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Black Box Strategy is the personal blog of Andrew Griffiths.

Airline Business: More Fees are the Solution

February 2nd, 2009 In: Strategy

Baggage Fees

Cynics won’t be surprised to learn that airlines are keeping their checked baggage fees, even though their ostensible reason (high fuel costs) has disappeared. As if to reinforce the cynics’ dim view, the airlines are trotting out a litany of excuses, including bad bets on fuel prices, $4 billion of losses in 2008, and a drop in passenger demand. These excuses explain the need for a higher ticket price, not a separate fee for baggage. So, to clothe their naked excuses, they’re falling back on the old chestnut, “it’s good for you.” They insist these fees allow customers “to choose only the services they want.”

One-Price System

Does this mean the airlines should return to a one-price system? Speaking from a business standpoint, no. Why deny yourself two bites at the customer’s pocket, especially when the second occurs at the airport when the consumer is your captive? As any behavioral economist will tell you, most customers won’t consider the additional fee when buying tickets. Since the airlines have already (a) convinced customers to accept the higher prices, and (b) set up the infrastructure to collect payments, it would be foolish to return to a one-price system. Particularly since oil prices will eventually rise again.

The Importance of Fees

How about from a customer standpoint? “It’s good for you” doesn’t have to stay corporate doublespeak. Instead of railing on against fees, we should celebrate them and demand more- provided these fees are of the right kind at the right time. These would be voluntary fees, fees that truly give the customer options for customization when they have the freedom to choose. Unfortunately, most fees the airlines collect today are involuntary fees that are tacked on when you’re at the airport or on the plane, and already captive to the airline. These fees were initiated as revenue generators, not out of a true desire to provide passengers with a customized experience. Without fees provided at the right price under the right circumstances, we can’t have customization. Without customization, airline travel will continue its path to ever increasing homogeneity and commoditization with airlines only making money when they manage to pack us in like sardines in a tin can.

Without voluntary fees, we’re condemned to awful flying.

Our Money is on the Table

Given the opportunity, many flyers would part with considerable sums to improve their experiences, or mitigate the awful ones. Flying is an event-rich experience: there are many small events that could become business transactions. Several events can have high levels of experience intensity: a negative experience can upset or even ruin your day. Every component, from the purchase, seat selection, remote check-in, travel to airport, and baggage check-in to security screening, waiting for boarding, boarding, and all the in-flight events could be customized though use of fees to provide the flyers with better, customized experiences. As long as these are provided at the right price under the right circumstances, many customers will be willing to pay. Until the airlines allow these transactions, they’re leaving our money on the table.

One Step Forward, Two Steps Back

Sometimes the airlines do allow for a modicum of customization. I’ve paid $6 for an aisle seat and $20 to be in an exit row, but these fees are still crude measures of customization, and the airlines aren’t going to get rich from that money. So they’re stuck with commoditizing their product: all they can do is (a) pursue a cost-cutting race to the bottom, and (b) annoy passengers with involuntary fees such as those for blankets and pillows, frequent flyer redemptions, etc. Unsurprisingly, many passengers feel nickel-and-dimed by these involuntary fees, and no amount of protest from the airlines that the fees have been well publicized will persuade passengers otherwise.

The Alternative

Airlines should creatively develop as many voluntary fees as possible. Utilizing the rule of right price, right circumstance, airlines should create a post-ticketing fee system with fluid prices that allows flyers to purchase underutilized flexibility and/or capacity. This way, a market would be created for currently wasted economic value, the stultified homogeneity of airline travel would be diminished, and service would improve for all. Taken to its logical end, this strategy could even break the industry’s overarching worship of load factor (percentage of seats occupied) because airlines would make more money operating with fewer occupied seats.

One way to implement these fees is using cell phones to hold auctions for extra capacity. We finally have the technology to implement these kinds of auctions, so the airlines should take this opportunity to make these transactions.

On-Board Baggage

To return to baggage fees, let’s use luggage space as an example. When traveling for business, I often wish I was able to purchase extra overhead space to avoid checking bags. Sometimes it would be nice to have this option when I purchase the ticket, but I would likely pay more for the privilege when I’m rushing to the airport, or standing in a long-line to check-in, or if the plane is late and if by skipping baggage collection at destination I can avoid a 2-hour wait for the next bus home. My willingness to pay generally increases as I get closer to the flight.

The airlines willingness to sell also increases as the flight draws nearer. At the time of ticket purchase, the airline would have to demand a high price for extra overhead space – otherwise they may be precluded from selling a seat to another passenger. But as flight time approaches, and seat occupancy is increasingly certain, the airline runs much less risk selling me the extra space. Somewhere in the middle, the airline’s price to sell and my price to buy will meet.

What happens if the flight is full? The airline can still make money by trading my desire for overhead space with another passenger’s. For example, if I’m willing to pay $50 to carry-on another bag, odds are that another passenger would be delighted to get a $25 credit in exchange for checking bags instead of carrying them on. And ultimately, if it turned out that passengers were willing to pay for extra on-board baggage, the airlines could ask Boeing and Airbus to design planes with baggage space, to further increase their revenue.

Myriad Options

We can apply the same principles to create options like buying the right to be next to an empty middle seat, or a child-free area. If the airlines are willing to implement voluntary fees, they will discover that the event-rich experience of flying provides many opportunities to generate revenue.

Your thoughts please

How much would you be willing to pay for what types of customization?

Do you think customization using voluntary fees would help airlines make money?