When I did airline pricing at America West a decade ago, I found that just about everyone I met thought they could do a better job than I. “Why are fares so high? If you lower fares, you could get more people to fly and make more money.” Now US Airways has decided to let people prove that they’re right by lowering fares in Rochester, New York.

In general, it makes sense that if you cut fares, you should have more people flying and then hopefully you’ll make more money. Even if your planes are full, you can cut walk-up fares and sell more of those and less of the leisure seats. The ultimate result is that profit would go up and that’s good.

The problem is that is doesn’t usually work this way. Often the fare cuts won’t bring enough extra to make up for the loss in revenue per customer.

US Airways is going to test this out in Rochester by cutting fares and seeing what happens. It looks like walk-up fares (purchased on the day of departure) will be going down anywhere from 31 percent (in Melbourne, Florida) to a whopping 76 percent (in Jackson, Mississippi). Here’s a chart with all the cities that are getting lower fares:

But it’s not just walkup fares. Other fares are being reduced as well. To Philly, a key market because it’s nonstop, leisure fares will drop 48 percent, for example. That ain’t bad. Down to $198 roundtrip from $378 roundtrip.

I like this move because it effectively tells people . . . “You think you know how to price? Great. Now put your money where your mouth is.” The residents of Rochester now either have to put up or shut up.

It’s also important to note that this was being done in partnership with Rep Louise Slaughter (D-NY) who has Rochester in her district. She’s the ranking Democrat on the House Rules Committee, so I imagine that it can’t hurt for US Airways to build up a little political capital there.

So now it’s up to the people of Rochester. Your fares are now lower by far, but will more of you fly? Will it stick?

US Airways says it will examine results over the next couple of months. For those cities that don’t see a revenue increase, the old fares will come back. For the successful ones, those will stay.

Anyone want to guess which markets will keep the fare cuts?

Allegiant has quietly slipped a note into a federal filing that says it wants people to be able to pay for fuel price fluctuations after a plane ticket has already been bought. And I like it. I know, you think I’m insane for saying such a thing, but there are some very good reasons why I like this. It really is good for the gambler, er, traveler.

Let me start by saying that the idea that you can buy a ticket and then be forced to pay more if fuel goes up sounds awful in theory. I mean, people save up for their trips over time, and not having certainty around how much that would cost would really destroy a lot of plans. Had that really been Allegiant’s goal, then this probably would have earned a Cranky Jackass Award. But that’s not what they’re doing. Let me take a snippet from the filing with the DOT itself.

Allegiant is considering a new pricing option for use on its website: when making a purchase, consumers would be able to choose between a traditional “locked in” fare that would not fluctuate, and a lower fare that could change before the date of travel. That lower fare could be reduced further or could increase (up to a set maximum that would be clearly disclosed) depending on changes in fuel price between the booking and travel dates. This would be a non-compulsory alternative for consumers; it would provide them another option for potential substantial savings on their trip costs and would be clearly disclosed and explained prior to any purchase.

In other words, there would be two pricing options. Let’s just throw some numbers around for the heck of it. You could pay $100 for your flight to East Bumblef**k and never have to worry about the price changing. Or you could pay $90 and then have the price fluctuate with the price of oil after. So if oil goes down from when you bought, presumably the price would go down and you’d save money. If oil goes up, the price would go up and you’d lose money. This is perfect for an airline based in Vegas, because it’s a gambler’s dream. (I wonder if they’ll hand out those sad pamphlets about gambling addiction with the sun setting on the cover?)

So why is Allegiant talking about this in a federal filing? Well there’s a proposal that would make it illegal to have post-purchase price changes. Allegiant is arguing that it would be a good thing for consumers and that one of the alternative ways to deal with this issue that has been proposed should be accepted instead. That alternative would not just allow blanket price changes, but it would have three main requirements.

1. The potential for the increase needs to be “conspicuously” disclosed to the buyer.
2. The maximum potential amount of the increase must be shown.
3. The customer would have to proactively agree to the arrangement before purchase.

Why does Allegiant want to do this? Because it allows the airline to sell a lower fare. And lower fares mean more people are willing to fly. As long as the disclosure is clear, then why not have this as an alternative? I can’t imagine myself ever wanting to take advantage of this option, but if others want to, then great. It lets Allegiant better match revenues with costs, and it gives customers the chance to decide if they want to play the game or not.

Well, this is going to be a popular post, huh? The idea that you should love airline fees probably sounds ridiculous to you. After all, complaining about fees has now replaced complaining about airline food as the traveler’s favorite pastime. But you really should be happy that there are fees out there. Before you start an internet campaign to talk about how much I suck, hear me out.

Since airlines are private entities, I assume we can all agree that airlines have a right to make a profit. If airlines were run by the government, then that would be a different story, but they aren’t. So airlines are trying to make a profit (some better than others) and should do whatever they can to get to that point. On a basic level, this means revenues need to be higher than costs. Ok, I think we’re still on the same page.

The problem, of course, is costs have spiked to a new sustained high level in the last few years thanks to jet fuel prices. This is probably familiar to many of you, but take a look at this graph showing jet fuel prices per gallon at the beginning of July in each year:

Even excluding that spike year of 2008, jet fuel prices have still more than tripled to become the largest single cost at many airlines. And fuel prices is pushing higher once again as I write this. Just think about that. Let me try to put it in easy-to-relate terms.

Let’s say that you sell televisions and times are good. To make this easy, you only sell one type of TV and it sells for $550. Your total costs average out to $500 a TV, so you make a 10 percent profit. (That’s not great for a lot of businesses but for airlines it would be stellar.) Up until now, your cost for a screen has consistently been $50, or 10 percent of your total costs. But all of a sudden, there’s a change in the screen world and prices permanently jump by 300 percent. Now, screens cost $150 and there’s absolutely nothing you can do about it. If you keep prices where they are, you lose $100 per TV for a negative 18 percent margin that will put you out of business.

So you have to raise prices to cover your costs. You think about jacking up prices from $550 to $650. You’d make a 7.5 percent margin which is ok but a lot fewer people want TVs at $650 than they did at $550. This is where things get ugly.

If you bring prices up to $650, you have to figure out how many TVs to make. After doing the math, you realize that if you jack up prices to that level you might lose half your demand. Since you have so much invested in the factory and tooling, if you cut your production by half, the cost per TV will rise dramatically because you have fewer TVs over which you can spread your fixed costs. It might rise to, say, $700. Then you’d have to raise prices even more and that’s going to cut demand even further. It’s an ugly spiral.

There are a couple ways out of this. If you’re a manufacturer of TV, you can just keep producing TVs and sit on them until you hope demand grows again. But that’s not an option for airlines, so let’s pretend that’s not an option here. So that cuts down on decent options dramatically.

You can lay people off, but you also need to get rid of machinery and tooling that you don’t need anymore. You might need to move into a smaller factory too. This might not even be possible so you have to consider bankruptcy to keep your company as a viable ongoing operation. There has to be a better way.

You then realize that there’s a way to keep prices in check without killing demand. You do raise your prices about 10 percent to $599 and most people are still willing to pay that much. But now, you tell people that the $599 version doesn’t have HD capability turned on. To get that, they’ll have to pay an additional $25. Then you start adding new options to help get the price up. They can order a deluxe remote control for $25. You start offering wifi capability for another $25. Now, those people who want the add-ons can pay more for them. But those people who wouldn’t pay the higher price can still get a base unit for a relatively affordable price. People can buy what they want and demand stays relatively high.

In the end, your total revenue per TV goes up to $700 with all of the add-ons that people choose. The basic TV being priced at $599 still keeps demand high for the unit, but the amount that some people pay to dress up their TV to make it better is what actually pushes you into profitability.

This isn’t a perfect comparison, of course, but the idea is sound. With the high cost of fuel today, there are two ways the airline industry could go. It could keep the previous pricing scheme but that would mean a lot fewer flights, much higher fares, and probably another visit to bankruptcy-land. Or it can provide a menu of options via fees that keeps the base price low for the no-frills traveler and still keeps a broader schedule available to serve everyone.

In the end, fees are a good thing. I may not like how many airlines have implemented them in a clunky, difficult to compare way, but that will change as airlines start to get better at this and consumers demand more. It doesn’t change the fact that the a la carte pricing method is a good thing for this industry.

Strong June Traffic Means It’s Time For Airlines to Raise Airfares — Cautiously – BNET
Continued strong traffic numbers mean airfares are going to continue on the march. But airlines need to be careful not to go too high. Huh?

US Airways Shows Stellar Operational Improvement, but Nobody Knows It – BNET
US Airways has really done wonders for its operation and that’s great, but nobody else knows about it. They need to work on that.

How JetBlue Tends To Its Brand – BNET
There was a good interview with JetBlue SVP Marty St George about how JetBlue focuses on its brand.

A road trip is a great way to tell a person’s story, as The Cranky Flier proves -Budget Travel
Sean over at Budget Travel had a great review of my newly-released book.

Why Allegiant Shuffles Airports in Ways Most Airlines Wouldn’t Dare – BNET
Allegiant is switching its Idaho Falls flights from LAX to Long Beach. Seems strange, but there is a method to the madness.

American, oneworld Step Closer to Legitimacy with EU Approvals – BNET
The EU has approved the American and BA joint venture along with the BA and Iberia merger.

Here’s an Ask Cranky question from a time long ago. Bereavement fares. Everyone knows about them, but are they any good?

I’d love to see you do a post on how bereavement fares have evolved (or not evolved) over the year. Back when I was skinny and had hair, and there were really only four classes of fares: F, FN, Y and YN, the bereavement fares gave a pretty dependable discount on the Y and YN fares. Now, with fares being an absolute alphabet soup, how to the majors and LCCs handle bereavement fares? I know when I did a short stint as an Alaska Airlines res clerk, I could usually beat the heck out of the bereavement fare – but that too, was a long time ago.

Frank V

There’s no question that times have changed. Back in the day, bereavement fares provided a tangible discount over the prevailing rate. The reason for this was simply compassion. People didn’t ever want to take those trips, but they had to and the airlines did what they could to make it a little easier.

As the industry’s fare structure changed and low cost carriers brought lower last minute fares, bereavement fares started to become irrelevant. Oh, they still gave a discount off the full fare. It’s just that nobody paid the full fare anymore.

For low cost carriers, bereavement fares don’t exist for the most part. Southwest, for example, doesn’t offer bereavement fares. Other airlines have varying policies.

American – The website offers a very terse suggestion that bereavement fares may be offered and you need to call them for info. They tend to use an older school approach with flat rates that are very flexible. It tends not to be very helpful.

Continental – They realized that the old model wasn’t helping anyone, so they switched to something new. Now, tickets up to $500 get a 5% discount, tickets between $500 and $1000 get a 10% discount, and tickets over $1000 get a 20% discount.

Delta – They offer a lot more information on bereavement fares on their website but it’s the same end result as American.

United – Like Continental, United has gone with a discount structure, but they’ve opted for simplicity. You can get 10% off any ticket.

As you can see, some of these are good and some bad, but they’re all a pain in the butt. You’re only allowed to take advantage of this for close family members, and each airline has a list of what that includes. You need to provide documentation as well. If someone is sick, you need to give medical contact information so the airline can confirm that this is real. In case of death, you’ll often be asked for the death certificate. It’s not a fun experience. In fact, it’s unpleasant enough to have been a subject of a Seinfeld episode.

But the fares are still out there. They’re just not easy to take advantage of.