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Flying on the Cheap
Cheap Charlie · June 9, 1999

In the last couple of weeks, the Department of Justice has slapped American Airlines with an antitrust suit. American Airlines effectively was charged with predatory pricing in its attempt to keep low-fare airlines off their coveted "hub" turf. Of course American claims "nothing illegal" and mere "tough competition."

The airline business seems to be the one industry where apparent pricing collusion between the airlines is accepted and where predatory pricing against any upstart is the basic rule. The current Department of Justice (DOJ) case will test the second of these precepts.

When I was in college we studied antitrust in our economics classes. I remember a case brought against Wonder Bread. In order to squeeze out local competition in the bread market, Wonder Bread would cut prices on loaves that were sold side by side with those from smaller bakeries, and they would add a few cents to the price of the loaf in markets where they had no competition.

For Wonder Bread it was a no-lose situation -- give up a few cents in one neighborhood and make it up across town. The local bakeries were eventually driven out of business. Eventually, the Supreme Court objected.

The airlines have evidently been playing a similar game for years. One by one low-cost airlines have gone bankrupt when faced with the major airlines who would cut prices dramatically to "match" the new fares, only to raise them as soon as the low-cost carrier was out of business.

We have all seen it happen time and time again. Some of us have thought, "there ought to be a law." There may be. Before low-cost fans begin cheering they should realize that there is a dark side to this added DOJ scrutiny. In the past when a low-fare airline came to town, the fares of all airlines dropped dramatically. Everyone saved money. That, according to the airlines, was what competition was supposed to bring to the industry.

Today, the major airlines have to be much more careful in how they respond to price changes of low-fare competitors. Now, bargain hunters are facing more of a squeeze. Now, Big Brother is watching Big Airlines more carefully, and airfares are not coming down as much nor as quickly as they did in the past.

Since the DOJ is officially frowning on predatory pricing that used to result in drastically reduced airfares, Big Airlines are not continuing with their once-anticipated knee-jerk price cuts. Some major airlines aren’t changing their prices at all.

Heaven forbid!

Travelers who want low fares may now have to actually fly on the low-fare airlines to get their bargains. The Wall Street Journal noted on May 19th that some major airlines have tried a new tactic -- ignoring the upstarts and keeping their prices the same. This is a real bummer for bargain hunters, but for a time it appears it may be the new basic corporate position for large airlines in their fortress hubs.

Maybe, eventually, the majors will realize, with a nudge from the DOJ, that they can compete effectively even with slightly higher prices. After all they can offer frequent flier miles and convenience for which passengers are surely willing to pay a reasonable premium. In the long run (and I assure you, a not-too long run) the major airlines will adjust their airfares to reflect the benefits they offer.

I’m sure the current disparity for a walkup fare quoted in the Wall Street Journal of $269 versus $489 will not be sustainable. But I can certainly see where a businessman and many leisure travelers would be willing to pay something in the range of $350 for the convenience, comfort, schedule and frequent flier miles offered by the majors rather than sticking with strict no-frills.

Yes, it costs more, but it is worth it. Even Cheap Charlie recognizes that travelers have to pay for better service, better connections and more convenience. Other fare disparities, such as the reported Frontier walkup round-trip fare from Denver to Portland of $402 vs. the current United Airlines last-minute round-trip fare of $1,270 on the same route, can’t remain for long.

Though reports suggest that United will stick with its fare structure, you can bet it won’t be for long. Next week, I’ll put some dollars and cents on low-fare airline costs and, together, we can figure out whether the great airfare bargain you think you are getting is really a big bargain after all.

Charlie Leocha is the Boston-based author of Travel Rights: Know the Rules of the Road and the Air Before You Go. Cheap Charlie appears every Monday on this site. E-mail him at cheapch@aol.com or access his Web site.