I bet you didn’t know this: An airline can charge you more for your ticket after you bought it. I’m not talking about ancillary fees to check a bag or have an exit row seat. This is the about the basic ticket price. After you have bought a $200 round trip between Chicago and Kansas City, United can come back and say, “Sorry, it is really is going to be $250 for the trip.” According to the Wall Street Journal (Allegiant Proposes Fluctuating Air Fares, Mar 2) all they need to is “directly notify consumers and disclose in their legal ‘contracts of carriage’ that they may do so.” This has probably never happened to you. Air travel is a pretty competitive business and I suspect that firms just don’t need the negative publicity that would inevitably follow such a move.
Still there is a move afoot for the Department of Transportation to eliminate this loophole so that the ticket price is the ticket price as all of us had been assuming all along. But here is the interesting part:
Allegiant Travel Co., owner of a low-fare leisure airline in Las Vegas, wants the Transportation Department to let it offer the option of selling plane tickets whose prices could change before takeoff. Worried about rising oil prices due to unrest in the Arab world, Allegiant said it would continue offering consumers traditional “locked-in” fares that wouldn’t fluctuate. But the airline wants permission to add the option of lower fares that could rise or fall by a preset limit, depending on how much fuel costs change between booking and the trip. …
Allegiant’s niche is carrying price-conscious leisure travelers from small U.S. cities to vacation destinations in Florida, Arizona, Nevada and California. Its average fare was just $76 one-way last year, but the company piled on another $30 per ticket in fees for things like advanced seat assignments and travel-package components such as hotel and car bookings.
Because many passengers book months ahead, it is difficult for Allegiant—which unlike most airlines doesn’t hedge its future fuel needs—to predict what the fuel price will be at the time of travel, it said in its DOT filing. “Fundamental fairness dictates that both parties to a travel transaction have available a measure of protection,” Allegiant said. The price of jet fuel has risen nearly 20% since the end of 2010.
Fundamental fairness, indeed. Allegiant is obviously in a different position from more mainstream airlines but if they make this work, you got to think that other airlines will follow suit.
I have some doubts about this plan. While Allegiant might see this as a question of fairness, it strikes me as stacked against the consumer. Allegiant might not hedge its fuel costs, but it certainly has a better idea than individual customers about where jet fuel prices are going to go. For example, I know gas prices are cyclical and are generally higher in the summer. I have no idea what happens with jet fuel prices. Depending on how price bounds are set, Allegiant may be able to dupe customers into helping it lower the impact of seasonal variations in fuel prices.
There is also the question of when prices hikes are executed. If I buy a ticket six months out, do I need to be worried about what the price of fuel is in the week that I travel or about the peak price over the six months? It’s not clear to me which is best for the consumer if fares also adjust down. On the one hand, if prices spike three months out from my flight, I would argue that I shouldn’t be affected because they could have delayed purchasing for my flight. At the same time, I would hope that they would stock up if prices dropped significantly a month before my flight.
While betting on fuel prices might inefficiently shift risk on to customers (that’s going to be so if customers are more risk averse than the firm), this is not say having airline tickets as contingent contracts is per se bad. I have colleagues who have proposed that airlines offer tickets that don’t specify exactly what flight passengers will be on. That is, the customer will know that she will go from O’Hare to Miami on Tuesday morning but won’t be told until, say, the day before that it will be the 8:30 flight instead of the 11:00 flight. Clearly this imposes some inconvenience on the customer but not risk in the overall price. It also helps the airline since they can now manage over booking and fare classes across multiple flights. That facilitates lower prices for these flexible tickets.