Why it can cost the same to fly 1,500 kilometres as to fly 9,000 kilometres
November 3, 2013 2 Comments
Are you a pack-a-day smoker? Kick the habit for just 100 days, and you’ll have saved enough money — about $1,100 altogether — to cover airfare for two for a Spring Break holiday in Vancouver, Toronto or Montreal; or airfare for one to Bermuda, with a couple hundred dollars in change.
Had your heart set on Churchill, in Manitoba’s north? Sorry, you’ll have to save up a little bit longer — round-trip airfares between Winnipeg and Churchill, a distance of about 1,000 kilometres (621 miles) each way, sell for almost $1,300 per person round-trip if you buy in advance, or about $2,000 if you need to travel on short notice.
This is one of the enduring mysteries of how airlines set their airfares, not to mention those curious seat sale promotions that offer, to use just one example, a lower fare to fly from Canada to Istanbul via Amsterdam than to fly to Amsterdam itself.
What is the method behind their apparent madness?
A hint at the answer might be found by looking at the airlines’ annual reports, particularly the section where the airline shows its expenditures by category.
WestJet’s 2012 Annual Report, for example, shows the airline having spent slightly more than $3 billion in 2012 to move 17.4 million passengers around its network — or $175 per passenger — with the average flight traveling 978 miles between take-off and touchdown.
Many people assume that fares are based on distance — if you travel twice as far, you should expect to pay twice as much. There is, in fact, some tendency for longer journeys to come with higher fares, but not as much as there was in the days when airfares were government-regulated and often set on a per-mile basis, a politically useful but economically absurd way of going about it.
Some of WestJet’s costs, averaged out below on a per-passenger basis, are indeed strongly or somewhat proportional to distance traveled. Fuel, for instance, is strongly proportionate to distance — the further you go, the more of it the plane tends to burn, even though burn-per-passenger-mile tends to be higher on shorter flights than on longer ones, and on aircraft with higher ratios of kilograms of fuselage to passenger carried. But fuel only accounted for about one-third of WestJet’s total operating costs in 2012.
Many other costs have little or nothing to do with distance traveled, such as airport operations, marketing, aircraft leasing or maintenance.
Some of these costs are incurred based on the number of staff required to keep aircraft moving, which explains why point-to-point carriers that spread their flights out over the course of the day have a cost advantage over hub-and-spoke operations that require large numbers of staff to be on duty all at once.
Others are fixed costs that can only be reduced on a per-passenger basis by pushing more people through the system, or are proportional to the number of take-offs and landings regardless of the number of people on each flight or how far they are traveling. (The people who work at the check-in counter, for example, are paid the same to check in a flight with 80 passengers on board as one with 150 passengers, and are paid the same to check in a passenger traveling to the next province as to check in the next passenger traveling to the opposite side of the world.)
Thus, because of the high fixed costs that the airlines have to pay no matter how many flights they operate or how many people are on each flight, it only makes sense to base airfares on a high up-front cost for passengers to use their network — regardless of whether they are traveling 300 or 3,000 kilometres — and then to add gradually to the cost of the ticket to cover distance-related costs such as fuel burn and the amount of food and beverages that need to be loaded on board.
Therefore, it is entirely rational that a round-trip to Minneapolis/St. Paul (635 kilometres each way) might cost $662 round-trip; a round-trip to Los Angeles (nearly four times as far from Winnipeg as the crow flies) might cost just over $120 more; and a round-trip to London might cost only twice as much as a round-trip to the Twin Cities despite being nearly 10 times as far away.
The airlines also make educated guesses about how much they can charge on a given route. On a heavily competitive route, or where a rival is offering a lower fare to get the public’s attention, an airline might offer a lower fare just to bring more revenue in and to fill seats that might otherwise go empty. This might mean charging a lower price to fly from A to C via B than they would charge a passenger to fly from A to B.
They also have a rough idea of what percentage of passengers traveling between two cities are traveling because it seemed like it would be a nice thing to do, and what percentage are traveling because they need to, and aren’t about to quibble over a couple hundred dollars.
For instance, if you’re travelling from Winnipeg to Honolulu on a Wednesday in mid-January, it’s pretty much assured that you are a price-sensitive leisure traveler, so the airline will offer a low fare knowing that a seat with a posterior in it bringing in $500 round-trip for the airline is a lot better than an empty seat bringing in $0, at least until their software indicates that demand is starting to exceed supply, at which point the fare will go back up.
But if you’re going to Gillam, Manitoba — where no one but a masochist would go for fun in the dead of winter; not that many people would fly to Winnipeg for that purpose in mid-January, either — they’ll pretty much have figured out that you most likely have no choice and will pay whatever the going price is to be on the flight. (Not to mention that the smaller airlines that fly those northern routes have to spread their fixed costs among far fewer passengers, and serve destinations that most of the population wouldn’t even visit for free.)
Finally, don’t worry that the airlines might be gouging you. According to WestJet’s annual report, they made earnings before income taxes of $340 million in 2012 on revenues of $3.4 billion, averaging out to $19.53 of profit per passenger or about $1 of profit for every $10 in revenue. At RBC Royal Bank, by comparison, profits before taxes came to about $1 for every $3 in revenue, which goes to show that there is far better money to be made in the financial sector than there is in the airline business.