If Allegiant Air gets its way, you might be able to purchase a ticket where the final cost would rise and fall with the price of jet fuel.
For the Las Vegas airline, it’s another way, besides higher fares and fees, to guard against rising fuel costs. For travelers, it’s a chance to gamble on a cheaper fare.
When booking a flight, passengers could choose between a traditional fixed-price ticket and a discounted, variable-price one. If the price of jet fuel falls by the departure date, customers with a variable ticket would get some cash back. If the price climbs, they would pay more, up to a predisclosed cap.
Most airlines already use financial contracts to lock in part of their future fuel costs to protect against wild oil price spikes. Otherwise, they pay the going rate at the pump and hope it’s not too exorbitant. The airlines gamble on finding the right balance. If they lock in too much fuel and prices fall, they lose.
Allegiant’s plan, in a way, passes that decision — and risk — on to customers.
“It’s an airline based in Vegas, so people are in a gambling mood I guess,” says Brett Snyder, president of Cranky Concierge, an air travel assistance company.
The Department of Transportation has proposed a new consumer protection rule preventing airlines from increasing prices after purchases are made. Allegiant recently disclosed the new pricing option in a letter to the government opposing the rule and suggesting this program as an alternative.
The airline doesn’t have any immediate plans for the new pricing option but wants the flexibility to offer it in the future, says Allegiant spokeswoman Jordan McGee.
Experts don’t expect the bigger airlines to follow along. They’ll likely stick to their current strategy of raising fares, reducing available seats and improving fuel efficiency to counter rising fuel costs.
Allegiant caters to leisure travelers, flying them from small cities to vacation destinations such as Florida, Myrtle Beach, S.C. and Las Vegas. Most customers book their tickets months in advance, increasing the chance that Allegiant’s fuel costs would have changed by the time they travel.
Among its routes, Allegiant offers direct, nonstop Jet Service from Bangor, Maine, to Orlando/Sanford Airport and to Tampa/St. Petersburg Airport.
The price of jet fuel has risen nearly 50 percent in the last year. At $243.7 million, fuel was Allegiant’s biggest expense in 2010, mostly due to a fleet of older, gas-guzzling jets. Fuel accounted for nearly 44 percent of its overall budget, compared with 25 percent for the entire U.S. airline industry. So, it’s easy to see why the airline would want to shift the risk and price volatility to passengers.
“I give them points for being creative,” says Henry H. Harteveldt, principal airline analyst with Forrester Research. “But I think it is ultimately very confusing.”
In part, that’s because it already takes some work to figure out Allegiant’s prices at booking. The airline charges a $14.99 “convenience fee” for using its website. Unless they opt out, passengers are automatically sold assigned seats and priority boarding for an extra $33. And when booking a flight to Las Vegas, you might find a $15 airport shuttle already added to your purchase.
The DOT also plans to address price transparency in its new rules expected next month.
“A lot of people have issues with the ways they display their fees today,” Snyder says. With the new ticket option, “will people really know what they are getting into?”
Fliers have shown some willingness in the past to gamble on airfares. Priceline and Hotwire have long allowed customers to buy cheaper tickets in exchange for not knowing exact flight times, number of stops and the airline’s identity.
But Harteveldt doesn’t think that travelers, keenly aware of fuel prices, will go for the Allegiant offer.
“The consumer is not stupid,” Harteveldt says. “The consumer gasses up her car at least once a week.”