Airlines’ windfall disadvantages many

Posted: May 4, 2010 in CRM
Tags: , , ,

The U.S. Department of Transportation yesterday said airlines’ revenue from so-called ancillary fees rose 42 percent to $7.8 billion in 2009.  This includes the fees you pay to check baggage and change reservations, the challenges most familiar to the business traveler.

Rather than simply increase ticket prices, which would be the fairest approach to increasing revenue because funds would be raised equally from all passengers, the airlines decided in 2008 to nickel and dime passengers when fuel prices rose to silly levels backed by $147 per barrel oil prices.

The ancillary fees apply to the normal costs of doing business that the airlines cannot afford to absorb because their margins are so narrow, so they pass on costs to travelers.  You might say this is appropriate and that if someone changes an itinerary they ought to bear the cost of the change.  Right?

I suppose I can agree with charging reasonable fees to change flights but recent experience tells me the cost of making a change is somewhere between forty and sixty percent of the ticket price.  Give me a break!  Changing a reservation ought to be a right we all have borne by all of us as a communal good because we all need to change flights from time to time.

Also, there’s the matter of checking bags.  We’ve become addicted to carrying on our bags to save time on landing and to avoid checking fees.  But the hard math says that there isn’t enough overhead bin space to accommodate all those who wish to carry on.  So what happens?  People with low zone seating numbers get on the plane first and take the available space.  That means if you have a bag and are boarding in Zone four, good luck.  Don’t even expect room for a briefcase or a coat.

The inequality of all this is evident.  We all pay the same rate for a seat but some people get more amenities while others have to buy amenities.  Airlines have become proficient at doling out amenities to their best customers.  Someone with special status due to an abundance of frequent flier miles on the books gets to board early, regardless of the zone that would otherwise be called for.

There is a work-around for this that will hold until the airlines install credit card processing at the gate.  Simply bring your bag to the gate and then check it when the gate agents discover to their surprise that there are too many people carrying on.  At that point the airline is happy to gate check your bag gratis just to get to push back on time.

Economists have a term for messing with the overhead bin space it’s called the tragedy of the commons.  What was once common area available to all is now commandeered by the powerful for private use.  It’s wrong, wrong, wrong and it’s not how you treat customers.  What’s annoying is that government regulators enable this kind of thing to the tune of hundreds of millions of dollars per airline in many cases or $7.8 billion in 2009.

Is it any wonder why so many travelers have nothing but dread and simmering anger for air carriers?

Comments
  1. Marcio says:

    Denis:

    A taxi cab ride from San Jose to SFO costs me $120. A 6-hour flight from SFO to JFK costs me $120. The cab doesn’t serve me food, doesn’t show up on time, and is not clean. Yet we complain about the airlines.

    I agree with your argument above (increase ticket prices, no charge for using the bathroom) and I am not here to defend airlines, but airlines practices are the symptom of market dynamics, which includes us the passengers.

    The truth is that air ticket prices do not represent the real cost and liability of building airports, putting those big things in the air an transporting people coast-to-coast.

    If we select our airline based solely on price (and most of us do) and pick crappy over decent service because of a $10 difference in ticket fare, the airlines will keep giving us what we ask for.

    It is a perceived problem, but the airlines is just following the trade-offs the average air traveller makes every day.

    How to fix it for people who don’t like it? I don’t know.The source of the problem is the consumer behavior, but consumer behavior cannot be changed easily.

    Perhaps air travel has to become more expensive first (as you predicted when we last met – to reflect real economic and environmental costs), which will reduce the number and change the average profile of air travelers, which will change the dynamics of an industry that is in a no-light-at-the-of-the-runaway situation.

    • Denis Pombriant says:

      Interesting observations but I think you miss the point which is that the airlines are selling a defective product and should not be allowed to do so. Your argument amounts to blaming the victim here, or more accurately, the customer. Imagine if car makers, to save money, opted to sell cars without wheels? You could still buy the car but then you’d have to bring your own rims and tires to pick up your vehicle. Or, perhaps the dealer would be happy to sell you wheels at, say, $500 per. Someone could always say that if the customer didn’t like the deal they don’t have to take it. But the deal in either case is non-negotiable. We have to travel by air, there are no options in many cases — either for alternatives (yes you could take a train from NYC to LA but few people do because of practical concerns) or alternative carriers. One of the major problems of air travel, and the reason we have the conundrum we have, is that everyone wants to be the low cost producer. Very few airlines are trying to hold up standards and charge a little more for better service. There is ample evidence that a market this big could support such an alternative model. Southwest and Virgin come to mind as examples of better attempts at service but they are a long way from offering a truly competing model.
      Air travel is already regulated albeit the regulators are asleep at the switch much the same as the Wall Street regulators were asleep earlier. The fact of the matter is that government needs to do its job better.

  2. Marcio says:

    I don’t think I am blaming the victim. My point is that there is no victim, airlines are delivering what the market demands.

    In the specific case of freedom of changing tickets and a few other allowances, one can buy a full-fare ticket. The huge difference between ful fare and restricted just reflects the fact that the vast majority of customers chose to buy restricted.

    So I just say that the bad quality of service reflects the absurdly low price we pay for air travel.

    I agree regulators can help to impose better quality standards if the market won’t, but that will reflect a substantial increase in price (no need to wonder, just look at the more regulated past or look at other regions outside the US).

    I also share your basic perspective that I personally would prefer to live in a world where air travel was more comfortable.

  3. Denis Pombriant says:

    Sorry I can’t agree with you. I think you are trying to have it both ways. The airlines occupy a unique place in transportation, they are the only game in town for most travel and they appear to collude indirectly to set prices and service levels. It is not a situation where you can take your business elsewhere if you are dissatisfied.
    At best it can be said that bad service and discrimination are the unintended consequences of low prices that you say the market is demanding. But no one suggests that the market demands such excessively low prices that the airlines cannot afford to provide a decent product. The airlines are all by themselves competing in a death spiral of low prices.
    The only remedy that ordinary people have against monopoly or oligarchy is regulation by their government. Regulation sets standards and limits the kinds of ruthless competition that results in poor service-product quality. You can look it up but this reasoning goes all the way back through the Common Law (and its Hospitality Law division) to the Magna Carta which, among many things, mandated service levels for inn keepers including charging them with responsibility for guest safety.
    The airline industry is a perfect example of an unregulated forum where competition is focused on price. The results we get are deplorable and they are a warning to all of us of the dangers inherent in excessive deregulation. What has happened in the airline industry is analogous to what happened on Wall Street and any other venue where regulation has been relaxed.

  4. Marcio says:

    Denis: I see agreement.

    Regulation is needed. The airline industry as it is today is not sustainable. There is no choice of a good product. I agree with all that.

    Just pointed out that to make it sustainable, air travel will need be less accessible (i.e. substantially more expensive).

    If it is cheaper to fly to the other coast than to take a cab to the city, more people will choose to fly, even without justification.

    If a large portion of the customers are in that profile, we see the death spiral you point out.

    • Denis Pombriant says:

      I can agree with most of that. Fares are too low. Ten years ago I paid $2k to fly from BOS to SFO and today I can do it for 25% of that fee.
      The airline industry needs to make a better product, that’s the bottom line, how they do it is not my concern other than to offer advice through a blog now and then. It is my job and duty as a customer to speak out about bad products and hopefully influence change.
      We get into the area of moral hazard when we only look at the cost and people don’t choose to fly vs. taking a cab because costs are similar, they choose to go where they go on the conveyances that are available. IT’s like saying a hospital is having a 2 for one sale on appendectomies…regardless of the cost no one has the operation for cost reasons.

So, what did you think?

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