Wednesday, February 17, 2010

Transport: Fare Incentives

TORONTO, ONTARIO - At this juncture, I ought to be traveling almost exclusively by rail. I have the time and I prefer traveling by rail anyway for environmental reasons, never mind the railfanning opportunities. Yet, whenever I have headed west farther than Michigan since becoming unemployed, it has been by air. How can this be? Simple. It's cheaper.

As hard as it is to believe, airfares--even relatively last-minute airfares--have been cheaper for every trip segment over 400 miles I have taken in the past two years, with one exception--Amtrak was slightly cheaper than Southwest Airlines for Sacramento, California to Portland, Oregon last December, so that segment occurred by rail. While I have never done a comprehensive analysis, this can't possibly be reflective of the actual costs. Even taking into account that rail travel takes longer, the fewer number of people involved in the infrastructure of running a train versus running a plane means the labor costs of going by rail can't be significantly higher, and everything else should be lower. Most significantly, the fuel costs should be radically lower--trains use just over one-third as much fuel per passenger-mile as an airplane according to the Sierra Club.

(I would have guessed a much larger difference, but that's still huge. Looking at the derivation--such as here--it seems to come from a passenger load on a train of twenty, which is too low by a factor of at least five for most Amtrak trains, even long-distance ones. It also gives a passenger load of 90 for aircraft, which would be a loading factor of less than 0.7 on a 737 when most airlines are averaging a load factor of 0.85, but that's a more mild underestimate than the rail underestimate. I have a feeling that all of these estimates were intended to favor the automobile).

Yet, it's actually not surprising that rail fares are often higher than air fares. Both the railroads (Amtrak and VIA Rail Canada) and the airlines use yield-management techniques on their fares to maximize revenues. Assuming their models are working properly, it's entirely possible that the demand for rail services is high enough that the railroad can charge fares higher than airlines and still maximize their revenues, whether from people that physically or emotionally cannot or will not fly, or those traveling to intermediate destinations. VIA Rail Canada obviously offers enough amenities and convenience that its regular fare from Toronto to Montreal is equivalent to the base fare on Porter Airlines (both about $144), though more discounts are probably available for the train.

I'd like to propose that the fact that rail fares are not cheaper than air fares means that our taxes on fuel are clearly not high enough, as it should cost less to transport a passenger by rail. However, if we believe the revenue-management software is actually working, it implies that airlines cannot actually charge more money for their tickets and earn more revenue. Raising the fuel taxes would decrease the airline profit margin, and at some point the airlines would simply stop flying a route because it would not be profitable.

Maybe that is what needs to happen. If the weakest airlines disappear from a route, the decreased supply would mean that the remaining airlines would be able to charge a higher fare and maintain profitability. Rail fares could also rise some because of increased demand from people that could no longer afford to fly, but not as much as the air fares. The impact would be modestly higher rail fares and significantly higher air fares.

In other words, there's no way I'm going to be able to financially justify taking the train unless it costs more than it does now. That may be the right outcome from a national policy perspective, but I'm not looking forward to that.

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