Airline Fees: A Race to the Bottom

A recent NYT article touched on the issue of charging airline passengers fees for small components of the service experience.  How close are we to the world that a Southwest commercial famously parodied, where customers have to scrounge for quarters to open up the overhead bins?  Not far, it seems.  Airlines have an emotional hurdle to charging extra for carry-on bags, but virtually everything else is fair game.

The economics of this decision are understandable.  Airlines have been losing money on ticket prices, claiming that the prices the market will bear are not enough to cover their unyielding costs.  The revenue they get from fees drops almost directly to the bottom line.  Fees translate into “pure profit” because there is very little incremental cost in, say, sitting in an aisle seat.

But as airlines chase each other down the fees rabbit hole, customer goodwill is likely to follow.  Customers hate being nickled and dimed in-flight, particularly those who fly regularly.  So why do so many airlines think they’ll prevail by giving their best customers a reason to hate them?  It feels like an entire industry is throwing in the towel.

The game is over when service executives assume that customers don’t value the difference between good and bad service. When this happens, whole industries can get stuck in a competitive death spiral where they try to get a larger and larger piece of a fixed pie they share with their customers.  This is happening with airlines today, but it doesn’t have to be this way.  Competing on service can increase the size of the pie and make everyone better off (customers, employees and owners), even in low-margin businesses.

Why is it so difficult to make this leap?  Because differentiating, by definition, requires doing things differently.  Managers with things to lose (a career in a conservative culture) have powerful incentives to keep doing the same things only harder, to run faster than their competitors rather than create a whole new game.

Most airlines are not just running the same, tired race — they’re now asking their customers and employees to do the running for them.  That’s what the proliferation of fees represents.  Rather than delivering an exceptional experience or innovating on costs, airlines are designing elaborate schemes to charge customers extra without giving them anything in return.  And then they’re throwing their frontline employees out there to deal with customers’ angry response.  My advice is to reroute the creativity from fee schemes to service.  We’re getting close to the point where most airlines have nothing to lose from trying.

4 Responses to Airline Fees: A Race to the Bottom

  1. paulmalone54 says:

    I believe that the current US consumer mentality ( get to the lowest immediate cost for ME RIGHT NOW and I don’t care what happens to the next guy ) has driven the airlines and almost every other business to focus on delivering the lowest price to consumers every time.
    As you know, this ultimately destroys jobs, businesses and families because the focus is on money/cost rather than value.
    Next time you call a business and get India or Jamaica on the call you’ll know that business is focused on cost. Ask the Indians or Jamaicans to solve a real problem you have and see where you get.
    Please ask your readers to read “Supercapitalism” by Robert Reich.
    It’s a very interesting look at what made us an economic superpower and what will ultimately destroy us unless we turn from our selfish ways.
    Thanks,
    Paul

  2. Excellent article. I hope more disruptors enter this space, such as Porter Airlines out of Toronto. Something’s got to give.

  3. Mike Toffel says:

    I think airlines have gotten their luggage add-on charges exactly reversed. They charge for checked luggage, which leads people to carry on more luggage which slows loading and unloading (“planing and deplaning). Seems to me they should charge for carry-ons, and allow two free checked bags. Don’t tell the airlines though, because I personally like free carry-ons. Just sayin’. Wonder why they do it their (backwards) way. Perhaps they think it’s more expensive to handle checked bags, but I wonder if that’s even true from a marginal cost perspective.

  4. Josh Bronstein says:

    I spent this summer trying to convince leaders of a major US airline to invest more in improving the performance of front line employees to drive improved service, but I respectfully disagree with the notion that bag fees have all that much to do with service quality. If we all felt like we were experiencing consistent world class service when flying, I don’t think most of us would mind paying a bit to check a bag.

    There are serious costs associated with transporting bags—especially those that are too large or too heavy to be carried on—and it’s only fair to ask the customers who consume that service to assume some modest costs. Besides, most airlines exempt their “best” customers, regular travelers and highest revenue ticket purchasers, from the fees.

    The problem lies not in the fees, but in the delivery of the “message” from often unfriendly, inflexible, and over-worked service representatives. With seniority based incentives preventing the implementation of modern performance management systems, airlines reward complacency—even among non-unionized employees—while they tie their own hands with regards to service improvement. Until bold leaders have the courage to measure front line employee performance and design incentive systems that identify and reward customer-focused behaviors, I believe poor service is here to stay…with or without bag fees.

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