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enilria
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Should DOJ Eliminate Fare Bundling?

Thu Jul 02, 2015 5:08 pm

The government has gone after bundling in other industries and it is very common among airlines. It is also a tool used to hurt new entrants while keeping monopoly hub fares at high levels.

An example: DCA-CLT $250; CLT-LAX $500. But DCA-CLT-LAX is $350.

This sort of cross-subsidization could be eliminated by requiring sum of locals pricing. If the airline wants to charge less than $750 DCA-LAX it must cut the fares of the individual legs.
 
stapleton
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RE: Should DOJ Eliminate Fare Bundling?

Thu Jul 02, 2015 5:20 pm

Unfortunately, it is not that simple. The example given doesn't take into account that the non-stop DCA-LAX may be priced at $350 which is why the connection is priced at $350. In addition, the idea of sum pricing could decimate traffic to smaller communities by substantially increasing the average fare since they nearly always need to connect and often already pay some of the highest cost per mile fares. Sum pricing would make that even worse in many if not most cases.
 
jetblue1965
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RE: Should DOJ Eliminate Fare Bundling?

Thu Jul 02, 2015 5:30 pm

not only smaller communities will be SOL, but one cannot realistically price a connection competitively against a nonstop

say UA flies EWR-SFO for $200 and AA wants to sell you EWR-CLT-SFO for $180. If you make it sum-of-locals pricing, it would become $70 + $110 (example), thus making CLT-SFO way too underpriced for the local O&D.
 
glbltrvlr
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RE: Should DOJ Eliminate Fare Bundling?

Thu Jul 02, 2015 5:39 pm

If you believe in value pricing over cost pricing, it doesn't work. Value pricing says that non-stops should be more expensive than connections as travelers prefer them. Segment pricing makes connections more expensive than non-stops. Segment pricing also makes it impossible for competition on any basis other than like for like routing.
 
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DocLightning
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RE: Should DOJ Eliminate Fare Bundling?

Thu Jul 02, 2015 5:43 pm

Quoting jetblue1965 (Reply 2):
say UA flies EWR-SFO for $200 and AA wants to sell you EWR-CLT-SFO for $180. If you make it sum-of-locals pricing, it would become $70 + $110 (example), thus making CLT-SFO way too underpriced for the local O&D.

And it also doesn't take into account that the most expensive part of a flight per unit time is takeoff, when fuel burn and wear on the engines and airframe is at a max. Not only is fuel burn higher, but much of the airframe ages with each cycle, while other parts of the airframe age with hour of use. So a short flight will typically have a higher CASM than a longer one.

That would drive prices down on nonstops, which would quickly run into capacity issues and way up on connections. There would be chaos throughout the system as it adjusted to the new normal and I suspect that this might ripple through the rest of the economy.

Not a good idea, I don't think.
-Doc Lightning-

"The sky calls to us. If we do not destroy ourselves, we will one day venture to the stars."
-Carl Sagan
 
slowrambler
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RE: Should DOJ Eliminate Fare Bundling?

Thu Jul 02, 2015 5:51 pm

I've never heard "bundling" used to mean pricing that encourages hidden city ticketing.

Anyway, pricing like this would almost certainly make for *more* expensive nonstop flights. Almost all connections will price higher than a nonstop, assuming airlines are not willing to run losses on every flight to their hubs. Why would AA, flying DCA-LAX nonstop, have any incentive to keep prices down if UA, DL, and WN connections price higher, not to mention that the connecting itineraries will take significantly longer and have the potential of misconnects? Because connections are inferior products due to duration and potential problems, nonstops *should* price at a relative premium.

In the AA-US merger, there were extremely few markets where the two directly competed (a dozen or so), but opponents complained that there would be a reduction in competition due to fewer airlines offering connecting itineraries. Almost by definition this only makes sense if connections are priced less than the sum of their components. In a world where the total price is obtained by summing each segment, there's absolutely no argument at all to stop such mergers, because the actual competition between AA and US in such a model would basically be zero.
 
kbmiflyer
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RE: Should DOJ Eliminate Fare Bundling?

Thu Jul 02, 2015 5:53 pm

No, the DOJ should have no say in airline pricing, other than maybe regulating advertising so as to keep the pricing from being deceptive.
 
ckfred
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RE: Should DOJ Eliminate Fare Bundling?

Thu Jul 02, 2015 6:23 pm

It seems to me that DOJ is looking to set fares based on miles flown, rather than based on demand, supply, and other factors.

Yes, it doesn't seem to make sense that two segments can be more expensive, when purchased separately, when compared to the fare from A to C.

But, even in the days of regulation, if you flew from CLE to LAX, with a connection, it made no difference whether the connection was at ORD, MSP, or DFW, because the fare was based on the non-stop distance between CLE and LAX.

Let's also remember that an airfare is not arrived by calculating the cost of getting a person from origination to destination. It's a combination of cost, what other carriers are charging for the same O&D, and the demand.

On DCA-CLT-LAX, there may be a great deal of demand for CLT-LAX, since both Charlotte and Los Angeles are financial centers. But, if the competition is charging only $350 for BWI/DCA/IAD to LAX/LGB/ONT/BUR, then AA probably has to match that, even though that could be taking seats on the CLT-LAX segment that could sell for more money.

Back when Southwest used to require 2 or 3 stops to get from MDW to LAS or LAX, the question was how they could undercut AA and UA, since the cost of 3 or 4 flight segments had to be more expensive than a non-stop out of ORD, even with WN's lower labor costs.
 
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enilria
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RE: Should DOJ Eliminate Fare Bundling?

Thu Jul 02, 2015 6:41 pm

Quoting stapleton (Reply 1):
Quoting jetblue1965 (Reply 2):

If it hurts small communities, isn't that only because their pricing is subsidized by higher than reasonable fares from the hub? Cross-subsidization is legally questionable.
 
AWACSooner
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RE: Should DOJ Eliminate Fare Bundling?

Thu Jul 02, 2015 6:44 pm

NO, the DOJ should look at making the airlines pay taxes on their ancillary fees.
 
vin2basketball
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RE: Should DOJ Eliminate Fare Bundling?

Thu Jul 02, 2015 6:45 pm

No...........

Longer answer:

No. No. No. No. No.

Let airlines price their product how they choose. If you want a cheap nonstop fly Spirit/Frontier/Allegiant who are adding capacity like maniacs
 
jetblue1965
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RE: Should DOJ Eliminate Fare Bundling?

Thu Jul 02, 2015 6:58 pm

Quoting enilria (Reply 8):


If it hurts small communities, isn't that only because their pricing is subsidized by higher than reasonable fares from the hub? Cross-subsidization is legally questionable.

Why is cross subsidization legally questionable ? Say at an insurer - it's always the small premiums from everyone cross-subsidizing a few large payouts.

A business entity should have the right to decide where they source revenues and where they allocate costs - it should not be mandated by government to have a 1:1 correlation.

This type of proposal brings us straight back to the regulation days when the government tell us exactly how to do anything.
 
stapleton
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RE: Should DOJ Eliminate Fare Bundling?

Thu Jul 02, 2015 7:08 pm

Quoting enilria (Reply 8):
If it hurts small communities, isn't that only because their pricing is subsidized by higher than reasonable fares from the hub? Cross-subsidization is legally questionable.

This is not a simple equation and to equate it to cross-subsidization is inaccurate. Fares between DCA and LAX are irrelevant to fares between DCA and CLT because of competition. DCA - LAX fares are driven by different factors including competition through other hubs as well as non-stop. The argument of cross-subsidization has absolutely no basis because of this. In effect, mandating sum pricing would eliminate competition through other hubs because fares could not be matched, there is too much complexity when accounting for the thousands of fare combinations between the hundreds of destinations.
 
Cubsrule
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RE: Should DOJ Eliminate Fare Bundling?

Thu Jul 02, 2015 7:44 pm

Quoting enilria (Reply 8):
If it hurts small communities, isn't that only because their pricing is subsidized by higher than reasonable fares from the hub?

What is "reasonable?" If pricing is based on demand, then many small communities will have high pricing to hubs because driving is a meaningful competitor. It's not worth it for any but the most time-sensitive passengers to fly ORD-PIA or CLT-ILM.
I can't decide whether I miss the tulip or the bowling shoe more
 
Osubuckeyes
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RE: Should DOJ Eliminate Fare Bundling?

Thu Jul 02, 2015 7:46 pm

It is a stretch to call connecting flights a bundle or a tying arrangement that would be illegal under anti-trust law. However, interestingly enough if skiplagging is as big of a problem as UA is saying it is then un-bundling would be the way to go independent of the DOJ.

NK sells all connecting itineraries unbundled IIRC. WN you can purchase un-bundled tickets as well, and occasionally they end up cheaper than buying a bundled connection. AA, UA, DL all have rules against un-bundled connections in their terms of service I believe, but I think it is rarely enforced.
 
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enilria
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RE: Should DOJ Eliminate Fare Bundling?

Thu Jul 02, 2015 9:42 pm

Quoting stapleton (Reply 12):
Quoting jetblue1965 (Reply 11):
Quoting Cubsrule (Reply 13):

Here's a discussion on price-bundling and cross-subsidies in aircraft manufacturing. Cross-subsidies violate antitrust where they are used to sell below cost. That's where the issues lies in the airline business. The calculation of costs is so nebulous that it has made nearly every past prosecution impossible. There are definitely routine cases where connect fares are below fully allocated costs of the seats. It's when we get into variable and incremental costs that things get murky. That should be the case in any industry, but apparently it's worse in this one.

http://www.justice.gov/atr/public/speeches/9536.htm


In its final decision, the EU eschews further reliance on Choi's model, but nevertheless inexplicably concludes (with no other support) that "bundling would lead to a re-allocation andtherefore to a shift of market share in favour of the merged entity"34 to such an extent that over the longer term GE's competitors would be unable to cover their fixed costs and would exit the market.35 Blocking a $42 billion merger on this basis, with neither theoretical or empirical support, is difficult to understand, to say the least.

Strategic pricing and cross-subsidization across business lines do not violate the antitrust laws or cause consumer harm unless the resulting prices are below cost and therefore predatory.

 
Rdh3e
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RE: Should DOJ Eliminate Fare Bundling?

Thu Jul 02, 2015 10:02 pm

Quoting enilria (Reply 15):

That implies that the person setting the prices indeed has pricing power.

Quoting enilria (Reply 15):
Strategic pricing and cross-subsidization across business lines do not violate the antitrust laws or cause consumer harm unless the resulting prices are below cost and therefore predatory.

This would mean implicitly that any airline operating at a loss is pricing it's product in a predatory manner because it again assumes (wrongly) that airlines have significant pricing power.

I know they aren't your words, but obviously its an obviously flawed comparison because the industries are too different to apply the same litmus test.
 
Cubsrule
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RE: Should DOJ Eliminate Fare Bundling?

Thu Jul 02, 2015 10:30 pm

Quoting enilria (Reply 15):
Cross-subsidies violate antitrust where they are used to sell below cost.

What antitrust law does non-predatory selling below cost violate?
I can't decide whether I miss the tulip or the bowling shoe more
 
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LAX772LR
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RE: Should DOJ Eliminate Fare Bundling?

Thu Jul 02, 2015 10:49 pm

Well, all of the reasons above... and the DOJ just cannot eliminate anything in aviation on a whim. All they can do is whine about it and threaten (or follow through with) a lawsuit.

The DOT has such direct authority, not the DOJ.
I myself, suspect a more prosaic motive... ~Thranduil
 
Osubuckeyes
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RE: Should DOJ Eliminate Fare Bundling?

Thu Jul 02, 2015 10:51 pm

Quoting Cubsrule (Reply 17):
What antitrust law does non-predatory selling below cost violate?

It wouldn't violate the Sherman act unless it was predatory. But what firm would sell below cost in a non-predatory behavior?
 
Cubsrule
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RE: Should DOJ Eliminate Fare Bundling?

Thu Jul 02, 2015 11:28 pm

Quoting osubuckeyes (Reply 19):
But what firm would sell below cost in a non-predatory behavior?

Let's imagine an airline with two hubs, in ORD and DFW. MSN-ORD is going to carry a lot of connects with low prorates and have a pretty high CASM. It likely loses money on a segment basis; say $1,000 per month. The economics of MSN-DFW are easier, and it makes $1,500 per month. So, the airline is making $500 per month of profit in MSN.

But, if the airline cuts MSN-ORD, suddenly folks are having to fly a long way out of their way for some of their connections. High-yielding travelers like their miles, and some will likely flee to other airlines, taking their MSN-DFW business with them. So maybe MSN-DFW is only marginally profitable standing alone. If that profit is less than $500 per month, then the airline is better off serving ORD too even though ORD-MSN loses money on a segment basis. There's nothing predatory in this scenario.
I can't decide whether I miss the tulip or the bowling shoe more
 
Viscount724
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RE: Should DOJ Eliminate Fare Bundling?

Fri Jul 03, 2015 1:34 am

The consumer benefits greatly from the current system. Airlines can generate additional revenue by offering low fares on connecting routes where they're competing with many other carriers via other hubs. Why should they be forced to charge more for A-B-C than for B-C? Makes no sense since a nonstop B-C is a higher-value product that passengers are willing to pay more for. Without the revenue from connections they would have to charge even higher fares for the nonstops.

I almost always use connecting routings from GVA to other points in Europe since the fares are lower than nonstops and I'm willing to put up with the extra time and inconvenience if the saving is significant which it usually is.
 
Skisandy
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RE: Should DOJ Eliminate Fare Bundling?

Fri Jul 03, 2015 1:38 am

Why are most here always defending the US carrier's reprehensible behavior?

Forget the (possibly illegal) anti-competitive behavior, the anti-customer sentiment, the trying to eliminate
any and all travel services that compare fares... etc....

But - what is so great about connections?

Why should connections be priced lower than nonstops?

Oh- there wouldn't be enough nonstops, if they were priced lower, and were more popular.... some of you say.

What then about widebodies coast to coast? What about a flight every 2 hours on a 777, than every hour on a 737?
They can do it in Asia, why not here? Would certainly ease congestion, wouldn't it?

Twice the number of flights ( yes- you who love all these connections) means:
-twice the pollution
-twice the congestion
-twice the noise
-twice the fuel consumption.

I see nothing attractive with this scenario... but that probably makes me weird, in the eyes of most a.netters.
 
Cubsrule
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RE: Should DOJ Eliminate Fare Bundling?

Fri Jul 03, 2015 1:46 am

Quoting Skisandy (Reply 22):
Why should connections be priced lower than nonstops?

The answer to that is easy: time is money. Nonstops take less time.
I can't decide whether I miss the tulip or the bowling shoe more
 
MKIAZ
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RE: Should DOJ Eliminate Fare Bundling?

Fri Jul 03, 2015 3:50 am

What the DOJ *should* do is to say that airlines can no longer have any recourse (closing FF accounts / cancelling remaining segments on a ticket) if a passenger decided to no-show (or makes a pattern of hidden city ticketing) - and that passengers can short check bags if they would like.

Once the OTA's get onboard, this will ultimately have the effect of ensuring that pricing for a one-stop connection is never less than either of the legs individually.
 
rtalk25
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RE: Should DOJ Eliminate Fare Bundling?

Fri Jul 03, 2015 5:06 am

In PHL, US charges high fares for nonstops out of PHL, especially on routes without LCC competition. In some ways, it is silly that PHL-CLE will cost more in fare than ABE-PHL-CLE. If based in PHL, to get a lower fare but not heading too far (as in all the way to BWI), one can to go up to ABE and depart out of there only to fly back into PHL to then take a flight to CLE.

However, I noticed over various fare searches, UA and DL will discount itineries in it's non hub airport, thus DL might actually sell the lowest fare PHL-DTW-CLE. At DL's hub in DTW, it's the reverse. You'll find AA selling the low fare from DTW to SFO with a connection in PHX. The non hub carrier will take the effort to sell lower fares.

In general, with competition, there is a balancing effect to the fare bundling effects.

I have noticed that CLT gets screwed with high fares at times, and in some traffic flows, there aren't good alternatives. e.g. flying CLT to Florida, the only alternative to US is flying DL with a connection in ATL. UA and WN's hubs are up by DC which are too much a backtrack. I'd think many from CLT likely drive down to Florida if US faring is too high (which often appears the case).

A r/t on US on CLT-MCO on 7/14-7/16 is $990. US also had the immense frequency to push WN off of CLT-MCO and B6 off of CLT-FLL.
 
OB1504
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RE: Should DOJ Eliminate Fare Bundling?

Fri Jul 03, 2015 5:28 am

What the OP is describing is not called fare bundling, and the proposal is a dangerous step toward re-regulating the industry.

Quoting AWACSooner (Reply 9):

NO, the DOJ should look at making the airlines pay taxes on their ancillary fees.


   More income for the government and airlines are less likely to come up with new fees. Consumers win.
 
CXfirst
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RE: Should DOJ Eliminate Fare Bundling?

Fri Jul 03, 2015 10:09 am

No.

If you purchase a ticket from an airline on a Route AAA-BBB-CCC, don't consider it as purchasing two tickets, AAA-BBB and BBB-CCC, consider it as one ticket taking you from AAA to CCC.

If you look at it that way, then it is logical that AAA-CCC does not equal the prices of AAA-BBB and BBB-CCC combined, as those 3 different fares are 3 different products being sold.

-CXfirst
 
WPIAeroGuy
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RE: Should DOJ Eliminate Fare Bundling?

Sat Jul 04, 2015 1:40 pm

Quoting Skisandy (Reply 22):
But - what is so great about connections?

With connections and the hub and spoke model you can go from Podunk town USA#1 to Podunk town USA #2 with one connection. Try that if routes were only based on O&D traffic. 2, 3, 4 connections to get across the US.
-WPIAeroGuy

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