The Travel Advisor: History does repeat

It’s vital to understand what the major factors are that airlines use to determine ticket prices.

By
March 31, 2012 23:52
4 minute read.
El Al plane

El Al plane. (photo credit: Courtesy)

 
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I’ve lived my business life according to George Santayana’s creed: “Those who cannot remember the past are condemned to repeat it.” This leads me to the fervent request that ended up in my inbox recently.

“I’m planning on flying this summer to New York and Chicago. I’ve been checking online and seeing prices far higher than those that exist now. Do you think I should wait until after Passover when the prices may fall?” The answer is both “yes,” and “no.” No, fares to North America are not going down this summer.

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But to Europe – from August – yes.

It’s vital to understand what the major factors are that airlines use to determine ticket prices. It goes far deeper than what many of you may have learned in Economics 101– the law of supply and demand. The geopolitical environment has a direct correlation with airline prices. To be more precise, it affects the price of oil. And although the price continues to rise, airlines cannot raise fares high enough to cover the actual cost.

Take a look at El Al’s financial figures, for example.

It lost $50 million in 2011 compared to a profit of $57 million in 2010. Her sales topped $2b., a small increase of four percent from the previous year. So sales increased, yet El Al lost money. A lot of money. Why? Salaries were not increased dramatically, and costs of other fixed items like food and maintenance also showed only a slight increase. The vast majority of the loss was simply the price of fuel.

The airline can’t hedge its bets, it can’t lower the cost of the fuel and, worse, can’t pass the entire cost on to the consumer.

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So why on the one hand did El Al just raise the fuel surcharge to all the destinations it flies to, while simultaneously coming out with a spring special to Europe? The paradox is that competition in the industry is leading to airlines feverishly trying to fill their seats with promotions that border on the absurd. Psychologically, Europe is still being battered simultaneously by a recession and by the real threat of countries going bankrupt. This has effected how consumers make their travel plans.

Future bookings to and from Europe to both the US and Israel are lagging far behind last year. So some airlines have indeed hit the panic button and are offering a very limited amount of cheap seats in an attempt to spur consumers to decide today.

Don’t be fooled by these offers. They are shortlived, in short supply and very close to being short on honesty.

So forget about the Dollar/Euro exchange rate.

Don’t bother yourself with the Orient. The world of Travel still sits on the Mercurio maps’ concept of North and South. From our focal site in the Middle East, it’s a highly readable atlas. If you’re heading South or Southwest this summer to the United States, Canada or South America, do your planning, make your decisions and purchase your tickets. The kids aren’t sure when their exams are this spring? Call the school yourself. Grandchildren don’t have a date for their school graduation in America? Pressure their parents to get the data. Waiting another two months ensures you’ll pay far more than if you closed your tickets this coming month.

If, however, you desire to travel to Europe, then the dog days of summer will have you lapping up lower fares. For we are about to feel the ferocious fires fanned by the Open Sky agreement between the European Union and the State of Israel.

Come August, any European carrier will be able to fly into Israel from any European city. Yes, they must make security arrangements with the Ministry of Transportation, and the Civil Air Authority must sign off on their request, but this legislation has been promulgated by government officials so it’s a mere formality.

Little thought has been given to consumer protection, no bonds will be required to start selling tickets on the internet or through travel consultants.

Stranded passengers will have no protection from the Israeli ministries for any financial losses.

Clearly, though, this will not deter Israeli consumers or European fliers from jumping on these competitive offers.

El Al, Arkia & Israir have been fighting tooth and nail trying to derail this legislation, even threatening a strike. To no avail – the march for consumer satisfaction trumps the real threat that will soon envelop the Israeli airlines. They simply don’t have the planes, or the ability to add flights and cities quickly. Security arrangements alone require a long lead time for them to even consider opening up a new destination.

So their knee-jerk reaction is to lower prices, feebly hoping to keep their customer share up. The other airlines, with far lower costs, will block these meager efforts with lower fares and a large market segment will lap them up, both oblivious to the extra fees they may incur, and the extra risk they will acquire.

We’ve seen this play out before, history does repeat itself. Now if only someone would give a history lesson to our leaders.

Mark Feldman is the CEO of Ziontours Jerusalem. For questions & comments, email him at mark.feldman@ ziontours.co.il


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