Should airlines be allowed to advertise fares without including taxes and fees?

Should airlines be allowed to advertised fares that do not include taxes and fees? Screengrab: Kayak.

Should airlines be allowed to advertised fares that do not include taxes and fees? Screengrab: Kayak.

Are you familiar with the Transparent Airfares Act of 2014?

The proposed bill in Congress would allow airlines to go back to the practice of advertising their airfares without taxes. So a carrier could advertise a $99 fare online, but then customers would be hit with additional taxes. The actual ticket would cost a good deal more than the advertised price.

I’m no Washington, D.C. insider, so I can’t tell you if the bill, introduced by Rep. Bill Shuster (R-Penn.) has a chance of becoming law. I do know that Airlines 4 America, the trade group for major airlines, including American, Delta, Southwest and United, supports it.

On April 9, the House Transportation and Infrastructure Committee moved to support the bill.

“We thank Chairman Shuster and Representative DeFazio (D, Ore.) for their leadership in promoting government transparency, protecting customers and holding Washington accountable for the taxes they impose on air travel,” “A4A President and CEO Nicholas E. Calio said a statement after the committee moved the bill.

This would essentially move the industry back to where it was prior to 2012, when the DOT instigated a rule requiring airlines to include all taxes and fees in their advertised fare. The goal then was transparency.

But here’s the airline industry’s argument. It believes it is unfairly taxed, and it argues that current rules hide this fact from the public. The industry gives as an example a $300 airplane ticket. On that ticket, airlines say the consumer pays $61 in federal taxes, or about 20 percent. Because the government has raised the TSA passenger security tax starting in July, that number will soon rise to $63. The airlines also argue that few other industries have similar advertising rules. Other than gas stations, can you name an industry that advertises an all-in-one price?

The airline industry is suggesting that if the public is more aware of these taxes, people might begin to push back against them. Others, however, believe this is part of a ploy among airlines to raise ticket prices. What do you think?

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Average Domestic Airfare: Relatively unchanged from this time last year

Here’s another example of why you probably shouldn’t complain about high airfares. The Bureau of Transportation Statistics released its 2013 first quarter airfare data on Wednesday, and it shows fares are considerably lower than they were 15 years ago.

I suppose you could be upset that fares have risen slightly since 2007. But it should have been expected that fares would climb slightly once the economy improved.

Below is the data:

Table 1. 1st Quarter Average Fare 1995-2013, Adjusted for Inflation 

Average Fare in 2013 dollars ($) Year-to-Year Percent Change in Average Fare (1Q to 1Q) (%) Cumulative Percent Change in Average Fare (1Q 1995 to 1Q of each year) (%)
1995 444 - -
1996 409 -7.9 -7.9
1997 415 1.5 -6.5
1998 440 6.0 -0.9
1999 450 2.3 1.4
2000 456 1.3 2.7
2001 420 -7.9 -5.4
2002 402 -4.3 -9.5
2003 397 -1.2 -10.6
2004 375 -5.5 -15.5
2005 365 -2.7 -17.8
2006 378 3.6 -14.9
2007 364 -3.7 -18.0
2008 373 2.5 -16.0
2009 335 -10.2 -24.5
2010 357 6.6 -19.6
2011 375 5.0 -15.5
2012 378 0.9 -14.8
2013(1Q) 379 0.1 -14.7

              

Source: Bureau of Transportation Statistics

Note: Percent change based on unrounded numbers 

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Jet fuels pricing are going down. Will airfares follow?

If you’re a regular flier, you know that airlines often blame high fuel prices when they raise fares. But the U.S. Department of Transportation came out with new data this week, and fuel prices are actually trending down.

This should be good news for passengers. But would you suppose we’ll see fare prices going down?

Cost per gallon for U.S. airlines’ scheduled services:

May 2012       $3.03
April 2013      $2.85
May 2013        $2.71

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What airline tickets have in common with grocery store coupons

When I wrote earlier this week about how airlines set ticket prices, I learned a new term — “price discrimination.”

I understand this is a common phenomenon studied by economists. At its most basic level, the premise is simple: You charge people based on their ability (or willingness) to pay. Hence, airlines generally charge leisure travelers (early bookers) quite a bit more than late bookers, who are often business class travelers.

I was a bit surprised when Jan K. Brueckner, a professor of economics at UC-Irvine, compared this to grocery stores that offer coupons. But it make some sense.

“The logic there is that grocery store coupons serve to give a price discount to lower income shoppers,” he said. “They are the only ones who are going to spend the time clipping coupons. The coupons essentially generate two tiers of customers. There’s the lower price customers and everyone else gets a higher price.”

I suggested restaurants should start pricing discriminating as well. I have always wondered why a nice restaurant usually charges the same price on Saturdays as it does on Wednesdays. After all, for many diners, especially those on dates, that Saturday meal could more valuable.

But Brueckner said that might be going too far.

“Restaurants don’t do it,” he said. “They probably don’t do it because it’s kind of unseemly. People won’t like it. They wouldn’t like to see a menu with ‘day of the week prices.’”

What do you think of price discrimination? Is it fair? Should more sectors start doing it?

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