We’ve written before about the surcharge we pay as consumers for civic bragging rights that we are a hub, first for Northwest Airlines and now for Delta Airlines. Economic development types greet expressions of concern as heresy, suggesting we should celebrate the fact that we can fly direct to many cities (fewer now with the Delta cutbacks in flights) and that we should be willing to pay more for the pleasure.
A blogger at the New York Times has now quantified the most unfair airports in the U.S. as judged by the cost of tickets. Memphis International Airport is #2.
A $550 airline ticket to Washington, D.C., a couple of weeks ago convinced us that the Memphis surcharge is out of hand. (That ticket was for a 21-day fare.) We realized that we’re more than willing to spend an hour changing flights in another city for a lower fare.
These high airfares have long been a serious issue by Memphians, and it is also a challenge cited by companies looking to move to Memphis or considering expansion here. Multiply the Memphis surcharge by the number of employees and consultants flying in and out of Memphis and it gets to be real money pretty quick.
We now know that the surcharge is almost 30% for Memphians flying out of Memphis International Airport. Hopefully, finally, someone will put this issue on the civic agenda and look for ways to improve things.
From New York Times blog:
By NATE SILVER
What’s a fair airfare?
Here’s a hint: It’s probably not the one you’re paying if you’re flying out of Newark, Cincinnati or Houston.
As I’ve been working on my monthly magazine column, which focuses on how you can leverage market inefficiencies to your advantage, I’ve been doing some research on airlines, whose labyrinthine pricing schemes ensure that customers who aren’t prepared to exploit the pricing oddities will instead become the suckers.
Seasoned travelers know a few tricks — for instance, the best time to look for bargain airfares is often on the weekend — and I’ll aim to teach you a few more in the magazine column. But perhaps the most basic strategy is to know which airports tend to be relatively cheap or relatively expensive to fly to or from. For instance, while individual fares vary significantly, the average passenger flying out of Newark Liberty Airport pays about 25 percent more than someone flying out of John F. Kennedy International for an equivalent seat on an equivalent flight.
I’m certainly not the first person to tackle this subject. Lists of the cheapest or most expensive airports usually appear a couple of times a year in major newspapers and magazines. The government also publishes extensive data on commercial airfares.
But some of these approaches suffer from flaws of various kinds. They may take a simple average of all fares at a given airport, for instance, which is problematic because each airport offers flights to a different mix of destinations. At LaGuardia Airport, for example, flights of over 1,500 miles are prohibited in most circumstances (that’s why you can’t find a nonstop flight from LaGuardia to Los Angeles), while Kennedy and Newark offer many long-haul flights. Conversely, the cities of the northwestern United States are relatively far apart, both from one another and from the rest of the country, so the average airfare into, say, Seattle is almost certainly going to be quite high.
The question, then, is not where are the average fares highest, but where are they the most unfair.
I doubt anyone would dispute that it’s fair for an airline to charge you more for traveling a longer distance, so distance is something we’ll need to control for. I’d also argue that it’s fair to charge you more for flying into or out of a smaller market where there is less demand for air travel. Fewer economies of scale are available in a place like that: the airline can run fewer profitable flights each day, so the costs of ground services like check-in and baggage handling will be spread over fewer passengers, and aircraft may be idle longer.
At the same time, smaller airports tend to be served by fewer airlines, and lack of competition can lead to higher prices; that isn’t fair to the traveler. Nor is it fair if your home airport is one like Memphis, where discount airlines like Southwest have had trouble breaking in to compete with full-fare carriers, despite years of trying.
What we need is an approach that distinguishes airfares that are high because of monopoly pricing from those on routes that are legitimately expensive to fly.
The method that I’ve adopted to study this is a tiny bit involved — readers who are not statistically inclined may want to skip ahead to the charts of the results.
The basis of the approach is data published by the Bureau of Transportation Statistics, which periodically releases a 10 percent sample of all domestic airline itineraries, including information on the fares paid. The particular files that I’m using come from the third quarter of 2010 and include data on, literally, millions of passengers.
The data required some cleanup. I’ve limited the analysis to round-trip tickets in which all segments were flown in coach (economy) class — the type of flights that most of us are interested in. I also eliminated itineraries where the passenger traveled outside the contiguous 48 states, had more than one stop (not counting layovers), or had different origin and departure airports. I removed fares that the bureau marked as being implausibly expensive (given the millions of records, these may have been data-entry errors) — or which were implausibly cheap.
I then ran a big regression analysis that attempts to explain airfares based on several factors.
The first factor is the distance traveled — we use the distance from the origin airport to the destination as though it were a nonstop flight, whether or not there was a layover along the way (since the airline is not exactly doing the passenger a favor by routing her through, say, Baltimore on her way from Buffalo to Atlanta, increasing the number of miles flown).
Second is a variable representing the demand for travel at both the origin and destination airports. Demand is assumed to be a function of the number of origin-and-departure passengers that an airport handled (not counting passengers who passed through the airport on a layover), but with a modification for average ticket prices. In other words, if the average fare at an airport was high, the model assumed that more people would have wanted to fly there but were deterred by the cost, and if the average fare was low, that some passengers would not have flown if the fares had not been such a bargain. (Specifically, it assumes unitary elasticity — a 20 percent increase in fares results in a 20 percent reduction in travel — for which there is support in the empirical literature.) There are demand variables specific to both the airport and the metropolitan area; these variables are expressed as logarithms.
These two factors — distance to destination and size of market — are the ones I would propose can be fairly reflected in ticket prices.
The regression analysis also accounts for three other factors that have significant effects on pricing. These are, respectively, the market share at the origin and destination airports held collectively by the five “legacy carriers” (United, American, Delta, Continental and US Air); the market share held by Southwest Airlines; and the market share held by the largest single carrier at that airport (for instance, Delta and its affiliates are responsible for about 66 percent of all traffic at Atlanta).
Prices are higher the more the legacy airlines dominate an airport, but they also tend to be a bit higher where Southwest has a large share as opposed to other low-cost carriers like AirTran and JetBlue. (Southwest is cheap, but it isn’t quite as cheap as some of these up-and-coming airlines and now represents something of a middle ground.) Also, prices tend to be higher when any one airline dominates an airport, regardless of whether it is a legacy carrier or a low-cost one.
These somewhat complex mechanics allow me to estimate what each airfare “should” have been assuming the airport had an average degree of competition between and among the legacy carriers, Southwest, and the other low-cost airlines. I can then compare these “should” fares to the average prices that passengers actually paid.
At Newark Airport, for example, I estimate that the average fare should have been $382, given the itineraries that the passengers in the bureau sample traveled. However, the average round-trip fare that those passengers actually paid was $454 — a 19 percent markup above fair prices.
At LaGuardia Airport, by contrast, prices were more in line with market rates (the average ticket price was $338, as compared to a fair rate of $331). And prices were actually somewhat cheap at J.F.K. (average price $389; fair price $413). Passengers at Newark paid an average of 12 percent more than those at J.F.K. for their trips to Los Angeles, 49 percent more for those to Chicago, 65 percent more to Dallas, and 118 percent more to Washington, D.C.
The main reason for the discrepancy is probably that Continental Airlines dominates Newark Airport — it currently handles 63 percent of domestic passenger traffic there, not counting the 6 percent for United Airlines, with which it is in the process of merging. No one airline dominates either LaGuardia or J.F.K. to that extent.
Also, New York’s airports are somewhat inefficiently configured, with both J.F.K. and LaGuardia in the same general direction from Manhattan. Many passengers in north-central New Jersey face an unpleasant choice between commuting two hours in traffic to either J.F.K. or Philadelphia, where tickets are fairly priced, or paying the premium that the carriers in Newark are happy to extract.
Overpricing is not just a New York (or New Jersey) problem, though. Passengers in the middle of the country often bear the most burden, including many of those in the poorest parts of the United States:
The table above reflects the 15 most overpriced airports from among the 50 where the most passengers begin and end their air travel. Topping the list is George Bush Intercontinental Airport in Houston, where passengers paid a premium of $85 — about 24 percent — on the average round-trip coach ticket. (Flights to Houston’s older, smaller field, William P. Hobby Airport, were only $8 overpriced).
Next up was Newark. Then we see several other airports, like Minneapolis, Detroit, Cleveland, Dallas, and Washington Dulles, where one of the legacy carriers has a dominant share of traffic. O’Hare Airport in Chicago was expensive despite — or perhaps because of — two legacy carriers (American and United) having a hub there.
These, conversely, were the best airports for frequent fliers:
The unifying theme is vacation destinations, like Las Vegas and pretty much anywhere in Florida. It’s important to keep in mind that the fares here reflect average prices. The legacy carriers often charge comparable fares to those of the discounters like Southwest when they have plenty of seats to fill, but when supply is short or the passenger books at the last minute, they may raise their prices several-fold. For instance, about 10 percent of economy-class round trips were sold at $750 or more by Continental, as compared to just 1 percent for Southwest.
This is a more viable strategy, however, for business destinations than for leisure ones. While a casual traveler can probably forgo a weekend in Las Vegas, a last-minute client meeting in Houston may be unavoidable (plus, someone else is probably paying for the ticket).
The most competitively priced destinations tended to be warm-weather cities. It’s hard to know whether this is because cities with nice weather attract a lot of price-sensitive leisure travelers, or perhaps because they entail less risk of delays and cancellations, which are as costly to the airline as to the passenger.
But there were some exceptions. General Mitchell International Airport in Milwaukee, for instance, was about $75 underpriced on average, the result of a fare war among several discount carriers. Buffalo — not known as a vacation haven, although it’s close to Niagara Falls — is also a nice city for air travelers. While both Dulles and Reagan National Airports, dominated by legacy carriers, are overpriced, Baltimore/Washington International Airport, a Southwest hub, is more affordable.
Let’s take a quick look at the data for mid-size airports — those ranked between No. 51 and No. 100 in origin-and-departure traffic.
Perhaps the most unfairly priced airport in America is Northwest Arkansas Regional in Fayetteville. Economy-class round trip tickets cost an average of $527 there, $158 above fair rates.
The reason, no doubt, is because the traffic there is dominated by business travelers on their way to and from the headquarters of Wal-Mart in nearby Bentonville. Although Wal-Mart is famous for its sensitivity to prices, and has saved consumers billions of dollars over the years, its pricing power evidently does not extend to the air fares its executives and clients have to cough up.
Memphis, about 28 percent overpriced, is nearly as bad, because Delta controls about two-thirds of the passenger traffic and FedEx ties up a lot of the airport’s flight capacity with its shipping hub. (Memphis is the busiest cargo airport in the Western Hemisphere.)
Another overpriced airport is Cincinnati/Northern Kentucky International, a former Delta hub that no longer gets as much layover traffic, but where Delta still has a 75 percent market share.
Almost every airport in this part of the country, in fact — Little Rock, Knoxville, Huntsville, Oklahoma City — is significantly overpriced. This is also the United States’s poorest region; in their own small way, expensive airfares are probably hampering the area’s economic development.
The cheapest midsize airports, meanwhile, are again those associated with leisure travel. Atlantic City, with an average round-trip fare of just $157, will leave you with plenty of money to blow at the craps table.
Finally, I’ve tracked the data for all 230 airports that serve more than about 100 origin-and-departure passengers a day.
To read the rest, click here.
Southwest hasn’t tried to come here before.
Let me say this: the analysis isn’t entirely correct. One reason Memphis fares are high is because only 20 percent of its passengers originate their flights here. If Memphis had a higher rate of origination, then I would imagine that things would be different.
Airfares here are ridiculous. I think the rate of orgination isn’t THE factor, but I know I’m tired of Arnold Perl and his crowd acting like it is and that we should smile and enjoy getting gouged. All I know is that the rates are suddenly less when some other airline besides NW or Delta reduced fares. There are airports with low origination rates that have much lower rates than MEM.
Several factors can determine airfares, but most air travel authorities cite competition as the number one factor. If there are a number of carriers flying out of a particular airport, the airfare is reduced. This is because all the airlines are competing for a limited number of passengers. Throw a discount carrier in the mix and the competition is even greater. Paying for the perk of last-minute booking and a refundable or changeable ticket is also going to increase the airfare. Gas prices have an impact on the fares as well.
The season plays a big role in determining airfare, especially during holidays when travel demand is at its peak. Based on the standard economic theory of supply and demand, the demand is high and people are willing to pay more. The least expensive day to fly is often on the actual holiday itself, such as Thanksgiving Day or Christmas Day.
The airports can play a role in airfares. Many airports, especially the larger airports, place surcharges on the airlines to fund upgrades to their facilities, and the airlines tack those onto the airfare. These fees are often referred to as Passenger Facility Charges. Some may not know that actual total airfares are never as advertised. The posted price won’t include the numerous fees and taxes like fuel surcharges, airport facility charges, 9/11 security fees and baggage fees among others.
Finally, many of the larger “legacy” airlines like American, Delta and United have a tiered fare structure that usually includes three classes: First Class, Business and Coach. Airfare is determined based on the level of services and amenities the passenger receives.
There are airlines, however, that directly try to offer lower fares than the major carriers and also impact the airfare charged by the competition. These “low-fare carriers,” like Southwest and JetBlue, usually offer the same fare on all seats (no first-class or business sections), operate from smaller airports and keep their flights’ stops in a straight line – known as a “point-to-point” schedule. They use these cost-cutting measures to pass the savings on to their passengers. The mere presence of a low-fare carrier in a city can make airfares drop in that area.
“Regional airports are also notorious for lack of
competition, but you can find this problem at larger
facilities too: for years, Cincinnati was one of the
nation’s most expensive airports and it drove
Midwestern fliers to distraction. As a result, more
passengers got in their cars and drove to other
airports. Dayton and even Indianapolis began
siphoning off Cincinnati passengers, simply because
airline tickets were cheaper.
This is where the lack of competition comes in, or we
can use the word “monopoly” if you like: no, Delta
isn’t the only airline out of Cincinnati, but it’s long
been a Delta hub devoid of real rivals and it charged
accordingly. Eventually, though, Delta presumably
tired of losing business and in early 2009, the carrier
slashed prices so Cincinnati no longer tops the most
expensive list (and here’s another comment I hear all
the time: “What took them so long?”).
In fact, Cincinnati showed the biggest drop in airfares
among all airports during the past third quarter
compared with the third quarter of 2008. Minneapolis
and Milwaukee followed close behind in this price
drop derby.
Minneapolis and Milwaukee? Yes, you can credit
the “Southwest effect.” When the low-cost carrier sets
its sights on a new town, airfare wars
Mediaverse-
The U.S. Department of Transportation Origin-Destination Survey indicates that local O&D traffic at Memphis Int’l represents over 40% (44.1% in ’07) of the total number of passengers utilizing the airport annually. While Southwest has not entered the local market, AirTran has served Memphis for a number of years and as the NYTimes blog noted, typically offers lower fares than Southwest. Passenger counts for AirTran grew by 42% between 2003 and 2007 but still only accounted for 7% of the local O&D traffic. Meanwhile, Southwest no longer represents a true discount airline operation and finds itself in the middle ground between low-cost carriers such as AirTran and Jet Blue and the legacies. Of course the pending merger of Southwest and AirTran will upset this balance somewhat.
The question then follows- where a true discount airline does indeed have a presence, why does the market choose to pay actively higher fares to fly with the legacy carriers?
Everyone knows Memphis has been a rip for years. Memphis is not in the big leagues anyway, they obviously categorize Memphis as “MID-size” anyway.
Urbanut,
Convenience. I’ll have to check but the number of daily flights and destinations by AirTran and the other “low-fare” carriers that have come to/left Memphis doesn’t righteously compare to the amount of flights that legacy carriers have. In any event, historically, local origination hasn’t been high and I doubt that will change much if Southwest backs into the market.
…but that is exactly my point. While there is much said about overpriced fares in Memphis- and I definitely agree with that assertion- the vast majority of O&D traffic obviously places a higher value on convenience than they do on cost. If the O&D traffic at Memphis International remains in the 4-5 million passengers range that currently exists, it will represent the same level of O&D traffic found in Nashville as recently as 2002. While not “high”, that is a substantial market for any airline as it represents a daily average of 12,328 passengers either beginning or terminating a journey here. That in turn equates to approximately 90 individual 737-700 flights (the model utilized by Southwest) filled to capacity.
I don’t know what the point really is, but anybody who lives, has lived, travels, or has traveled to Memphis for a long time, knows that fares have sucked forever. Futhermore, the airport itself is not an inviting facility at all when compared to a lot of other airports. Heck the aiport serving Ft. Myers offers a more pleasant environment and service(s).
The attitudes of the airport workers from curbside/taxi, counter personnel, food servers etc in the Memphis Airport are unpleasant by comparison as well. In some cases I’ve experienced downright nasty and totally indifferent personnel who can hardly speak English. Many others are sloveny stupid acting and in no hurry to provide excellent service with a positive attitude. Even the TSA agents are generally stupid acting and unfprofessional by comparison.
Sidenote: I generally wait for my baggage at the Claim area, longer in Memphis than any other city to which I travel. They must have the slowest handlers in the nation.
This combined with the poorly planned offsite car rental facilities, does nothing to enhance a positive, and convenient encounter. Most of the car rental personnel, drivers, etc act equally detached, indifferent and moronic about the simplest of things. No one seems to have a professional sense of urgency and purpose. Most seem to be sleepwalking through their jobs. This sentiment is everywhere in the Memphis International Airport community.
A question was asked:
>>>>The question then follows- where a true discount airline does indeed have a presence, why does the market choose to pay actively higher fares to fly with the legacy carriers? <<<<<<
My answer is that perhaps the traveling public out of any city doing that, must be stupid and have no clue how th shape of affect the market with their own dollars.
Or, maybe they think they're getting some valued-added benefit, like air miles, bonuses, points, or future discounts. Also, it might be because of buffoons booking coporate travel at the last minute with no regard to planned travel- using OPM maybe.
It's obviously not because they are smart consumers.
Anon-
Despite your highly articulate response, you obviously missed the point of the comment. That being, of course, that time is valuable in and of itself. In this case apparently the time saved by way of non-stop flights supports current pricing levels.
Lots of other cities have time saved by numerous non-stop flights ! that doesn’t support getting screwed..it “supports” it because the people and traveling public are rolling over and playing dead about the issue for YEARS in Memphis, TN. They have been disengaged. The airport authority has been indifferent and in many times acting in CONCERT with airlines to maintain the status quo (Memphis loves the status quo, always has). NW Airlines lobbied and got preferential treatment about gates, gate access, landings, services, gate fees, etc etc…not to mention effectively keeping out other airlines by negotiating biased contracts with the airport authority and others. They essentially kept competition OUT of the Memphis International Airport, or in effect had “veto power” (de facto) over a lot of decisions. This was inttentioanlly done years and years ago. Bribes were also paid, perks offered as well. Memphis was being stupid a long time ago.