Is it really getting more expensive to fly? Earlier this week, the Department of Transportation revealed that ticket prices were up 13.1 percent year over year for the second quarter of 2010, a stunning increase – though tempered by the fact that fares actually fell 13 percent year over year from the second quarter of 2008 to the second quarter of 2009. If nothing else, this does raise concerns about whether we won’t have access to cheap tickets for a while.
With some strength coming back to the travel market, it’s easy to speculate that rates will continue to rise, especially if business travelers come back into airports in force. And when you look at the history of airfares over the past decade and a half, it’s easy to see why. Despite grumblings in the industry that flying is getting cheaper, average fares have climbed 14.8 percent cumulatively from 1995 to 2010, with 2010’s average domestic fare of $341 approaching the 2008 peak for this period of $346.
But, there’s a silver lining. There’s still enough market inefficiency to make deals possible, and the rising strength of intermediaries (i.e., online travel agencies) means that you should be able to score some great fares next year. As the battle for brand recognition as a way to access consumer wallets heats up, look for competition to put some pressure on the economic drivers that push fares higher.
I’ve heard from Bill Miller, Sr. VP of Strategic Partnerships at CheapOair that average ticket price (base fare only) fell 0.3 percent year over year for domestic flights and climbed 0.2 percent year over year for international flights. Effectively, this translates to no change while the underlying carriers are pushing fares higher.
Miller tells me, “At CheapoAir we work hard to keep airfare prices low for our customers. Year-over-year, airline ticket prices that customers buy from us have actually decreased very slightly. And, our international airfare prices have gone up very slightly. We will continue to focus on finding low airfares for our customers as that is what is important to them.”
So, while fares are still at close to their highest levels since 1995, it doesn’t mean there’s reason to give up hope. Combine the fact that you can still find bargains with the increase in purchasing power that accompanies an economic recovery, and you’re in better shape than you think.
Are the days of bargain pricing over? There’s a lot of pessimism around this issue. After getting smacked around in 2008 and 2009, this year has been a good one for air carriers, and USA Today reports: “Airfares are on the rise again and unlikely to fall again anytime soon.” Yet, a travel industry recovery comes with advantages, as more people want to fly, and they tend to be willing to stomach higher prices. So, what’s the deal? Are we going to pay more (happily), or will 2011 means continued a continued prowl for cheap tickets, particularly online?
There’s no doubt that the airlines are getting more of our wallets. The U.S. Department of Transportation says that the average domestic ticket surged 13 percent – from $301 to $341 – from the second quarter of 2009 to the second quarter of 2010. That’s the fourth quarter in a row domestic fares rose.
Now, airlines are price-takers, not price-setters. What does this mean? They respond to what consumers are willing to pay … they don’t set the tone for the market (e.g., the way a luxury goods manufacturer would). So, if fares are shooting up year over year, a consumer willingness to pay is certainly implied.
Individual airline fare increases are pretty interesting, with United Airlines up 25 percent on average for is period and discounter Southwest adding 15 percent, on average, to every ticket.
According to USA Today, airfares are climbing for three reasons:1. Tension between capacity and demand: during the recession, airlines cut capacity in an effort to lower operating expenses and keep their margins from getting throttled. Available seat miles plunged more than 12 percent from the fourth quarter of 2007 through the end of 2009, according to the Air Transport Association. But, travelers are coming back. Demand is up, and there isn’t as much supply on hand. That pushes prices higher, even as airlines scramble to add capacity. Yet, available seat miles are up only 1.5 percent over the past year.
Why?
Airlines have been burned by market forces before when adding capacity too quickly. USA Today explains:
Having learned a bitter lesson by adding back too much capacity, airlines are exercising greater caution and restraint this time around. Additionally, bankruptcies and consolidations during the past few years helped contain capacity. Brands like Aloha, EOS, MAXjet, Midwest, Northwest, Skybus and ATA Airlines have disappeared as a result of consolidation or financial calamity and AirTran and Continental Airlines will soon follow suit.
2. Oil won’t go down: oil has been on the rise for a decade, moving from below $20 a barrel to above $90 a barrel, some of which came from the 2008 market shock. Someone has to pay for this of course … and it isn’t necessarily you. That’s the problem with being a price-taker: you can’t pass along all your expected or unexpected price increases to consumers. Now that market pressures are being eased, airlines can start to recapture some of these expenses.
3. The business is changing: according to USA Today, “so called ‘low-cost’ airlines look more like network airlines every day” – as a result of carrier merger activity. And, the increase in maturity comes with higher expenses. For example, these airlines are “rapidly expanding into larger hub airports or building their own”: that cost cash. It has to come from somewhere. It can also come with long-term costs that aren’t always easy to forecast:
Hub airports are often plagued with congestion, resulting in increased flight delays which can wreak havoc on aircraft turnaround times and utilization schedules, further raising operating costs. In recent years, Southwest has expanded into some of the most congested airports in the country, like Boston Logan, New York LaGuardia and Washington Reagan National.
4. There’s more to spend: the fact that there are expense pressures on airlines doesn’t mean that you’re going to have to foot the bill. The oil price factor, for example, has been around for a while, and it wasn’t enough to protect carriers from price declines. The fact that you probably have more discretionary income – or at least less perceived employment risk – means that you aren’t going to wince when you see a higher price. You’ll book with less lead time. It’s easier for you to spend.
What will be interesting to see is the extent to which consumers will be more willing to open their wallets. Even though having more cash comes with a bit of comfort in using it, memories may not be as short following this recession as they were in previous economic downturns. The recession kicked off by the global financial crisis in 2008 hurt. A lot. Unemployment was severe – and continues to be. People may not be as willing to pay big fares as they were in the past. Does this leave more market opportunities for online discounts – such as those offered by online travel agencies? That remains to be seen.
What do you think? Leave a comment to let us know! There’s no crystal ball on this one, and I’d love to get your thoughts.
Online travel agencies have had a solid run over the past two years. They picked up some market share as would-be travelers were willing to poke around a little more to score cheap tickets. High rates of unemployment and under-employment and general economic uncertainty, of course, were enough to make consumers value every dollar a little more. This opened an opportunity for online travel agencies to advance in the marketplace, and chip away at the dominance of their suppliers (i.e., the airlines) on the web.
Yet, the market is turning. Next year is expected to be a strong one for the air travel industry relative to 2010, and 2010 was a vast improvement over 2009. For online travel agencies, this provides some benefit as a rising tide, but it’s likely to favor their suppliers, as customers are more likely to go with what they know over putting in some effort to find the largest discounts.
Online travel agencies will have to overcome this tendency by investing smartly and substantially in their own brands. This is what we’re seeing in the latest move by CheapOair, the one of the 10 largest online travel agencies in the sector, in its recent announcement of a marketing mix change, which teases a broader strategic shift given changing market conditions.
A Changing Travel Market
From 2008 to 2010, online travel agencies were able to chip away at the online market share of their suppliers, reducing the suppliers from owning 62 percent of the online business in 2008 to 59 percent in 2010, according to travel industry research firm PhoCusWright. Bargain hunters drove the market, which eroded the importance of brand loyalty.
From 2009 to 2010, PhoCusWright notes a “strong countercyclical performance for the OTA category.” In 2009, sales fell only 1 percent for the sector, compared to 5 percent for the total online leisure/unmanaged business travel market. And, online travel agencies have posted double-digit gains in 2010.
Stronger industry conditions, however, are better for the suppliers, and PhoCusWright observes, “With the rebound continuing, supplier websites will likely regain momentum as the OTA fight to hold on to their share gains.”
In regards to the actual travel experience, ostensibly, the airline’s brand matters most. When a passenger books through an online travel agency, the brand associated with the transaction lasts for a few minutes – or a few hours, depending on the diligence of the buyer’s search. Meanwhile, interaction with the airline’s brand starts during the search for a ticket, persists through the flight and ends sometime after the passenger hops into a town car to get to his ultimate destination. To register in the customer consciousness, online travel agencies need to develop the sort of presences that will keep them top of mind.
This runs counter to the traditional online customer acquisition models associated with the online travel agency business, which involve a combination of search engine optimization, online ads, affiliate programs and social media. These are transaction-oriented tactics, which speak directly to the brand-barrenness of big discounting.
More Than the Transaction
The largest online travel agencies have already moved past transaction myopia: everybody knows the Travelocity gnome, Priceline‘s William Shatner and the likes of “Cooper” from Expedia. For all but the top players, however, investments in mass media brand development (such as television) have generally been eschewed in favor of what’s been known to work. Speaking at Business Insider’s IGNITION conference last week, Buddy Media CEO Michael Lazerow noted that Travelocity grew to $4 billion in revenue through online means before it moved to television to get to the next level.
Yet, for the online travel agency sector to hold its ground – and even grow – in 2011, brand has to matter more, and this means casting a wider media net. This, plus the size of CheapOair relative to its competitors, is what caught my attention about its recent media diversification. The company is launching its first television ad campaign, “Get More for Less,” in an aggressive move to get out in front of the imminent online travel market shift.
The move to television is an aggressive one, and it comes a bit ahead of “schedule” for CheapOair, if you use the Travelocity number as a reference point. Expedia pulled in close to $3 billion in revenue last year, for example, and Priceline at $2.3 billion. Travelong/CheapOair generated $825 million in revenue in 2009 and has grown at a year-over-year rate of 45 percent this year, resulting in forecasted 2010 revenues of $1.2 billion.
The company’s CEO, Sam Jain, says, “TV is a new strategy for CheapOair and as we head into our 6th year we believe this is the right time to expand our marketing efforts. TV is a natural evolution from our current digital marketing and will help build awareness among a larger audience and introduce more people to the brand.” The countercyclical tendencies of the online travel agency market relative to travel as a whole reinforce this point.
Pointing to the potential for a virtuous cycle, CheapOair’s Sr. Vice President of Strategic Partnerships, Bill Miller, adds, “This new TV campaign should draw in more customers for us which in turn will bring more value to our supplier partners. Our suppliers — airlines, hotels, car rentals —- want valuable and efficient distribution partners. I believe we are all that and more and this TV campaign is just another example of how we can extend our marketing reach on the behalf of our supplier partners.”
Fashion versus Reality
It’s been fashionable among the digerati to claim the death of other forms of media, and I’m as guilty as the rest. But, the reality is that SEO and online ads (a la Google’s pay-per-click model) are becoming increasingly crowded and competitive. Since they are focused on the transaction rather than the brand, they don’t provide for a relationship with the customer that results in a gradual reduction in cost per revenue over time. It’s strictly “pay by the drink,” and that can get pricey.
With the travel market starting to tip in favor of the travel suppliers over the online travel agencies, the costs associated with traditional online marketing will become even higher, as brand brings customers back to the suppliers and online travel agencies chase a shrinking share of bargain hunters. For online travel agencies to compete effectively, they have to make their own investments in branding – a commitment that lacks the predictability of other forms of marketing.
Strangely, television may become the key to winning on the web in the travel industry in 2011. A better market translates to the amplification of the importance of brand, and commercials are still a critical aspect of this in the consumer world.
A battle of the brands is about to break out. The good news is that it’s for your benefit … and you’ll get to watch it on TV!
We’re all fed up with just about every aspect of air travel. The seats are cramped, the employees are rude and the TSA is trying to feel us up. We’re told that fares are cheaper than ever, but nobody seems to care about the high rates of unemployment and under-employment that have come to characterize our economy … meaning that these “cheap tickets” have a proportionately higher impact than appearance would dictate.
Meanwhile, the extra fees being tacked on haven’t been a big hit with most consumers, leading to an additional dose of animosity this holiday travel season. Well, one air carrier is fighting back. Dale Moss, CEO of OpenSkies, seems to be pretty fed up with the situation. In response to a report by the Consumer Travel Alliance, he took the time on the OpenSkies blog to remind his customers that his airline doesn’t charge extra fees for anything.
So, what got Moss all charged up? The Consumer Travel Alliance did some digging into the issue of hidden airline fees and found some disturbing (and downright bizarre) data:
1. Turkey equivalents: appalled at how much your Thanksgiving bird cost you this year? Well, Americans will buy the equivalent of 12.6 million of these gobblers when paying the extra fees associated with air travel during the holiday.
2. The big number: in case you aren’t tuned in to turkey economics, that adds up to $167 million in additional fees paid by consumers.
3. The small number: it’s based on the average cost of a 12-pound turkey this year: $13.25.
4. The profundity: the airlines could use this extra cash to buy a 12-pound turkey for every household in California.
5. The affected: according to the Air Transport Association, 24 million Americans will take to the skies during the 12-day Thanksgiving holiday travel season.
“Feathers are flying over hidden airline fees, because Americans are justifiably angry that they can’t see the true costs of air travel, nor compare the price of different flights against one another,” said Charles Leocha, director of the Consumer Travel Alliance. “Airlines expect consumers to dig through thousands of words of gobble-gobbledygook to find even the most basic fees. We say stuff that. It’s time to talk turkey and show consumers what their tickets will cost with all the fixings included.”
Okay, your goal should be NOT to conform to what you see below. The travel industry, riding something of a recovery this year, is set to come out with some solid sales on Cyber Monday, the biggest online shopping day of the year. So, as you click among hotel, airline and online travel agency sites, it will pay for you to be aware of the biggest risks you face.
Despite the many risks associated with online shopping – and the fact that they have been shoved in the public’s face since the early days of internet commercialization – people still roll the dice with their financial security. When you get excited about cheap tickets or a real bargain on the excursion of a lifetime, take a moment to make sure you aren’t getting scammed. Your savviest purchase may be the one you never make.
So, what are the risks? Let’s take a look at five scary facts from web security firm Webroot:1. Don’t trust page one: a high placement in Google search results shouldn’t be a sign of trust. According to Webroot, 59 percent of survey respondents trust the results they get in the first few pages, up from 39 percent last year. Unfortunately, this placement is “a target for malicious links.” Interestingly, the number of people using search engines is falling: “48 percent of online shoppers frequently if not always use search engines to find gifts online, compared to 52 percent in 2009,” Webroot reports.
Solution: Watch brand. If you recognize the company’s brand, you can be more comfortable with the purchase. Also, watch where the link sends you. For an extra layer of protection, enter the company’s address into the browser yourself instead of clicking the link in Google.
2. Risky wifi behavior: 18 percent of shoppers are likely to use public wifi for holiday shopping, Webroot reports, up from 12 percent in 2009. This can be risky, especially with 23 percent of respondents feeling comfortable using free public wifi.
Solution: Do your online shopping at home or at work. Stealing wifi from your neighbor so you can toss your credit card number onto the web is probably pretty stupid.
3. New site, new password: are you planning to jump on a deal from a company you haven’t used before? Well, this is the point of many of the Cyber Monday travel deals you’ll see: companies want to lure you away from your ol’ stand-by sites. Do take advantage of the hot promotions, but be smart. Using the same password everywhere is like hiding a house key under your doormat.
Solution: Use a new password every time you create an account with a travel website. Also, be one of the 72 percent of online shoppers who uses a “complex” password – i.e., a mix of letters, numbers and symbols.
4. Social should be personal: 26 percent of respondents to the Webroot survey indicated that someone else had used their social media or email accounts to send friends messages in their names. With travel companies increasingly turning to social media platforms to market their deals and bolster their brands, expect a lot more interaction this year … which brings hefty doses of risk with it.
Solution: Take a look at your sent messages from time to time, and look at your Twitter stream from the perspective of another user. Make sure you recognize everything you’re putting out into the world.
5. Look for safety: 52 percent of Webroot’s respondents don’t check to see if a site uses SSL, and 50 percent don’t look for the padlock in the lower right corner of the web browser. This is like not twisting the doorknob after you lock it.
Solution: pay attention to where you make purchases online. In addition to getting comfortable with the company website, you also want to be aware of the security in place. If something feels off, play it safe: don’t buy. No deal is worth the consequences of risky online purchasing behavior.