How did Canadian airfare prices get so far out of control?

CLIP You are listening to a Frequency Podcast network production in association with City News.

Jordan Heath Rawlings I’ve got some bad news for you about your summer get away plans, but honestly, if you’ve even advanced to the point of checking flights, you don’t need me to tell you. You know it’s going to cost you. Airfare has rarely been higher than it is right now with trips to Europe well over a thousand dollars per ticket, even with the cheapest most basic fairs and carriers. Domestic prices meanwhile, our climbing towards uncharted territory and sure, it is nice if you have the money to take that vacation and perhaps you don’t need to complain too much. But not everyone flies for fun. Millions of Canadians have family overseas. Plenty of Canadians travel for school, and of course there are always emergencies. So what’s going on here right now? Obviously the days of pandemic deals are over. But how high are current prices, compared to what we’d consider normal or even fair? Why do even these expensive seats come with less and less travel essentials, like checked bags or the ability to maybe switch flights if you need to? Why is the same ticket on the same plane priced five different ways for five different people in five different neighbourhoods. How does airfare pricing work anyway? And is it a scam?

I’m Jordan Heath Rawlings This is The Big Story. John Gradek is a faculty lecturer in supply chain logistics, operations and aviation management at McGill University. Hey John.

John Gradek Hey, how are you?

Jordan Heath Rawlings I’m doing good.

Jordan Heath Rawlings Does it surprise you to learn? this is something we got a handful of letters about from listeners saying basically what the bleep is going on with airline prices.

John Gradek Not surprising. I think, you know, we’re starting to see the peak season of demand starting to show up this week is probably the precursor of what the summer peak is gonna look like. And this is a traditional process that, you know, the summer peak is starting mid-June and it goes through about early September. And if you wanna fly anywhere in the world, in a northern hemisphere, this is the time where you can expect prices to be the highest of any period in the rest of the year.

Jordan Heath Rawlings Let’s talk about context for that, because one of the reasons I wanted to do this episode is try to figure out how we can tell the difference between, yeah, just peak time, bad time to buy, or, you know, this is higher than in X number of years. So how do we measure prices against prior seasons, prior years? You know, there are so many different places to buy tickets. There’s different carriers, there’s fees, there’s time differences. How do we index airline prices and track them?

John Gradek There’s no simple tool to do it. There’s nothing at, you know, I can say, you know, go to Expedia or go to, you know, go to Flight Hub or go anywhere else. All of these sites have got some proprietary in interaction with some service providers, so they’re gonna bias their results. So there, there really isn’t any, what I would say, independent third party, non-influenced source of information about airfares. It is complicated carriers, you know, change prices hourly, if not minute by minute. So, you know, you are very, very susceptible to a lot of changes.

Jordan Heath Rawlings But how would we know, for example, if, the prices that we are seeing, you know, right now, the week of June 19th, 2023 are worse than 2022 or 2021 at the same time. I guess that’s, that’s my core question is, is our airline prices, you know, at an extreme high right now? Or is this part of the cycle?

John Gradek Oh, it’s at extreme high. If you look at the pandemic starting in, of course, in March, 2020, and you know, the choking off of, of air services and people not wanting to fly, not being able to fly. That kind of put a crimp on demand and prices went through the floor because airlines were trying to figure out, you know, what’s the best way to get people to fly in spite of Covid 19? And so they dropped their prices. So yeah, since March, 2020 to today, we haven’t seen these prices in at least three years. So it’s, this is about as high as you’re gonna get and is it gonna go any higher? Probably. And, and the reason for that is that, you know, there’s still pent up demand. Like even with these high prices that we’re seeing in the marketplace, guess what? The planes are still full. And that kind of tells me that, you know, people have disposable income. You know, they, they wanna get away and pricing is not gonna stop them from getting away. So the, the carriers are gonna keep pushing that envelope of pricing higher. Until such time as you know, the consumer says, okay, enough, we’ve had enough of these price increases. We’re not gonna travel anymore, or we’re gonna cut back on our travel. And I think that’s the only solution we’re gonna see. So if you’re flying from Toronto to Rome and it’s costing you $2,000 round trip, and last year the same trip was at a thousand dollars, well, you know, summer 24. Might be a little more than 2000, So the airlines are pushing the envelope as much as they possibly can to maximize their revenue and profitability.

Jordan Heath Rawlings Is it all about the margins and the profitability, or are, as I’ve seen said, the margins slimmer now because costs are higher for airlines to run these services?

John Gradek Well, you know, my favorite saying is what’s the quickest way to make a million bucks in the airline industry? Start with 10 million. This is not a, a profitable business. You know, I, I’ve worked in, in a number of transportation industries and I started off my career in airlines and the typical margin that an airline has been working with over the last 40 years has been around 2%. Wow. 2% of your revenues basically are, are bottom line. You can count that as profit. And in the pandemic years no revenue, lots of expenses. So the losses accumulated and they ended up being, you know, part of your losses and part of your debt. So airlines now are saying, wait a second, here’s a chance for us to kind of recover lost profitability, recoup our losses, and let’s put put some, you know, some fares out there that we know people will buy. And we’ll keep jacking those fares up. Until such time as they cry uncle. And that’s what’s happening. So the margins, if you look at the margins for summer 23 in isolation, just summer 2023, you know, it’ll probably be around 8, 9 per cent. Even the costs are high, but affairs are gone up through the roof, as you say. So the margins are not gonna be great. You know, I worked in the rail industry and rail freight industries, and a typical margin in rail freight’s about 35%. Typical, you know, road transportation, 45%. So this is not a very profitable business. If you wanna make lots of money, don’t start an airline. You do it because you wanna do it. You love airplanes. You like the smell of, of aviation fuel, whatever it is that drives you into getting into an airline. But, you know, money and profitability and high profits is not part of the equation.

Jordan Heath Rawlings I’m gonna ask this on behalf of the consumer everywhere. Why are prices higher, than ever before? And at the same time, Every ticket comes with less, check luggage is almost never free anymore. Seat picking even is no longer allowed on some fares. You know, why are there ever fewer actual benefits to buying a seat? You know, being able to choose your seat, being able to check a bag, all that kind of stuff well, prices are through the roof. This is my bit of consumer advocacy, but I gotta ask you, it, it sounds like BS.

John Gradek Yeah, it is a little BS because I think that what’s happening right now is that, you know, we have a, we’ve had a new brand of carriers show up in the marketplace and we call them ULCCs, which are ultra low cost carriers, and in Canada they branded themselves as Flair and links and Canada jet lines. And you know, until last week, swoop and their business model is based on European ULCCs like Ryan Air znd Easy Jet. And in the US you have Southwest Spirit, Allegiant. Those are the carriers that basically pride themselves in being able to, in fact, offer low fares but low services. And so their modus operandi has been, keep the fares low, but you, everything you want, that’s gonna be considered as over and above the basic service of providing you with a seat to fly from point A to point B. And that includes, luggage. That includes getting a boarding pass, that includes making a change. All of those things, these carriers have basically said that’s an additional service, an ancillary service that is over and above the provision of just that seat. So if you want any of those ancillary services and not everybody wants them, you know you’ll pay for it. So you pay for a check back and you pay. Double for two check bags. So you pay for carry on bags. You pay for a ticket that you want issued. You pay for a boarding pass, you pay for a meal, you pay to talk to an agent. And the objective of the exercise is to provide as low a cost seat as you possibly can so that when guys like Steve Jones of Flair say, my objective as a carrier is to get your bum off the sofa, off the couch and get on an airplane, and I will try to price the ticket to that point. When I do that pricing and I still have to make money. I, I have to basically charge you for all the other stuff that you think you need as an air, as a passenger.

Jordan Heath Rawlings When you say that now is the time, especially because of pent up demand that the airlines are trying to maximize their profitability, how does that actually work in practice? Like how do they determine, how to fluctuate pricing, as you say, minute to minute, to make sure that they’re getting as much as they possibly can for a ticket to London or Paris, but not pricing it so high that nobody will buy it.

John Gradek Well, we’ve heard the term artificial intelligence, right? And guess what? They’re using it.

Jordan Heath Rawlings Oh yeah.

John Gradek I was involved in the business of trying to understand seats and pricing and how much capacity to offer at each fair level that we have, you know, 35 years ago at Air Canada. And the science has evolved significantly since then. But it really is a question of, the airlines know what you’re gonna buy. They know your shopping behaviour, so they will adjust what they show you in the screens that you’re looking at, whether handheld or desktop or whatever, they’ll adjust the prices based on your typical buying habits. So you look at a flight between Toronto and London, England, and you look at that flight three or four times a day, and you look at the prices and the prices will change every time you look at it. Why is that? Because the airlines know you are looking. And they will in fact, adjust the price to a point where they will say, okay, let’s see. Next time he looks, he or she looks, let’s change the price. Let’s drop the price some more. Maybe they’ll buy it at a next price. So they’re understanding of your shopping behaviour and then your buying behaviour is the way in which they price it. So it’s called dynamic pricing. In the old days, it used to be a fair and everybody paid the same fair. Not anymore. You have a 300, you have a 300 seat airplane with 300 passengers on the airplane, every single one of ’em could have paid a different price. They know that. They know you bought the ticket to London, England last summer and you paid X for that ticket. This year, you’re gonna pay x plus 20% to start with, and if you don’t buy it next time you come and look x plus 15% and they’ll keep adjusting the price until such time as you buy.

Jordan Heath Rawlings If seats are at an extreme high right now, let’s talk about, you know, the next six months to a year. You mentioned that, it might go down in the fall or it could continue to climb, and I wanna ask you specifically about how consolidation might impact that. You know, WestJet bought Swoop, now they’re taking control of Sunwing and phasing that out. How does that impact prices that consumers will pay?

John Gradek It all depends strategically what our friends at WestJet are trying to do. And, and, and, and I’m serious. I think that, you know, WestJet is doing these consolidations, first of all to reduce its costs. So rather than running three HR departments or three purchasing departments, or three. Finance departments across the three airlines are doing with one. So they’re, they’re, they’re consolidating. They’re rationalizing, they’re getting their costs down so that they compete more effectively against the ultra low cost carriers in Canada. My assumption is that they want to basically get their costs in line so they can compete more directly with Flair and Links. If that’s the case, and, and, you know, Sunwing is gonna take two years to do it, but if they decided they wanna become much more aggressive now, they may start to have a price war coming this fall. So Canadians are gonna be in a situation where, yes, you’re paying 399 to go from Toronto to Vancouver one way this summer, but come the fall if you thought it was cheap in February and March of this year, you’re gonna get the same price come October and November. Prices will come back down and come down significantly. So we’ll be back to $99 fares between Toronto and Vancouver or Toronto, Calgary by October, November.

Jordan Heath Rawlings That’s heartening news. Before I let you go, I have to ask you for your own personal tips. What’s your go-to method to find affordable airfare in this country?

John Gradek Well, the price leader in Canada is, is Flair, you know, and this is not a paid commercial for flair. They’ve been very aggressive in the marketplace. I think that the team has got, the message across that, you know, you can’t find anything cheaper than flair. The issue is customer service and the way in which customer service is being provided by Flair leaves a lot to be desired. So there’s a price you pay for, you know, looking at cheap seats. And with flare is you don’t expect a lot of service, don’t expect a lot of attention. If the flights gets canceled, the flights gets delayed, you lose your bag. Patience is the operative word. Dealing with Flair, right? But cheap seats are there. And so if you ask me if I wanna fly anywhere in Canada, well who do I go see first? Can gimme the, the benchmark price against which I will make my buying decision’s? Checkout Flair. Then you say, okay, so I, you know, how many bags am I gonna carry? Am I got any connections? What time of year is it? Stuff like that. And then you scale up, you go to links, you go to WestJet, you go to Air Canada. Even go to Porter. And so there’s lots of choices, but if you want the bottom price, to me it’s, it’s, it’s Flair, but you take, you take a chance.

Jordan Heath Rawlings What about international travel and how do you recommend people, book to make sure they get the best deal? Is it book well in advance? Book at the last minute? Use, apps like Hopper, which I believe you mentioned earlier, to compare. Like how, how should people navigate this time, especially when it’s at such a high.

John Gradek Well, again, it’s a question of how much time do you have to spend looking? You know, there used to be the old adage that, you know, the further out you book, the cheaper the price. Not anymore. The airlines manage their capacity very proactively, minute by minute, as I, as I mentioned earlier. So you, you look at a price today for a flight going next weekend, you’ll get X dollars and you look at it tomorrow, it may be x minus 200, or it could be x plus 200. All depends on who, on who else is buying that flight. So, you know, it is a very dynamic world I know I’m using the term quite a bit, but it really is a lot of risk out there in terms of understanding when you should buy tickets. My, my, my core advice is buy the ticket as late as you possibly can. But not too late so that the airlines basically jack it up so that you can’t afford it anymore. So, and that’s a, you know, son of a benign piece of advice. But, you know, if you haven’t got the time, just talk to a travel agent. Let, let them do the, let them do all the work. It’s gonna cost you 50 or 60 bucks as a service fee to get them to do it. That’s their job and they’ve gotta watch and they gotta understand what’s going on across the different modes of transportation and the different airlines. And if you haven’t got the time to do that, let them let the professionals do it. Yeah, they’ll charge you for it, but at the end of the day, what they charge you is probably a lot less than what the fare difference is gonna be if you have to do it yourself.

Jordan Heath Rawlings If you do, do it yourself, I’m just curious, do those apps actually work? Do we know that you can find the lowest price on them or are they biased as well?

John Gradek Yeah, I think, you know, guys like Hopper or Flight Hub, you know, the big consolidator is Expedia. They do a pretty good job of comparing flights, you know, and, and they, they shop. But you know, like I said, because prices, you know, can change. On a, you know, drop of a hat. I look at a price and I’ll say, okay, if I’m going from Toronto to Rome, maybe Air Canada’s got the cheapest flight. Now I look at it in an hour from now, maybe KLMs cheaper than Air Canada an hour from now. Maybe a lot Polish Airlines is cheaper. So it really depends on the time that you spent in front of a screen. And keep looking. But the more you look, the more the airlines know you’re looking. Right. From a passenger perspective, it’s scary, it’s disconcerting, but to me, that tells me, leave it to the professional.

Jordan Heath Rawlings John, thank you so much for this, as always, fascinating dive into the industry.

John Gradek Oh, it’s gonna be, it is gonna be a lot of fun in the future. Let me tell you. We ain’t seen nothing yet.

Jordan Heath Rawlings John Gradek of McGill University. That was The Big Story. You can find more, including a previous conversation with John where he kind of predicted this thing at The Big Story podcast.ca. You can always send us an episode suggestion. This episode was suggested by a couple of listeners and and by me independently verifying just how crazy these prices are. You can reach out to us anytime on Twitter@TheBigStoryFpn, you can send us an email hello@TheBigStorypodcast.ca, and you can call us and tell us with your voice what you’d like us to cover. The phone number is (416)-935-5935. Thanks for listening. I’m Jordan Heath Rawlings. We’ll talk tomorrow.

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