This summer,  I will be traveling to Bulgaria for a few weeks to enjoy the Mediterranean with my girlfriend. We’ve been looking at ticket prices over the last few months, and they’ve been incredibly high. I’ve started looking into why this might be and have come across two reasons.

First, airlines are cutting back capacity; some voluntarily, while others due to strikes. The recession meant cutting back everywhere, and now that demand is jumping, airlines are just happy to have planes packed again. Increased demand with decreased supply equals price increases.

Secondly, airlines have enacted costly fees. In my opinion, these fees are a scam, and are actually hidden from the consumer and labeled as “taxes”. In many cases the fees are almost as much as the flight itself! Let’s have a look:

1. “Peak Travel Fees” – An extra $30 fee for tickets through Labor Day.
2. “Fuel Surcharges” – In some cases $100-200 extra per flight for the cost of fuel.

Wait a second, isn’t fuel included in the price of a ticket? I’m certainly not paying for the comfort of stuffing my 6’3″ body into a coach seat, and I would think that the cost of transportation is included in the cost of a ticket. In reality, a fuel “surcharge” should really only apply if you buy your ticket and then after you purchase the ticket the price of fuel skyrockets….in which case, why hasn’t the airline hedged this risk by buying oil futures/options? Or are airlines forgetting that fuel makes up 30% of their operating expense  (look at the 10-k for Southwest if you’re curious) and planning for cost variations is encouraged.

But lets assume that this is expected for a second and that this fuel surcharge includes the FULL price of fuel, how much would  a passenger flying to Sofia expect to pay?

According to TravelMath, the flight to Sofia is just over 4,500 miles.  How Stuff Works estimates that an international flight burns .01 gallons of fuel per mile per person. Lastly, the spot price of jet fuel from the IATA is $2.04 per gallon.

Multiply all of this together and you get $92.50.

Thus, when you take into account the 4 legs of my round trip flight, you get 4 x $30 (for the summer peak fee) and 2 x $92.50 for the fuel fees which equals $305. And indeed, thats about where most of the flights fees are. Granted, most of this is hidden from view, so it’s just an estimate…but it all feels very sneaky to me.

So why does this occur? Flyers are INCREDIBLY price sensitive. Airlines used to offer all sorts of perks from gourmet meals to legroom to juggling midgets for entertainment. But when it comes down to brass tacks, people buy based on price. Allowing these fees encourages airlines to lower ticket prices for advertising and marketing purposes (only $300 to get to Europe! <tiny font> just pay $900 in fees! </tiny font>). And indeed, when you look at the varying prices the “cheapest ticket” is $787 with $490 in fees and the most expensive ticket is $1,179 with $160 in fees.  All told, there’s only $60 difference between the two.

Alternatively, during the fuel scare a few years back many airlines bought long term hedges on oil that allowed them to lock in a certain price on fuel. A few, such as Southwest, were smart and made a killing. Many, such as United, lost millions upon millions of dollars when the price of oil dropped.  I haven’t looked into this in any depth, but its possible that the airlines are locked into these bad contracts and the surcharge just makes whole any difference between the spot price of oil and the exorbitantly high price of oil the airlines paid for it.

My last throwaway hypothesis, and my most diabolical thought, is that these fees allow airlines to collude on prices while still looking competitive. “My price is $787 and my competitors price is $1,179!!”  Both airlines have almost identical total costs while still arguing perfect competition.

What do you guys think? Will competition erode these excess fees?

Related articles by Zemanta

• Egencia Releases 2010 Corporate Travel Global Benchmarking Study and Travel Manager Research (newswire.ca)
• Airlines Add Fees for Summer Travel (abcnews.go.com)
• U.S. airlines impose peak travel fees on summer flights (seattletimes.nwsource.com)
• Lawsuit claims British Airways guilty of illegal, deliberately deceptive pricing (newswire.ca)
• U.S. Proposes Rules on Airline Tickets and Fees (nytimes.com)