Airline Fees: A Race to the Bottom

February 28, 2010

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.


A Recession-Proof Business Model (Stop Provoking Your Customers)

March 26, 2009

In a recent WSJ article, an airline analyst was quoted as saying that when everyone else is charging for formerly-free services such as pillows, it didn’t make sense that Southwest wasn’t.  I couldn’t help but think that these analysts might be part of the reason the industry is in such dire straits.

Southwest’s CEO responded that “adding fees is no way to grow an airline — customers hate that stuff.” He’s right. Despite the brave, new economy in which we find ourselves, a few things are still true. One is that it’s hard to sell things to customers who hate you. To state the obvious, this is particularly true when when they have real alternatives to whatever you’re selling. Less obvious, it seems, to companies that think their customers have no choice but to suck up the pain, is that if your customers hate you enough, those very alternatives will show up eventually.

When an industry racks up serious customer pain points — think lock-in periods for cell phones — it’s an invitation for competitors to enter and win by championing the customer.  Usually, this changes the game for everyone.  Southwest is rare in that most of its incumbent competitors (and the analysts who egg them on) have yet to internalize the full source of the company’s advantage. 

Southwest gets a lot of things right. One of those things is its aggressive commitment to meet its customers’ core needs, including low fares, direct flights, and flight schedules that optimize on frequency and flexibility. Another is its ability to meet those needs with enthusiasm and dignity. The fact that it’s pulled it off for the last 30 years while its competitors descended into toxic relationships with employees, unions, shareholders and customers helps explain why Southwest consistently delivers superior financial performance.

These are tough times. My best advice is to ignore the equivalent of the airline analyst in your own life and resist the temptation to try to survive at your customers expense. Let Southwest’s resilience in one of the world’s toughest industries be your inspiration. If your goal is to be around to serve your customers when the economy recovers, a good place to start is to stop provoking them.


The Demise of Airline Service

January 2, 2009

In her NYT OpEd, Ann Hood described the declining level of service experienced in-flight. This likely resonates with everyone who has flown consistently over the last ten years. It is also emblematic of a larger decline in service as documented by Business Week, WSJ (August 2006 special section) and others.  In Hood’s column there was an undercurrent of employee apathy as part of the explanation for declining service. In my experience, systematically poor service is rarely if ever the fault of employees.  Service models are designed to set employees up to either succeed or fail. Airlines today are clearly choosing the latter. In fact, it is good airline service that is surprising these days, precisely because airlines are relying on the heroic efforts of employees to compete. This is bad service by design.  To fix it, airlines need to go back to the drawing board and redesign their basic business model.