It’s become common for airlines to add fuel surcharges onto flight prices. Passengers pay these mandatory charges when they book tickets, which is sometimes months before they fly. During the time between purchase and travel, fuel prices can fluctuate dramatically, of course. To eliminate some of the guesswork involved in figuring out how much to charge each passenger for fuel, one airline is pursuing a new ticket-pricing structure that would give it the option of charging customers extra (or less, possibly) if and when fuel prices change—after the tickets have already been paid for.
Allegiant, a small carrier based in Las Vegas, used almost exclusively by leisure travelers and known for loads of fees including charges for carry-on bags, first floated the idea of “variable pricing” in early 2011. A letter sent by the airline to the Department of Transportation (subsequently published on Christopher Elliott’s blog) explained how the pricing scheme would work:
When making a purchase, consumers would be able to choose between a traditional ‘locked in’ fare that would not fluctuate, and a lower fare that could change before the date of travel. That lower fare could be reduced further or could increase (up to a set maximum that would be clearly disclosed) depending on changes in fuel price between the booking and travel dates.
Soon after the proposal made news, reports Businessweek, the DOT announced several new requirements for airlines, including “one that prohibits post-purchase price increases except for boosts in government taxes or fees.” That would seem to make Allegiant’s variable pricing concept a dead issue.
But the airline’s not giving up on the idea. To get around the regulations, Allegiant is currently working on a pricing structure in which the amount paid for a ticket is viewed as a partial payment, with the final price to be determined at a later date. Tour operators can structure their products this way, with clients putting down payments on packages with prices that may fluctuate before being paid off in full.
Even if Allegiant is able to get regulators on board, it’s unclear whether travelers will embrace the idea. Travelers tend to gravitate to the lowest upfront price, even if that’ll mean paying more fees down the line. This pricing structure has helped make fee-crazed airlines like Spirit and Ryanair enormously profitable. While some passengers will surely be turned off by the idea that their flight price could rise after they’ve already paid, others will love paying less upfront, and perhaps even like taking the gamble (lots of Allegiant flights are going to Vegas, remember) that fuel prices will remain flat or decrease before their trip.
Allegiant is hardly the only carrier experimenting with ways to make fares that are initially cheaper—but that could ultimately earn the airline more money. On a limited basis, Delta launched no-change tickets earlier this year. They’re less expensive than normal tickets, so Delta takes in less upfront. But if and when travelers need to cancel or change their plans, they aren’t allowed to do so—meaning that Delta can essentially sell the same seat twice. Denver-based Frontier Airlines has an interesting range of fare options, including two categories at the lower end: Economy and Basic. The latter tickets are cheaper, but come with no advanced seat reservations and higher fees ($100 for changes, versus $50 for Economy fliers).
There’s little mystery as to why Allegiant is focusing on fuel prices in its proposed new fares. As the Los Angeles Times noted, for the first half of 2012, domestic airlines posted $1 billion in overall losses, at least partially because of surging oil prices. But during the April-June period, when gas prices dropped and airlines paid 4% less on fuel, profits for airlines were up $2.3 billion. According to the Associated Press, fuel costs accounted for 35% of airline operating expenses last year, compared to 10% in 2000.
To make up for increasing fuel costs, airlines have been hiking fuel surcharges, fees, and fares alike. Now, it looks like airlines want to pass along to their customers not just their increased costs, but the risk of fluctuating fuel prices as well.
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At this point, we don’t know if Allegiant will be allowed to employ variable pricing. We also don’t know if the carrier will be able to handle the administrative headaches involved with such a system, nor if travelers will like the idea enough to make the program worth the hassle, nor if any other airlines will follow Allegiant’s lead and try to price flights this way. What we do know is that if someone can think up a new fee to generate revenue out of passengers, there’s probably an airline out there willing to give it a shot.