The WSJ has an interesting interview with Michael O’Leary, the CEO of Ryanair. (“O’Leary Pilots Ryanair Into Lead With ‘Mad’ Ideas for Cost Cuts”, December 2009). The Irish equivalent of southwest (low cost and no-frills) focuses on extreme measures of cost cutting, allowing the airline to be among the most “consistently profitable airlines this decade.” The interview brings a few intersecting observations, which are well summarized by the following excerpts:
Like, paying for checked-in bags: It wasn’t about getting revenue. It was about persuading people to change their travel behavior—to travel with carry-on luggage only. But that’s enabled us to move to 100% Web check-in. So we now don’t need check-in desks. We don’t need check-in staff. Passengers love it because they’ll never again get stuck in a Ryanair check-in queue. That helps us significantly lower airport and handling costs.
So apparently Ryanair is in the business of shaping customer behavior (and making money) and not only making money. There are two sides for charging fees for checked-bags. On one hand – you reduce the number of checked bags and thus reduce the need to have a whole operation built around it (and thus cut costs). On the other hand, more people use their carry-ons, more carry-ons have to be placed on the overheads bins, and more bags are probably checked in the gate, leading to probably more time at the gate, more delays, and potentially higher penalties. But there is also the revenue side, and I have to admit that I am just not buying it when Mr O’Leary says it is not for the revenue (did any one say “cheap talk”).
First, in the grand scheme of things I am not sure if the airlines take all the factors together and whether cost cutting is the real justification or is it the total net profit increase. Second, while I admire his understanding of customer incentives (and we at “The Operations Room” like the idea of shaping customer behavior), I do believe that when firms try to shape customer behavior for the greater good (as he tries to portray it), it almost always “gets it wrong”, and falls in love with the additional revenues rather than the “right behavior”. (For a discussion of this see Naor’s (1969) paper, which I already quoted before.)
And it gets better:
Now we’re looking at charging for toilets on board—not because we want revenue from toilet fees. We’d happily give the money away to some incontinent charity. What it means is, if by charging for toilets on board, more people would use the toilets in the terminals before or after flights, I could take out maybe two of the three toilets on board, add six extra seats and reduce fares across the aircraft by another three or four percent.
You can summarize it in two words: this is a “Fee to Pee“. And this is really about shaping customer behavior. I will make sure to bring enough money to my next Ryanair flight. Just in case.