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September 2013

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

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Figure 1 displays the PPI for scheduled passenger air transportation from December 1989 to January 2012 and illustrates the major PPI-related events that took place during that timeframe.

One advantage of pricing a single fare code was that it ensured consistency with the “fixed input output price index” (FIOPI) assumptions that form the basis of the program’s index methodology.4 In addition, the terms of transaction for each sale were held constant in all pricing periods.

However, airline industry trends that occurred throughout the 1990s and 2000s revealed key weaknesses with the fare code method. As airline computer systems became more advanced, the airlines began issuing a larger variety of fare codes so that they could more easily react to changes in demand. At the same time, the airline industry shifted away from traditional distribution channels, such as call centers and brick-and-mortar travel agencies, and toward Internet-based distribution channels. The shift toward Internet-based distribution channels was expedited as the airlines began to charge customers small fees for speaking with call center representatives and as they stopped paying commissions to traditional travel agencies, causing many of them to go out of business.5 Web-based airline ticket distributors, such as Expedia and Travelocity, earned increasing revenues and market share during that time. Airlines responded by selling tickets directly to consumers via the Internet in order to compete with these online travel agencies.

At the same time, consumers felt that they could make informed decisions and realize greater savings by using both online travel agents and the airlines’ websites to do comparison shopping. Internet bookings from those two sources grew from 7 percent of all bookings in 1999 to 30 percent by 2002.6 As airlines began selling more tickets directly online to passengers, they introduced an increasing number of new fare codes, including Internet-only fares and deep discount email sales. As these and more fare codes were introduced, it became increasingly difficult to represent industry prices with existing PPI item allocations. Requesting additional items was considered, but respondent burden was a concern, with BLS unwilling to jeopardize continued cooperation with the survey.

At the time, the PPI airline index did not encompass these Internet fare codes. As a result, in early 2003 BLS analysts conducted research to gauge the feasibility of augmenting pricing data to include deeply discounted web-based fares. The research indicated that it would not be possible to use the fare code method to maintain constant-quality fare codes to be tracked over time, because many web-based fare codes were introduced with deep discounts and then quickly discontinued. This strategy on the part of the airlines created a twofold problem: deeply discounted fare codes with special restrictions were almost impossible to select for pricing, and even if these fare codes were selected for pricing, they would be discontinued so quickly that they could not be priced consistently from month to month. For example, some airlines introduce holiday fire sales on the Fourth of July and then remove these fare codes as soon as the holiday ends.

Notes

5 The number of travel agency establishments dropped 46 percent from 1997 to 2007, according to 1997 and 2007 Economic Census data.

6 “Airline ticketing: impact of changes in the airline ticket distribution industry,” GAO-03-749 (U.S. General Accounting Office, July 31, 2003), http://www.gao.gov/products/GAO-03-749.

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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.