Airline fees annoy many customers, but add up to good income for airlines. There are many reasons … [+]
People hate airline fees. From baggage fees to seat assignments, rebooking fees and more, many customers get frustrated because they can’t figure out their total price until all decisions are made. As airlines move to offering “tariff families” that re-bundle some basic functionality, this is becoming easier for some, but not the most thrifty, travelers. What’s worse is that many third party websites that sell airline tickets, such as Expedia, cannot realistically represent the many service options offered by each of the hundreds of airlines on offer. Hence, buyers of these websites are sometimes surprised when they pay a fee that they did not fully expect.
Why not just bundle everything back together as before? Buy a ticket, get a seat assignment, two checked bags and one large carry-on bag for a single price? The reason for this is because airlines have realized that by separating these things, they not only generate more revenue, but also give consumers more control over their overall price. Here are the weighty reasons why these fees persist:
Consumer price control
The Liberty Mutual emu is a constant reminder that “only pay for what you need” is everywhere as an empowering message that controls the consumer. Not everyone checks baggage, so why pay for baggage infrastructure when you don’t? Some people will pay to sit by the window or near the aisle while others will happily take any seat on the plane. By unbundling and adding fees for items that were previously included in an airline ticket, airlines are giving the consumer some control over the total price they ultimately pay.
The economics behind fees is all about price elasticity – how much demand for an item changes when the price changes. Many customers choose the airline they fly based on even a modest price difference, and the most frugal customers can even change their travel destination based on that or choose not to travel at all. However, once the trip is purchased, the decisions to check a bag, where to sit or what to eat are all separate decisions and can have completely different price elasticities. Airlines have learned that they are better able to match price to demand when they bill different services than when everything is bundled.
Harder to reach for competitors
The airline business is highly competitive, especially since many customers perceive the services to be largely homogeneous and price information is readily available when purchasing. As any entry-level airline pricing analyst can tell you, if they hit a competitor’s lower fare, they will never get into trouble but could get into trouble if they make a conscious choice to keep a higher fare. If everyone is offering the same thing, this can be a good policy. But when one airline gives more than the other on the base fare, it gets tougher. Southwest Airlines LUV, for example, would find it more difficult to get the lowest price from a fully unbundled competitor because they contain two checked bags and they also don’t pay seat assignment fees. The lowest price that another airline sets may not cover their full cost. The harder it is to find a low rate, the more likely it is that the low rate will be unique when displayed on Expedia or elsewhere, and the more likely the most thrifty customers will choose it.
Reduces flight costs
The airline fees also act as a behavioral incentive, and this leads passengers to behave in ways that are more cost-effective to the airline. When bag fees are charged, customers bring fewer bags. As a result, airlines lose or damage less baggage and save fuel on every flight due to the lower weight. If there is a fee to print a boarding pass with an agent, as some airlines do today, more customers can self-service their boarding pass and bring their boarding pass on their phone or print it out at an airport kiosk. This, in turn, enables the airline to rent fewer ticket counters and hire fewer staff.
Can lower flight taxes
Air tickets are subject to a federal excise tax of 7.5%. This originated in the 1950s when air travel was considered a luxury good. So if an airline sells a $ 100 ticket, it pays $ 7.50 to the federal government. If instead the airline sells a $ 60 ticket but charges $ 40 in baggage fees, the customer will still pay $ 100 but the airline will only pay the excise tax on the ticket, in this case 4, $ 50. This is not the main reason airlines charge fees, but there is a benefit they get from lowering their ticket price at the same time.
Improves sales stability
The aviation industry is highly seasonal as demand changes depending on the day of the week and the time of year. This is reflected in flight prices that fluctuate depending on the time of day and throughout the year and can result in highly profitable flights in some parts of the year and losses on the same routes at other times. Since a lot of the revenue comes from fees, the line of income becomes a little more stable as the fees are likely to stay the same whether the tariff is $ 60 or $ 600. This makes it a little easier for airlines to budget and forecast revenue and provide more stable income results for investors.
Airline fees also come with challenges, including the perception of complexity and the risk of customers learning and switching bait after being attracted to an exceptionally low price. But these challenges are manageable and the creation of the passenger families has largely addressed them. The tariff families also help to illustrate the value in the slimmed down, fully unbundled price. This structure benefits customers and improves airline results, so most airlines are sure to stay in the future.