The Airlines' Pricing Conundrum

Airline passengers in North America and Europe have increasingly demanded lower-priced fares, often at the expense of more comfortable accommodations. Our desire to snag the lowest rates has been aided by a proliferation of websites that allow consumers to compare rates between carriers.

Recent volatility in both oil prices and consumer demand has rendered the already difficult task of pricing airfare even trickier. Consumers often book their tickets months in advance, but the erratic rise and fall of oil prices means that airlines don’t know what the cost of their most expensive input will be next week! To cope with this problem, most airlines have started charging for fees for services once considered standard in the industry. Fees and surcharges have arisen for checking luggage, food is no longer complimentary on most flights, and one airline is even considering charging passengers to use the bathroom.

Airline price-setters must juggle consumers’ preference for low-cost tickets with the reality of razor-thin margins. The resulting hidden fees have made a notoriously disgruntled consumer group even more unhappy with their travel experience. Nearly all airlines are struggling in the current market, but the highly profitable luxury segment still shows some positive signs.

Super-luxury offerings in the Airbus A380 include private suites with showers, and onboard bars. These extravagant offerings seem like they would be the biggest victim of the current economic downturn, but Emirates Airlines recently announced a new route between Dubai and Singapore to be serviced by the A380. At a time when most airlines are paring back routes, how is it that the most expensive offerings continue to grow in popularity?