuck Schumer Misses the Mark on Airfares
January 08
16:09 2015

MIAMI — U.S. Sen. Chuck Schumer (D-N.Y.) called for a federal probe into high airfares last month, citing the fact that domestic air fares remain high despite lower fuel prices. Schumer has been a vocal critic of airlines in the past, most notably questioning the a-la-carte pricing model adopted by most U.S. airlines in recent years. However, despite Schumer’s exhortations, his simplistic tying of airfares to fuel prices is misguided.

Sen. Chuck Schumer

Sen. Chuck Schumer

Contextualizing the Actual Rise in U.S. Airfares


When political figures and non-aviation media talk about airfares, they tend to talk about the headline airfare numbers, reported by the U.S. Department of Transportation’s Bureau of Transportation Statistics (BTS). By that metric, airfares have certainly risen over the past five years, even adjusted for inflation. The chart below shows average fares for each of the four quarters of the year from 1995-2014, adjusted for inflation. As the chart shows, U.S. airfares actually peaked around 2000, declined in the wake of 9/11, bottomed out during the late 2000s financial crisis, and only now have returned to 2001 levels.

Slide11

Now this graph doesn’t actually reflect the change in out-of-pocket travel cost, thanks to the prevalence of ancillary fees. However, when you actually consider the scale of ancillary fees in the U.S. industry ($8.9 billion last year) versus the size of the overall industry, it adds just $16 per passenger. Even with the rise of Spirit Airlines and similar carriers, U.S. passengers overall do not pay a lot more than their tickets in the form of ancillary fees.

This is because in the overall passenger mix of U.S. airlines, there are lots of people (international travelers, business travelers) who don’t pay baggage and other a-la-carte ancillary fees. One group of passengers does disproportionately pay such fees however, and that is leisure travelers. Coincidentally, the mainstream media disproportionately travels for leisure.

Moreover, when you’re thinking about how to best measure changes in fares over time, there are several complicating factors which make looking at base fares (even including ancillary fees) over time a poor way to actually measure the changes in cost of air travel over time. First, the average airfare in a given year doesn’t necessarily buy the exact same product.

Over time, the average stage length for a U.S. airline ticket has increased substantially (25 percent between 1995 and 2013), and higher stage lengths require higher base fares.

However, longer flights cost more to operate, necessitating the higher fare. To account for this, a better metric to use is yield, which measures airfare per passenger mile flown. However, yield by itself is also somewhat problematic, because shorter flights tend to have much higher yields than longer ones (due to the balance between fixed and variable costs for airlines).

To account for this affected, the yields should be adjusted for stage length. Next, you’ll want to add in ancillary revenue per passenger mile flown, and then adjust for inflation. Taking these steps provides a useful metric to actually contextualize the change in the cost of air travel over time. The output is shown in the graph below.

Slide13

As the chart indicates, the cost of air travel is still substantially lower than it was in the late 1990s, and not much higher than it was in the early 2000s. Fares cratered in 2009 with the recession, and total costs seem high only because many people still remember the 2003-2007 period, when low cost carriers raced to add capacity and win market share as the industry lost billions of dollars. Despite Schumer’s publicity generating statements, the cost of air travel is not unreasonably high

Profits Draw Unfair Criticism


One reason that Schumer’s demagoguery may win support is the remarkable rise in profits at U.S. airlines, who are collectively expected to report a net profit of more than $13 billion for 2014, starting later this month. Across the board, U.S. airlines are reporting record profits and excellent operating margins, as consolidation and structural changes in the industry (decreased start up activity due to regulatory changes at the FAA) have boosted revenues. Given the record profitability, many reason that something should be done about higher fares and that higher fares cause harm to the consumer

But a longer term view illustrates the fallacy of such thinking. The following two charts provide a concise summary of U.S. airline finances since deregulation in 1979. In the first chart, which shows inflation adjusted profitability, the final data point shows the cumulative net loss suffered by the U.S. airline industry over that period, more than $33.1 billion.

The second chart displays margins over the same period, and as the chart indicates, the only sustained period of substantial ( > 3 percent) profitability in the U.S. market was from 1994 to 2000, amidst an economic boom. Today there is no economic boom, but even with “record” profits, airline industry net margins only just crossed 5 percent in 2013. This is an industry that has vacillated between booms and financial ruin, with each of the latter cycles prompting a round of consolidation.

Adjusted for Inflation — Source(s): US DOT, BLS

Adjusted for Inflation — Source(s): US DOT, BLS

Source: US DOT

Source: US DOT

No industry should be forced to provide its product at a net loss, nor can any industry do so for a sustained period while still providing as high quality of a product. If, as Schumer proposes, we consider high fares in a period of low fuel and high profitability as constituting consumer harm, then surely periods where airlines lost money count as implicit subsidies to consumers. And over the deregulated history of the industry, consumers have often made out far better than other stakeholders, namely employees and shareholders.

Airfares remain extraordinarily cheap by historic standards. Allowing a necessary renaissance in airlines’ financial fortunes to fall prey to government sanction would ultimately prove detrimental to the end goal of a strong and sustainable US airline industry.

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Vinay Bhaskara

Vinay Bhaskara

Senior Business Analyst, Big Airline Enthusiast, Avid Airport Connoisseur, Frequent Flyer, Globetrotter. I Miss Northwest Airlines Every Day. vinay@airwaysmag.com @TheABVinay

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