Sunday’s New York Times had an interesting article on the state of customer-airline relations (Will Airlines and Passengers Call a Truce?, Feb 21). The general tone is that we, the flying public, are as mad as hell but seemed resigned to taking it some more.
While the airlines have general won praise for how they have dealt with this winter’s snow storms, customers are still generally displeased with how the airlines have moved to “à la carte” pricing — charging additional fees for everything from checking bags to having an aisle seat. Some of these fees were originally tied to increases in oil prices but now seem to be largely about the extra revenue:
We need to return to profitability, and we need to do so immediately,” says Mark Bergsrud, the senior vice president for marketing at Continental Airlines, echoing what has become an industry mantra. He and some other airline executives offer another line of reasoning for the new environment: the me-too factor. Cellphone providers, sports arenas and theaters all add charges on top of the basic price of what they sell. Customers are used to it, so why shouldn’t the airlines join in? “It’s something that’s happening throughout business,” Mr. Bergsrud says, “and we’re just slower getting there than many others.”
The additional factor industry types point to is consumer behavior — that is, we are to blame for the fees we despise:
Still, passengers cannot escape some responsibility for the airlines’ tactics, says Tim Winship, editor of SmarterTravel.com. “We have to look at ourselves in the mirror as consumers, and acknowledge the extent to which our own price sensitivity has contributed to the way things are,” he says.
That sensitivity has been made clear during the recession. After raising fares 15 times in 2008 to offset record fuel costs, the airlines were able to raise prices only four times in 2009, when the slow economy caused air travel to drop by about 25 percent. From July to September, the most recent quarter for which information is available, the average round-trip domestic fare was $306, down from $358 in the period a year earlier, according to the government’s Bureau of Transportation Statistics. So far this year, airlines have twice tried unsuccessfully to raise average prices. The first was an attempted $16 round-trip increase in January by American, Continental, Delta and United, and a $10 round-trip increase that many carriers tried this month. But low-fare airlines resisted, and prices stayed higher for only a few days before the airlines retreated.
“They’re testing the price elasticity of consumers, and consumers are saying, ‘We’re very sensitive to price,’ ” says Rick Seaney, chief executive of FareCompare.com, which tracks airfares. “Consumers are just expecting weekly discounts. One dollar matters nowadays.”
So let’s first question whether you and I are to blame here. I am not quite willing to take the fall. Is it my fault that airlines find themselves in a commodity business? The simple fact is that all that separates Delta from American is the color of the paint on the plane. That’s their fault, not mine. They collectively have lost any ability to differentiate their offerings and thus prices should be driven to cost. If prices well above costs persisted in corn or soy beans, economists would argue that there is something wrong with the market. Why should we expect anything different at O’Hare?
Now about the fees. I think that these can generally be separated into two categories. Some fees have no real impact on the airline’s costs and those are all about segmenting customers. These would include charges for early boarding at Southwest or for an aisle seat on a number of airlines. If you don’t understand why those exist, you are also confounded by $5 popcorn at a movie theater or $7 beers at the ballpark. I would add that American Airlines recently got a ruling from the IRS saying that these fees were not subject to the federal excise tax on air fares (which funds air system improvements). See here. That gives the airlines even more incentive to shift the cost of flying to ancillary fees than upfront prices. If you can live with the middle seat back by the galley, you win. If you are traveling with kids and want to sit together, you may have some issues.
The other set of fees influence customer behavior and may, I hate to say, be socially good. Gady touched on this in his post about Ryanair. Michael O’Leary, the CEO of Ryanair, likes to argue that fees for checked bags influence customer behavior and save money for the airline. His firm, he says, passes those savings on to passengers. We’ve actually been working on a model of this, and it can be true. If, on the margin, it is cheaper for customers to reduce their need to check bags than it is for the firm to handle another bag, it is efficient (in the economist sense of the word) to shift the cost to the customers. That doesn’t mean I like it but I at least sometimes benefit from the lower fares that result.
