$13 Cross Country Airfares! But Why Are Airlines Pricing Below Marginal Cost?

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.

  1. 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.

  2. 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.

  3. 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.

  4. 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.

  5. 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.

  6. 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?

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community InsideFlyer.com, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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Comments

  1. To end these no-fly times, we should NOT be flying. Offering very cheap fares only gives temptation/excuses/reason to not #stayhome and stay #6ft_apart. Bargain fares will help keep Covid-19 around longer. #stayhealthy #shelterinplace

  2. Since I have recovered from the WuHan Virus, I can now fly without fear. I’ve booked a ton of flights for super-cheap fares. I love it.

  3. 7. Trying to keep contractors, vendors, and suppliers in business to avoid future headaches. Its possible that if they don’t maintain a basic low level of flying all their contractors that provide meals, repairs, and other obscure services the general public is unaware of would have to let go their senior employees on the ground, the ones who would train the rest up when things come back, and would lose various licenses, certifications, have equipment scrapped, etc. Its possible that the airlines contracted many of these things out so long ago that they have no ability to do it themselves and if they let things go they could not start things back up because nobody could perform routine maintenance on the machines to de-ice the wings or refuel the jets etc.

  4. While airlines are waiving their change fees I understood that people would still have to pay the difference between the fare they booked and the one they want. Wouldn’t this be a way of getting people into the system so then the sunk cost of buying this cheap ticket compels them to pay the higher fee for the flight they really want?

  5. I think #5, or a version of #5 is _potentially_ relevant. Let’s use LCCs/ULCCs in Europe as an example (to assess #5): they sometimes sell fares at these prices, and not just in the dead-of-winter. It’s not unheard of to find a £10 flight from London to Berlin. Europe is arguably a decent comparison because they’re a region with similar geographic and financial characteristics. Admittedly, MIA-LAX is a much longer segment and European LCCs/ULCCs probably make a lot on ancillaries, but my point I think, is that some airlines do fares like this very regularly.

  6. Can I book 2 different itineraries to the same destination with overlapping dates so I have a choice on when to fly then cancel or not show up for one as the dates get closer?

  7. i suppose that there’s an extremely limited number of people (for now) who could mileage run on AA or AS for Alaska status if they recovered from Covid-19.

  8. I’m surprised we’re not seeing mileage runs. If OMAAT wasn’t a millionaire I would expect him to go for United status (if they finally let him) and try to earn a bunch of United vouchers.

  9. Not cancelling the flight prevents ticketed passengers from getting refunds. The pricing also prevents people who voluntarily cancelled earlier flights from booking a new flight they expect to get cancelled and then requesting a refund.

  10. I think that it’s primarily #2. If not for the bailout, I think that you would see a lot of airlines just shut down, which is what has happened internationally. But if UA/DL/AA/SW shut down, the Government would at least think twice before bailing them out. On the other hand, if they charged regular prices for such flights, you would see plenty of “ghost flights,” which would make the bailout seem pointless.

  11. Related to #3, is there a “use it or lose it” issue here? That is, if an airline chooses not to make a flight, does it risk being denied the right to make that flight in the future?

  12. I would focus on low jet fuel prices. In addition to low oil prices, excise tax of 20c a gallon on jet fuel has been suspended. Additionally, the price refiners receive to refine jet fuel has also fallen to an all time low.

  13. This is terrible, regardless of the airline’s rationale. They are just spreading the virus from here to there and back again. Plus it is an environmental disaster to be flying planes with just a few passengers, even with cargo. Cargo can be left to cargo planes.

    You got the taxpayer bailout money you asked for so do the country a favor: park your planes and send your employees home with there paychecks.

  14. People should not be flying now. Unless it’s an emergency. Many people are working very hard to get people to stay at home as a key component of “flattening the curve”. While of course mileage runs are tempting, they are utterly and completely inappropriate at the moment. And it’s inexcusable that airlines are potentially stimulating even the smallest amount of incremental demand, demand that could cause suffering and death. The stakes are high.

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