One Mile at a Time noted $16 one way fares on American Airlines between Miami and Los Angeles. These are ‘basic economy’ fares that usually aren’t changeable (although they are right now to encourage bookings) and don’t allow advance seat assignments (but with planes empty you can more or less have any seat you wish).
These aren’t even the lowest cross country flights that are out there. For the next 30 days you can buy Fort Lauderdale – Los Angeles for just $12.89. (After that the lowest fare jumps to almost $27.)
Now, even though the $2 trillion CARES Act – among other things – waives the 7.5% excise tax on domestic airfare, that only represents 21 cents worth of savings here and the bulk of this $12.89 is still in (airport and security) taxes. The airfare to the airline is just $2.79 for the flight.
Fares like these aren’t an anomaly either. I see Austin – Los Angeles $24; Denver – Phoenix $25; Houston – San Francisco $43; Newark – Charlotte $14 (on Spirit Airlines, American is $25). And these were just the first markets I checked, with low low pricing found across several airlines.
Low Prices Aren’t Stimulating Much Demand
I’d expect that anyone traveling now to be price insensitive. Airline load factors are in the teens, meaning that even with fewer flights the ones that do operate are mostly empty. The TSA is screening about 90% fewer passengers than a year ago.
In the immediate aftermath of 9/11 I actually saw average airfares rise because (1) discounting wouldn’t put additional people on planes and (2) those who were flying more or less had no choice at any close margin.
Below Marginal Cost Pricing
A ‘saver award’ where a customer redeems miles for a domestic seat that’s going to go empty anyway was traditionally thought to still ‘cost’ the airline $20 – $25 for processing, incremental fuel due to weight, etc. They’re not even coming close to covering that here. Airlines are pricing seats below marginal cost. And with so few passengers they can’t even laugh it off with ‘we lose money on each passenger but make it up in volume.
Discounting isn’t limited to a single airline, so if any carrier wants passengers they need to match pricing. And the risk to the consumer is limited, if you book one of these right now and change your plans you won’t be charged a fee to change plans later – the ticket will become full credit towards purchase of future travel (purchase must generally be made within 12 months). For those who need to travel they can do so for less than I’ve ever seen it.
If you’re looking for a great deal (although above marginal cost) it’s notable that I’m still seeing $54 non-stop flights between Florida and California as far out as November (and $65 one-ways in January).
Why Would Airlines Do This?
In the past if an airline published a fare this low they might cancel tickets calling it a mistake (something the Department of Transportation will no longer stop them from doing). So why are they pricing so intentionally low right now? I can think of a few possibilities.
- Avoid shutdown. They want to show they still have some passengers, that people still need to get around, so that the federal government doesn’t order total shutdown of airlines. A shutdown is itself costly because it means parking planes and prepping them for storage, and pilots lose their ‘current’ status without enough takeoffs and landings.
- Persuasive for a bailout. Consumer demand will be part of their application for bailout funding. The legislation has been passed but airlines still have to apply and their applications need to be approved.
- Fear of negative P.R. from empty planes. The government bailout requires airlines to maintain some service to each airport where they operate, and they don’t want to be criticized for ghost flights, an easy target of environmentalists.
- Beneficence. Airlines are still flying planes, and if that’s going to happen anyway and they’re losing money anyway they might as well transport passengers. They’re even doing some good in the process. But good will alone doesn’t make sense as an explanation when United Airlines says the government bailout just delays furloughs, which should still be expected come the fall.
- They’re not actually losing money. Marginal cost is simply lower than we thought. Airlines had an incentive to low ball their marginal cost for frequent flyer accounting purposes, but never really went below $20. Is the market response telling us that airlines aren’t actually losing money on an incremental passenger priced this low? If they’re paying flight attendants and gate agents anyway, everything is done electronically, and oil is in the low $20s per barrel, that incremental passenger may not be as costly as they used to be. We just need to update our priors.
- Testing. Live and Let’s Fly thinks airlines are testing demand to see if it’s possible to bring out passengers. I’m not sure they’d try literally “any non-negative price” though, why not stick to marginal cost which is really what they’d need to know? And since airlines are, deregulation aside, one of the industries most interwoven with government (which runs air traffic control and security and owns the airports, and gets sign off on nearly every business practice) even without a pending bailout it seems unlikely they’d be trying to do this in markets where government ‘shelter in place’ orders are in effect.
I don’t find #4 or 5 persuasive. I don’t think #6 explains prices below $13. And while there’s a benefit to avoiding #3, environmental concerns seem to have taken a back seat in the current crisis (see, for instance, suspension of plastic bag bans – and airlines have generally suspended recycling of inflight items). So suspect the motivation here is optics with the government, rather than the public, as consumer (some combination of #1 and #2). Can you think of any other reasons?