This is inspired by examples I’ve seen in Tyler Cowen and Alex Tabarrok’s principles book and the supplementary blog.
Over the weekend, I flew US Airways from Memphis to DC and back. On Friday, I took a plane that stopped in Charlotte and continued on to DC. I didn’t even get off the plane in Charlotte before proceeding to DC.
For fun, I decided to check out one-way fares on this route. Suppose Carl needs to book a flight from Memphis to Charlotte and Murray needs to book a flight from Memphis to DC. Both are traveling tomorrow morning. What will they pay?
Travelocity shows that Carl will pay $279 to take US Airways flight 1730, departing from Memphis at 7:35 AM and arriving in Washington DC at 12:47 PM with a connection in Charlotte. Murray will pay $645 to take US Airways flight 1730, departing from Memphis at 7:35 AM and arriving in Charlotte at 10:12 AM.
You might notice something odd: Carl and Murray are going to board the exact same plane in Memphis. Murray is getting off the plane in Charlotte. Carl is staying on that plane until it gets to Washington DC. Murray is paying $366 more than Carl even though he is taking a shorter trip on the same plane.
Questions:
A. What gives? How can we explain this kind of pricing behavior?
B. This is the kind of thing that inspires moral outrage and righteous indignation about “corporate greed.” Can we turn this argument around, though? In other words, how might we respond to Murray when he arrives at the customer service desk angry about having been gouged by the airline? For the record, I suggest that you never take this approach with an angry customer.
Obligatory disclosure: I didn’t get any valuable consideration for mentioning any of the products mentioned in this post.
{ 35 comments }
The smart traveler would have booked the longer flight, taken a carry-on only, and just gotten off at Charlotte.
Only if he didn’t want to get back to Memphis on that itinerary.
Maybe you could book two one-way flights: Memphis-DC then DC-Memphis and maybe that would cost less than the round-trip Memphis-Charlotte, but it wouldn’t be the drastic $366 savings …likely more like $87 in savings.
If you are going between two major airports then both air ports are going to be layovers for flights going both directions.
So if:
Mephis –> Charolette = $645
and
Mephis –> Charolette –> Washington DC = $279
Then the reverse is likely true.. namely:
Charolette –> Mephis = ~$700
and
Charolette –> Mephis —> ??? = ~$300
Then you could be clever and book 2 one-way tickets with layovers in your real destination cities. That way instead of saving $87 dollars as you postulated you could be actually saving closer to $600 or $700 dollars.
Although that would probably have a 95% chance of getting you labelled as a ‘terror suspect’ in the TSA Interesting-People-to-Molest book.
A. “What gives” possibilities: 1) The route from Memphis to DC through Charlotte is in less demand because of the stop-over and time preferences. The flights from Memphis to Charlotte and then Charlotte to DC are under-booked and therefore discounted so the airline can create efficiencies by having fuller cabins and therefore reducing its fix costs (fuel, employees on flight, gate fees, etc.). 2) Those traveling from Memphis to DC direct are willing and able to pay the price for the fare. The direct flights are full because those flying to DC in the morning are less price sensitive due to other influences (corporate expense reimbursement, time value of getting to DC 2.5 hours earlier, etc.).
B. Explain to Murray the reasoning in A and that he has options available to him to lower his fare, though at the “cost” of a longer flight, stop-over, and possibly changing planes. You could also use a sell point that the lower cost fare, while “slower” is much less crowded, and he’d have more room and possibly be more comfortable.
I’m just guessing here, but perhaps more airlines provide service to Washington, D.C. than to Charlotte, N.C. More flights by more airlines, hence there’s more supply for that particular good, hence more competition, hence more pressure by vendors to offer loss leader (or at least lower-profit) prices to keep their market share up.
The people flying on less-popular flights are partially subsidizing the cost of the more-popular flights.
Basically the question is why is the Memphis-Charlotte leg priced differently depending on where you go. Pretty tricky. For instance, if the Charlotte-DC flight has relatively few people on it, then they might be willing to let you travel on that part for relatively little, whereas if the Memphis-Charlotte leg is mostly booked, then they would want to charge higher for it. However, that wouldn’t explain the problem since it isn’t like you’re paying the Memphis-Charlotte price plus $50 for the Charlotte-DC trip. To go to DC, you’re paying Memphis-Charlotte minus $400, which is pretty huge.
Alternately, they could have a shortage of planes in DC and are willing to basically offer a discount to passengers going there in order to get the equipment there (where it can go on higher value runs). I’m not sure that explains the size of the difference though. Unless you consider that in their accounting, the airline attributes different revenues for the Memphis-Charlotte leg depending on where you’re going.
I also don’t think there’s a train going Memphis to Charlotte, whereas there is a train going Charlotte to DC. Again, this would explain why the Charlotte-DC leg is cheaper than the Memphis-Charlotte leg, but not why there is basically an implied negative price on the Charlotte-DC leg (or rather that the Memphis-Charlotte part is overpriced).
Charlotte is a hub for US Airways, so that might affect things.
I think John is pointing the correct direction with his statement: “a shortage of planes in DC and are willing to basically offer a discount to passengers going there in order to get the equipment there (where it can go on higher value runs).”
In this case the supply/demand evaluation should be based on the entire work day of crew and equipment. That is why storms have such impact on schedules: it is not the time of the storm that is the problem, but the time to clean up and the time to get all of the correct crews/equipment caught up and in place to resume a normal schedule.
So essentially the Charlotte to DC leg is being priced at -$366. This doesn’t make any real sense, even in the case where you have less demand or where you need to move equipment to DC. Why pay people to sit on a plane that you have to move, when you could fly it empty? The only way I could see this making sense is if the airline is paid by some 3rd party (e.g. government, DC airport, DC chamber of commerce) for the number of tickets they sell to the DC area, or if some regulation prevents the airlines from moving empty planes.
Flying empty planes is expensive! It’s much more cost-effective to get paying passengers by offering them a discount for taking a layover instead of direct flight.
But in this case, they’re not just giving passengers discounts, they’re basically paying passengers to sit on their planes. Flying an empty plane is expensive, but flying a full plane where you paid every passenger is even more expensive.
You have to remember one thing – destination is not price sensitive. I choose my flight based on price. I choose my destination because I need to go there. This is simply an attempt at price discrimination on the part of the airlines, probably based on differences in numbers of alternative flights available to passengers. If Charlotte is a US Airways hub, then there are probably fewer other airlines going there. I’m a little surprised you found such a large price difference. Savvy fliers have known about this sort of thing for years, and pursued exactly the strategy suggested by Caden. The airlines figured out their tactic didn’t work when they flew a mostly empty plane from Charlotte to DC.
But other airlines aren’t rigid in their flight schedules, are they? They could easily start running more flights to Charlotte to capitalize on US Airways’ ridiculous price, could they not? Why would such a high price survive in a world of adaptive competition?
They *could* run more flights to Charlotte, but only if they can get enough passengers to make it worthwhile. I think you would have to have a lot more information about the airline industry to know if it is, in fact, worthwhile, but the fact that other airlines aren’t running more flights to Charlotte is an indicator that it is not worthwhile to them. And remember, they have to get enough passengers going to Charlotte AND leaving Charlotte.
Airlines also usually have monopolies or oligopolies at any given airport. Delta can charge an arm and a leg to fly to Detroit, which they all but own, but not to Atlanta because of Airtran/Southwest. U.S. Airways probably has an agreement with Charlotte to limit competition and allow them to recoup some of the losses they get by flying into more competitive airports.
Ken hit the nail on the head–price discrimination. The same seat on the plane will also vary in price based on when you buy it–2 months in advance, at the airport when you arrive, etc. They are being rational–maximizing revenue to maximize profit.
The higher 1-way airfare intends to severely discourage 1-Way ticket-buyers… and to cover possible additional costs/losses to the airline involved in handling the very small minority of travelers who need the 1-Way option.
Commercial aircraft fly round-trips on a standardized schedule– and it’s much more profitable & efficient (to the airline) to sell roundtrip tickets at specified dates/times to individual passengers. Hard-scheduled roundtrips sold to passengers greatly simplify the overall scheduling problems faced by all airlines. Empty seats generate zero profit… and filling return flight seats at the whim of the traveling public causes significant problems in airline schedules.
If you buy a 1-Way ticket, there’s then automatically an empty seat ‘somewhere’ on a return aircraft flight… that the airline would very much like to sell to someone. But since most all travelers make roundtrip flights — it’s very difficult to find another buyer for that 1-Way return ‘empty-seat’ left over. Plus, the airline doesn’t know exactly where that ‘empty-seat’ is in their future schedule.
So the airline solves their problem by charging about DOUBLE the price for a 1-Way ticket — thus, indirectly forcing the 1-Way traveler to pay upfront for that ‘empty-seat’ on a return flight.
Viewing this situation from a different perspective — one might conclude that the airlines are actually selling cheaper tickets to roundtrip buyers… in return for those buyers accepting a rigid out/back flight schedule. OTOH, 1-Way buyers might be viewed as correctly paying a market premium for flexibility in their return travel schedule.
Perhaps the market is right on this aspect of airline pricing (?)
Its because the representatives that we hire to go to Washington DC just refuse to waste their constituents money and will not pay for such price gouging! Cheaper prices for every city could be had if only more bureaucrats were involved in the pricing mechanism! /sarcasm
I think some of the above posters have nailed it. It’s expensive to fly a plane from one location to another. Flying empty planes is a needless expense. Needing planes to go to other locations so that they can fly people out of those locations is one reason. Another reason might be that there are simply fewer people wanting to go to a destination, and rather than fly a plane that’s half-empty, they’ll take additional passengers going to the other airport, and pick up more passengers who want to go to the first destination.
People like Greg don’t get this because they don’t understand the economics involved, and they don’t have to pay for airline fuel!
We need a better class of travel agents, whether computer or human, so we can game the system to get deep discounts on flights.
Then you will see prices actually start making sense.
Real cost per mile is way lower than it was 20 or 30 years ago, some of which probably is due to better search and comparison tools, as well as discount brand airlines like Southwest.
It is not that the airlines are giving a discount to passengers to fill planes. They are essentially paying people to sit on their planes. If your options are a) drive around for 4 hours and waste gas or b) drive around for 4 hours and pay your passenger $20/hr at the same time, which are you going to do? By your logic, the second option is better because at least you have a passenger.
People like Michael A. Clem don’t understand basic matematics, such as the fact that 645 > 279.
Greg, the simple fact is that the airline is *not* paying passengers to sit in their planes, they are simply charging them less if they have a layover. Simple math: 279 > 0. And you’ve done nothing to dispel the theory that this pricing difference is simply price discrimination. After all, if people are flying from Memphis to Charlotte, but not going on to Washington, then the airline has to pick up additional passengers going from Charlotte to Washington, or else fly with those seats empty.
You’re still trying to argue that an airline would prefer to charge $279 and have a passenger sitting on both legs of the trip than charge $645 and have a seat empty on one leg of the trip. No rational person is going to believe you. I’m not even sure what you mean by price discrimination here, but the original post you made was arguing that they give a discount so as to fill up the planes. There are plenty of reasons I can think of for the prices we see here, but filling up planes is not one of them. If the prices were $279 for the first leg or $289 for the whole trip, then your argument would hold water. As it stands, you’re trying to hold water with a net.
No, Greg. I’m sure that the airline would *love* to fill up the plane with nothing but passengers paying $645 to travel from Memphis to Charlotte. The problem is in finding enough people who want to do just that. Short of that, they have to do what they can to ensure that the flight is profitable, and not a net loss.
And waiting in “stand-by” is probably no longer possible with the security restrictions. You could get on a flight super cheap when they allowed that.
I don’t fly very often but noticed planes from Ft. Meyers to Chicago are always packed and Chicago to Fort Meyers usually not filled. Why is that?
There was a time when I needed to fly from Los Angeles to Pittsburgh, and drive back. I was also making fairly frequent trips back and forth by plane. (This was before TSA became such a pain that I stopped flying entirely.)
I simply scheduled a round trip with about a month or two between one leg and the other, and at a later time, repeated the process in such a way as to spend a weekend in Pittsburgh using two legs of two different round-trip tickets. I may, after a year, have simply not used the final leg of the final round trip, or perhaps I found a way to make things balance out; I don’t recall how it resolved, eventually.
One time, however, I made an error – I arrived in Pittsburgh in the morning and left for LAX that very same night. Far too much time on a plane in 24 hours for my taste – but I did breakfast with one set of friends, lunch with family, and dinner with a 3rd set, all in the same day.
Quite obviously this is a case of rich greedy private corporations exploiting the working class consumer. We need the government to step in and make all chartered flights free of charge. Transportation is a fundamental human right, not an economic good subject to fancy schmancy supply and demand theories out of touch with the needs of society. Anyone who thinks otherwise is a right wing nutjob who wants the poor to starve because he’s a sadist with mental health issues herp derp.
Smarty pants
I think this might be airline specific. It appears as though US airways places a great deal of value on a ‘direct flight’. Their rates drop significantly when you add a stop. I looked up US airways from Memphis to Chicago and figured out that while they have the cheapest connecting flights, they’re the most expensive direct flight. It seems they subsidize their cheap connectors by charging extra for their direct flight customers.
I have too often fallen into the trap of trying to explain a phenomena (usually an apparent “negative” attribute of the free market) that never actually occurred. So, Art, to answer one of your questions about how I would address Murray (or his champions), I would first ask if the situation actually occurred and for evidence of the fact.
This is now my default strategy and it has saved me time, given my opponents moments of pause and sometimes even shown them how they are not thinking critically.
So that is my advice… first verify, then consider, then defend (or change your position in light of more information!)
Moreover in all seriousness, it’s not like the airlines are saints. Maybe this really is a case of a company charging exuberant prices simply because it can. The consumers can respond by flooding their mailbox with angry emails or discouraging others from using that airline. Once enough people become aware of the problem and get outraged by such service, eventually the airline will have to bend to their demands and lower its prices.
Honestly this isn’t that hard to figure out. What you have is an anomoly in US Airways pricing scheme. If you want to see something interesting; check out a one way ticket from New York to Washington. As you look at the list of carriers and the price difference between non-stops and one-stops you will notice that US Airways is somehow different from every other airline on the list. They are the only airline that seems to have an issue with you only boarding one of their aircraft. Maybe they have a Keynesian CEO who figures that it’s better for the employment of pilots and flight attendents if you punish customers for flying efficiently.
As I recall, passenger rail train service in the early 20th century also had price discrimination for similar issues. Passengers would pay higher rates for shorter destinations than for longer destinations. The government solution was to prohibit such price discrimination. The result, of course, was to decrease and eventually end passenger rail service, forcing people to take buses or cars instead for their trips.
I would tell Murray: use it to your advantage.
Given that the airline ticket represents a contract entered by both parties without coercion, there is nothing to claim about that. And to my knowledge, neither Murray was forced to pay the price nor was the airline forced to charge as much for the given trip.
Maybe if you dig deep enough in this, you will probably find some official regulations which forces (or encourages, because it will be more profitable) the airlines to charge that way. In absence of that, and under the assumption that the airline is profitable, then the only conclusion is that by charging this way, it’s more profitable for the airline.
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