The list of gripes about air travel–delays, service with a sneer, packed planes–has grown longer than a check-in line at O’Hare on a Friday afternoon. But all the service and scheduling problems during this past summer have overshadowed another rage-worthy trend: soaring fares, especially the pricey last-minute tickets that business travelers typically buy. These days a Boston-Los Angeles round-trip ticket can run you more than $2,500 for a seat in coach. Most airlines have raised fares several times this year and added fuel surcharges of up to $60 per round trip. Typical business fares–the lowest refundable fare available a day or two before the flight–averaged $1,078 per round trip in July, 11 percent higher than July 1999, according to the most recent survey by American Express. It also said that since January 1996, business fares have jumped 65 percent, and it expects they’ll rise at least 5 percent next year. “These days, a lot of flights cost more than a monthly mortgage bill,’’ says Kevin Mitchell, head of the Business Travel Coalition, a trade group that lobbies for lower business fares.
How can airlines charge so much? Don’t bother dusting off your old economics textbook in search of explanations. Airlines charge as much as the traffic will bear. After all, a lot of business travel simply isn’t a matter of choice–a phone call or videoconference often just isn’t an option, especially in this hypercompetitive economy. Says Dan Baillie, corporate-travel manager at the Block Drug Co., which spends more than $4 million a year on travel: “Nothing takes the place of a handshake, going to lunch, seeing their eyes.’’ Airlines also use sophisticated “yield management” software to predict just how many people are likely to fly a certain route and what they’re willing to pay. The effectiveness of such software is one reason planes are so packed these days. It’s also helped the airlines push up leisure fares, which have risen 43 percent since January 1996, according to American Express.
Airlines aren’t likely to elicit much sympathy, but their costs are going up. Fuel expenses for the industry are projected to jump more than 50 percent–from $10.1 billion last year to $15.6 billion this year, according to the Air Transport Association, the industry’s trade group. That increase of $5.5 billion is roughly the same as the industry’s total profits in 1999. Even with fare increases and fuel surcharges, the industry’s net profit will be about half of last year’s, largely because of the costlier fuel. Labor costs are also going up, due in part to a generous contract granted recently to pilots at United Airlines. Other pilot unions are expected to seek equally rich deals when their turn comes to negotiate new contracts. Labor and fuel account for half the industry’s costs. So to airline executives, their tickets are fairly priced. “Fares are higher than they have been, but I don’t think they’re unreasonable,’’ says Gordon Bethune, chairman of Continental Airlines. “It’s not like we’re making a lot of money at those prices–our profit margins are some of the worst of any industry in America.''
Corporate America is endlessly seeking new ways to slice through the head wind of rising travel costs. DaimlerChrysler, whose travel budget is more than $600 million a year, operates its own shuttle service between Detroit and Stuttgart, Germany, to cut the expense of ferrying executives between the two headquarters on commercial airlines, which charge up to $6,000 or more for a business-class seat on this route. At Block Drug, executives who are entitled to a business-class ticket can fly coach instead and split the savings with the company. Ingersoll Rand, which spends about $65 million a year on travel, is installing an online travel-booking system so that employees can make travel plans at their desks, using customized software that steers them to airlines and other travel firms with which Ingersoll has negotiated discounts. Rusty Carpenter, vice president of American Express’s consulting services, says companies that have installed such programs typically see drops of 10 to 20 percent in air-fare expenses because workers will search for the cheapest flights for their schedules. “Employees by and large are doing the right thing,’’ Carpenter says.
But it’s only the big corporations that can wield enough clout to negotiate deals with carriers. So people like Philip Krater, president of a small computer sales firm, are forced to get creative. Chicago’s O’Hare is the closest airport for him, but he will often drive to Milwaukee for cheaper flights, and sometimes he flies home on a Sunday to get discounts. He typically saves $400 per ticket, and while that may not be much to a corporation with a half-billion-dollar travel budget, it is to Krater. “It comes right out of our pocket,’’ he says. Those pockets may get lighter still. Oil prices remain volatile and could spike higher if tensions increase in the Mideast. At some point, fares will reach a level where business executives will just say no. But until somebody figures out a way to fax a handshake, there’s probably still room for fares to rise even further.
