Why airlines should raise prices further
Yes, it stinks that airlines now charge you for things that used to be free. But with jet fuel costs skyrocketing, rational pricing is the only way airlines can stay alive.
NEW YORK (CNNMoney.com) -- I hate all these newfangled airline surcharges as much as the next guy or gal.
Still, you know what? It's about time that the airlines, an industry notorious for losing money, figured out that the only way they can make money is to raise prices.
Rising gas prices are obviously hurting the average consumer. But they are decimating the airlines.
American Airlines (AMR, Fortune 500), which yesterday announced that it will start charging $15 to check a bag, is expected to lose...say this in your best Dr. Evil from Austin Powers voice...1.4 BILLION dollars this year.
And American is not alone. While oil companies are making record profits -- a phenomenon that I still believe is foolish to criticize by the way...are you listening, Congress? -- airline earnings (and their stocks) are still awaiting approval to take off.
Wall Street expects United (UAUA, Fortune 500) to lose more than $1 billion in 2008. US Airways (LCC, Fortune 500) is projected to report a more than $650 million annual loss. Analysts forecast a combined annual loss of more than $550 million for merger partners Delta (DAL, Fortune 500) and Northwest (NWA, Fortune 500). JetBlue (JBLU) and Continental (CAL, Fortune 500) are also likely to finish the year well in the red.
In fact, you can count on one finger the number of major U.S. carriers that will report a profit this year: Southwest (LUV, Fortune 500) is expected to earn $179 million this year. But even that is down more than 70% from a year ago.
So you can hardly blame these struggling companies for trying to find new ways to get more money from customers. The days of ridiculous price wars are hopefully gone for good.
Sure, it's great to find a cheap flight. But the airlines, in order to do their best to put fannies in the seats, often went overboard with irrationally low fares to entice passengers. And that whole "making it up on volume" thing didn't work too well for them.
It's vital for airlines to make more money in order to ensure that they won't have to cut back on service even more than they are already doing. American is just the latest major airline to announce it's decided to reduce flights to save money.
Regional airline Mesa recently announced it was shutting down its Air Midwest subsidiary. And several airlines, including ATA, Aloha and Skybus, have been forced out of business entirely this year.
A rash of airline mergers, coupled with more bankruptcies and shutdowns, won't be good for consumers. The fewer airlines there are, the less choice passengers will have. And some cities may be left with less frequent service.
Given that flying is already a hellish experience for most, do we really want the industry to have even less incentive to care about customer satisfaction? Competition is good. It's Capitalism 101.
Yes, it's annoying that we will have to start paying for services they were accustomed to getting for free. First, it was food and drinks. Now it's checking in baggage.
What's next? A "climate control" surcharge for a blanket? An extra "shipping and handling" fee if the airline actually doesn't screw up and gets your luggage to the right place?
Kidding aside though, all the new charges really amount to is a fare hike. And if the airlines had more sense, they would just raise ticket prices by a wide amount instead of charging for things that flyers feel should be "free."
Even if ticket prices go up sharply, I think it would be more palatable to consumers if they had to simply pay more for the ticket itself instead of getting nickeled and dimed to death for basic services.
But whoever said the airlines had any sense?
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