Article

September 2013

Scheduled passenger air transportation in the Producer Price Index: improvements and trends

In response to airlines’ increasingly complex and variable airfare pricing regimes in recent decades, the Bureau of Labor Statistics moved from an individual fare code approach to tracking prices to an average-pricing approach; as a result, the Producer Price Index for scheduled passenger air transportation is better able to capture true airline pricing behavior.

The Bureau of Labor Statistics (BLS) publishes a monthly Producer Price Index (PPI) for the North American Industry Classification System (NAICS) industry 481111, scheduled passenger air transportation. The introduction of this index in 1989 expanded BLS coverage of service industries,1 with the airline industry accounting for approximately one-fifth of the revenue for NAICS sector 48–49, transportation and warehousing.2

Since the scheduled passenger air transportation price index was first introduced, airline pricing has changed substantially. The rising importance of the Internet as a distribution channel, as well as improvements in computerized revenue management systems, has allowed airlines to monitor supply and demand more closely. As a result, seat-by-seat variation in prices paid by passengers on the same flight has increased. Also, frequent-flyer programs have grown to the point where they have caused prices to vary as more passengers are awarded free or discounted tickets. More recently, airlines have expanded the number of ancillary fees they charge for transporting baggage and for other services related to air travel.

Because of all these developments, the method for calculating the price index for scheduled passenger air transportation was modified. This article discusses the transition from the fare-code-based pricing method used when BLS first introduced the index to the average-revenue-per-passenger approach that is currently employed. Whereas the fare-code approach was based on tracking the prices for individual tickets, the average-revenue method reflects the real transacted price for all passengers who travel on each BLS-sampled flight. The strategies that were more recently enacted to account for new ancillary fees also are described. The impacts of these changes are then evaluated, with a focus on the relationship between the PPI air passenger index and the price index produced by the airline trade organization Airlines for America (A4A).3

History and methodological challenges

Throughout the 1990s, the PPI for the airline industry was based on a pricing method according to which an individual fare code offered by a sampled airline was selected for a specific origin and destination (O&D). The starting and ending point of a flight, the O&D is variously referred to as a route, city pair, or market. Each fare code specifies the following characteristics:

·         The class in which the passenger will travel (e.g., first class, coach)

·         Advance purchase information (e.g., 7 days in advance of the flight, 14 days, the same day as the flight)

·         Allowable travel days (e.g., weekdays; weekends; all days; particular restricted days, such as holidays)

·         Restrictions on changing or canceling the ticket

·         Whether the ticket can be upgraded to a higher class of travel, pending availability

·         The percentage of the number of miles flown that are granted as frequent-flyer miles (e.g., 150 percent of miles flown granted, 50 percent of miles flown granted)

Notes

1 See Roslyn Swick, Deanna Bathgate, and Michael Horrigan, “Services producer price indices: past, present, and future,” paper prepared June 30, 2006, for presentation at the Conference on Research in Income and Wealth, July 17–19, 2006, Cambridge, MA, http://conference.nber.org/confer/2006/si2006/prcr/swick.pdf.

2 “2007 Economic Census” (U.S. Census Bureau), http://www.census.gov/econ/census07.

3 “A4A monthly passenger and cargo yield (fares per mile)” (Washington, DC: Airlines for America®, June 2013), http://www.airlines.org/Pages/A4A-Monthly-Passenger-Yield-(Fares-per-Mile).aspx.

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About the Author

John L. Lucier
lucier.john@bls.gov

John L. Lucier is a supervisory economist in the Division of Industrial Prices and Price Indexes, Office of Prices and Living Conditions, Bureau of Labor Statistics.

William J. Page III
page.william@bls.gov

William J. Page III is an economist in the Division of Industrial Prices and Price Indexes, Office of Prices and Living Conditions, Bureau of Labor Statistics.