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The airline ticket pricing game

Airlines – especially Air Canada – far from transparent about average fares, lowest fares and the games they play to boost ticket revenue

By: Michael Janigan

Perhaps no other aspect of air travel is so filled with inaccurate and misleading information as the market place for best prices for airline tickets. It is a problem that extends beyond national borders. Consumers Union, publisher of Consumers Reports said in a September 2000 media release that “when consumers are quoted prices for tickets, they often presume that these fares represent the best prices among all of the available flights. But that’s not always the case. Sometimes the seller may omit certain fares or certain carriers. When a consumer can’t find the cheapest prices the market has to offer, it raises disturbing questions about the sellers’ motives and biases.”

The same organization has urged that the U.S. Department of Transportation establish a Truth in Airfares Order that would require commercial passenger carriers to disclose directly to consumers the most recently available average fare and lowest fare charged by the carrier for the route and class quoted to the inquiring party.

With each reduction in Air Canada’s passenger capacity, average ticket prices go up

In Canada the lack of transparency is even more problematic due to the presence of a market-dominant airline. Public outcry about the merger of Air Canada and Canadian Airlines centred upon a prediction of diminished seat sales by the merged airline. Post merger, Air Canada, has attempted to mollify critics by pointing to its numerous advertised seat sales and its announcements of fare reductions as proof of their competitive commitments. However, a closer look at the consumer value of these claims is warranted.

On December 14, 2000, Air Canada announcing fare reductions in 600 markets across Canada. However, this good news story evaporated when the fine print was examined. The reductions were only to one class of fares. There are about 10 to 15 different fare classes, each with its own price. For example, there is a seat sale class, a 7- or 14-day advance booking class, full fare class, and so on. Each seat is given a fare class with an associated price. Most of the seats are higher priced with a minority in the lower priced classes. As each seat is booked, the pricing of all other seats change on the basis of a computer-driven program. Once the lower-priced seats are gone, seats in the more expensive fare classes are all that remain. This means that reductions in the number of lower-priced seats can lead to higher overall fares. By reason of the higher load, the remaining passengers have no choice but to take a seat in a more expensive fare class. With this in mind, it should be remembered that the December reductions had taken place after Air Canada announced on February 10, 2000 that it would cut capacity on domestic routes by 15% in the summer of 2000.

Consumers should not bet on a reduction in fares when fuel prices drop

It is also intriguing to monitor the pricing game at Air Canada in light of the prevailing government theory that all its fares are set as if a competitive market existed. The National Post on October 28, 2000, in its article, “Average Ticket Prices up” reported that Air Canada’s fares had increased 9% over the previous year. This increase was measured by the cost of a one-way fare. Part of this increase took place by reason of a 3% fare increase announced in late 1999 and ascribed to increased fuel costs. Interestingly enough, prices were not raised on competitive international routes. But, what is most puzzling is that in a speech on May 16, 2000 at the annual shareholders meeting, Air Canada’s President and CEO Robert Milton said that in 1999 “fuel expenses declined by five percent.”

The same rationale of rising fuel costs was revisited by Air Canada at the end of last year for another round of fare increases. On this occasion, Jet A1 fuel had gone up 6% in 2000 but was expected to drop again in 2001. However, consumers should not bet on a reduction in fares when fuel prices drop. Like any business with monopoly power, Air Canada has the ability to set fares in a largely non-competitive domestic markets to meet rising costs and inflated shareholder expectations. It can also use the revenue to potentially cross-subsidize its more competitive operations. And as we have described earlier, the Canadian Transportation Agency is effectively hamstrung in its ability to set reasonable air fares even if it had the political or regulatory will to do so.

Michael Janigan is Executive Director and General Counsel of the Public Interest Advocacy Centre (PIAC), an Ottawa based NGO providing legal representation and research on behalf ordinary consumers of important public services. They’re on the Web at www.piac.ca

 

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