Fares are Rising at LAX

LAX - Los Angeles, United

A few months ago, the powers that be at LAX (that’d be LAWA) decided they were going to raise the rents on the airlines flying out of the airport. It has since become a soap opera with the parties trading barbs back and forth. Now, United has decided to bring customers into the spat, so it’s time to see what exactly is going on here.
07_04_13 lawauamathLAWA says that the cost of running the airport has gone up significantly since 9/11 (security costs and all) and the airlines need to start paying their fair share. It’s clear that they need more money – according to their annual report (PDF), the year ending June 30, 2006 saw an operating loss of $10m – but I’m not sure who should be responsible for that shortfall.

Predictably, the airlines don’t think it should be their problem, and they started complaining about this 5 seconds after it was announced. Until now it was just a war of words (and lawsuits), but Wednesday United announced they were putting a $10 surcharge on all flights out of LAX to make up for the difference. (US Airways has matched and only Southwest promised they would not.) The airline says that the rent increase will cost them $10m a year, so they need this surcharge to offset that cost.

LAWA quickly shot back at the airline saying that in 2006, United had about 4.9m passengers fly out of LAX. If traffic doesn’t grow at all, they’ll still rake in $49m a year with this surcharge. That’s a lot more than the $10m in increased costs for United, so almost $40m will go to increasing profitability.  (Hey, you have to pay Tilton’s bonus somehow.)  Unfortunately though, LAWA’s math is all wrong.

So what is the story here?

I’ve been digging around the last couple days, and I haven’t found the exact info I wanted, but I think I’m close enough. Back in February, LAWA put out a press release about this issue but only in regards to airlines using Terminals 1 and 3. (United is in Terminals 6, 7, and 8.) In the release, they say that the total costs will increase from $6 per enplaned passenger to $11 per enplaned passenger. For the rest of this analysis, let’s assume United also will see a cost of $11 per enplaned passenger once this increase is in effect.

That is a pretty hefty increase, but the result is hardly out of line with other airports.  This presentation (PDF) shows 2005 airport costs on the second page of the document. Houston/Intercontinental and Chicago/O’Hare appear to be in the same range as LAX. Washington/Dulles, Miami, and San Francisco are well above. (It should be noted that SFO has reduced costs significantly since then – they’re now down under $15 per passenger, still $4 above LAWA’s charge.)

So, LAWA needs the money, and United has decided that they aren’t willing to shoulder the burden so they’re going to pass it on to us travelers. Honestly, I think they’re just trying to make a statement to LAWA here and they have no intention of leaving this out there. My guess is that they just want to get the public angry at LAWA but instead it will backfire against the airline.  BUT, let’s take them at their word here for a second to answer the burning question.

Is that $10 surcharge really going to make up the $10 million United has to pay in additional costs? LAWA’s math is definitely not right on this one, so let’s do some of our own.

LAWA says United had about 4.9m passengers board planes at LAX last year. That number actually appears to be only United mainline flights and NOT Express even though those should be included. United sets fares and takes in the revenue for most of the Express flying, so that needs to be counted.  Including Express, they actually boarded in the neighborhood of 6.2m passengers. Does that mean that United will actually pull in $62m in a year?!? Nope, not at all.

Thanks to the guys at FareCompare for passing along the fare rules here. In short, the surcharge only applies to people flying from Los Angeles who are NOT connecting. So here are the scenarios:

  • Someone goes from LAX to Chicago and back. That’s $10 for the first flight out of LAX.
  • Someone comes to LAX from Chicago and goes back. That’s $10 for the return flight from LAX.
  • Someone goes from LAX to Chicago one way. That’s also $10 for the one flight out of LAX.
  • Someone goes from Chicago one way to LAX. There is no surcharge since no flight left LAX.
  • Someone goes from Chicago to Maui connecting in LAX both ways. There is no surcharge because the fare was from Chicago to Maui and the stop in LAX doesn’t count in fare rules.

So even though LAWA wants us all to think that every United passenger departing LAX will pay, that’s clearly not the case. Connecting passengers don’t pay and that’s a big chunk of the people coming through the airport.

That being said, I’m not letting United off that easily. We know they have 6.2m passengers departing, so to generate only $10m from the surcharge, a mere 16% of the passengers flying United would have to be starting or ending their trips at LAX. That’s way too low, so United is in fact going to make a lot more money than they let on.

All this is making my head hurt.  In the end, LAWA wants more money from the airlines to run the airport.  The airlines are passing it on to the customer, which is fine, but they’re raking in a lot more than they need to cover the extra costs, which is not fine.  And as usual, there’s nothing we can do about it.

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3 comments on “Fares are Rising at LAX

  1. I’m not sure the math above is correct, in particular there is no ground for $10m figure (other than LAWA estimate that might as well be wrong). If United (like the low-number terminals) faces $5 per passenger airport surcharge increase, that implies that if 50% or more passengers are connecting United will not bring in a single dollar of additional profit. While this figure may be not too encouraging for travelers too, it looks much closer to fair play than 84% assumed in the original post.

  2. Actually, United is the one that claimed the increase would result in $10m of additional cost. It’s in their press release here.

    So, the $5 increase that was quoted for Terminals 1 and 3 must not be the same as what United is seeing in Terminals 6, 7, and 8. Either United was at a higher cost per enplaned passenger before and the increase is closer to $2 for them now (which was my assumption though far from being certain), or they’ve been able to negotiate to get to around a $8 per enplaned passenger cost from $6 which would also get them to the $10m figure.

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