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Posted: September 09, 2010

Flying the supply-side skies

The market will keep airfares in check

Robert Polk

Recently there has been a lot of talk about the rising price of airline tickets. The proposed United/Continental (UA/CO) merger is also adding fuel to this fire. The obvious thought being that if UA/CO do merge the combined carrier will take even more capacity out of the system and airfares will go up even faster and higher. Add to that the fact that if that merger happens other legacy carriers will merge and yet more capacity will be taken out of the shrinking U.S. market.

I am a firm believer in the laws of supply and demand. I do not believe airfares can rise faster than the demand for airline seats. Granted, if you shrink supply enough then even low-level demand will create upward pressure on airfares. However, if enough capacity is taken out of the U.S. market by the legacy carriers you can bet your last upgrade that Southwest, JetBlue, AirTran and Frontier/Republic will be more than happy to step in to any market that becomes under-served. These low cost carriers will keep the legacy carriers' fares in check even if we end up with only three legacy carriers.

With this in mind, and before we all join in complaining about where airfares are today, we should take a look at where airfares have been in the past. I'm a big fan of numbers, spreadsheets, and charts so our agency has tracked the average price of an airline ticket (as purchased from our agency) week over week for over 30 years. For the past 19 years we have tracked this information in Excel and the data is much easier to use. Since 1992, the average price of a ticket purchased from our agency is $430.43. The average ticket price has risen only 2 percent in 18 years.

To me this data says the following:

• Airfares have not kept up with the rate of inflation, even when there was inflation.
• Airfares have not kept up with the increase of labor costs; fuel costs; airport costs; and just about any other cost you can name.
• Airfares are not high enough to cover current airline costs. (We could certainly debate how airlines spend money, but that will have to be another day.)
• Our country needs a strong and consistently profitable airline industry, and we currently have very few strong and consistently profitable carriers.
• Market forces will take care of airfares. In the past 18 years we have seen strong economies and weak economies. What we have not seen is wild fluctuations in the price of air travel. I firmly believe if the price of flying becomes too high both corporate and leisure travelers will stay home in droves.

You can certainly make the argument that while airfares have remained in a tight range for a long time the recent increase in the amount and number of ancillary fees has increased the cost of air travel, but for only SOME passengers. Passengers that need to check luggage, that choose to purchase a lunch on board or choose a premium seat have seen their costs increase. On the other hand if you have premier status with your preferred carrier or you do not need any additional services you have not been charged any ancillary fees. I do have to tell you that I really, really dislike having to pay these new fees when I am not traveling on my preferred carrier.

Please do not get me wrong -- I do not want to see the price of air travel rise. I can tell you first hand that many more people travel with our agency, and in general, when fares are low than when fares are high. Our industry needs more travelers, not fewer, and our agency needs more customers, not fewer. We can all complain about airfares today but please keep in mind air travel is still a real bargain, and simple supply and demand will keep them in check in the coming months and years. We do somehow need to figure out a way for the flying public to have attractive airfares and profitable carriers at the same time. If I could figure this out, I would be playing a lot more golf.
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Robert Polk is CEO of Polk Majestic Travel Group, Denver's largest independent travel agency. He welcomes your comments at Robert@polkmajestic.com

Robert Polk is CEO of Polk Majestic Travel Group, Denver's largest independent travel agency. He welcomes your comments and questions at Robert@polkmajestic.com.

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