In Defense of “Greedy” Airlines

The American airline industry is perhaps one of the favorite targets of consumer angst and distrust. It seems as though one cannot go a week without hearing of another mid-flight horror story or a 6 hour delay on the tarmac. Booking and taking a flight has gone from a pleasurable taste of the power of modernity for the whole family (imagine the black and white pictures of 1970s airplane cabins) to a Kafkaesque nightmare, in the public mind. Gone are the days of no-charge checked bags, reclining seats in coach, and friendly cabin crew. Gone are the days of “free” meals and complimentary drinks on transcontinental flights. Gone is the romanticism of the industry, for many.

More than anything else, many lay-consumers sense an overall feeling of being nickel’d and dime’d every time they fly. Whether it being that they sense they are paying too much for what they see as sub-par service or specific policies they find objectionable, dissatisfaction among airline customers is a common feeling.

But where does this service originate and what is the purpose behind these policies? Do airlines really charge more for additional bags just out of greed, or is it for a deeper reason connected to guaranteeing the best service to the most customers? To whom do airlines have obligations? There are a few insights we can turn to to understand these policies and standards of service.

(Before I get too far into this, I want to make clear I am not analyzing the practices of airline executives and management, which are notoriously questionable. Rather, I am taking a look at the services tendered for the prices offered. For a look at the practices of airline executives and management, check out Hard Landing.)

Service is Better Than Ever … for the Price

Unfriendly flight attendants, overpriced drinks, and a complete lack of meals are common observations made by nostalgic airline customers, but these complaints don’t really have much grounding in reality. Today’s flights may lack full-service meals, but airline tickets are cheaper than ever, when adjusted for inflation and costs (e.g., jet fuel), and services are always increasing. Many domestic flights today have better entertainment systems available to every seat — in the form of satellite television and radio, as well as route maps, and video games — than many people had in their entire homes a decade ago. More and more flights offer in-flight wireless internet service, which is constantly improving in its quality, and a wider variety of drink choices.

In general, flights are leaps and bounds better than in the past.  To echo Louis CK, customers sit in a throne in the sky, going 500 miles per hour, and can check their email, facebook, watch TV, and chat with their friends, 35,000 feet below them and on the other side of the globe. Such service would be imaginable only in science fiction decades ago.

Be Thankful for Baggage Fees

A favorite target of airline customer dissatisfaction is the hated baggage fee. Whether it be the charge to check a bag or low-cost airlines’ carry-on fees, customers feel entitled to be able to check a bag for the price they are paying. Though it may be true that a customer who pays $500 for a ticket on one airline that requires them to pay an addition $25 for a checked bag may be able to pay $400 on another and check a bag for free, this dissatisfaction isn’t necessarily (purely) grounded in a desire to nickel and dime you. Rather, it’s basic economic price discrimination. The airline is charging you more for the bag because they don’t want you to bring it in the first place.

This discrimination is best illustrated in the case of low-cost airlines, such as Frontier Airlines, RyanAir, and Spirit Airlines. These carriers are known for their ultra-low fares, but also for charging customers not only for checked bags, but also for carry-ons, something that would be unheard of at a traditional airline. It seems obvious this would be a way for the airline to make up for the money lost by charging low-fares, but that’s a simplistic way of understanding the economics of air travel.

For these airlines, time really is money. Their business models emphasize full flights and very quick turnaround times at gates. The faster the flight and ground crews can get customers off the plane, the faster they can load more customers on and get back in the air (every airline does this, of course, but this is especially important to low-cost carriers, who offer a no-frills, get-you-there-safely product). Customers who have a bag under their seat and a bag in the overhead will take longer to get off the plane than customers who simply have a bag under their seat. Not only will they take longer to get off the plane, but they’ll also hold up other customers behind them, turning what could have easily been a 10-minute deplaning into a 15-minute deplaning.

Factor in the additional time to get a cargo-load full of bags off the plane, and then another one on, and a flight can easily run 10, 15 minutes behind schedule, even if everything on the flight deck and at the gate are going to plan.

An on-time flight means less money having to be spent on labor and fewer logistical messes. On-time flights mean fewer missed connections and fewer lost bags. On-time flights mean, more than anything else, lower ticket prices for the consumer.

There is, of course, the fuel consideration. A heavier plane burns more fuel, but this is a minimal cost consideration (and compensated in baggage weight limits, anyway), when put in light of the time-cost of additional bags.

(Click here for a speech by RyanAir executive Michael O’Leary on this matter)

Which nicely segues into the next point…

No, It’s Not Your Weight

Every year or so there comes a news story about an angry passenger who was kicked off a flight for refusing to buy a second seat for themselves because they didn’t fit in their first seat. A favorite target of online communities, airlines’ policies towards larger, overweight customer policies — usually requiring passengers to buy an additional seat if they don’t easily fit in the first seat — look like airlines are simply “fat shaming” and are actually illegal in some countries, like Canada, for being discriminatory.

Opponents claim that if there is an open seat next to them on a flight, they shouldn’t have to pay for it, and if there isn’t, they should simply be moved somewhere on the flight where there is one (or the passenger next to them should be).

There are two good reasons these policies are in place. The first having to do with airlines’ expectations for flights, and the second having to do, again, with incentives.

According to some analyses, airlines make profit on only one seat for a 100 seat flight (Source: US Airways)

Airlines expect almost every flight they operate to be full or near-full (it is rare for an airline to operate a route that doesn’t reflect this, without some kind of subsidy). Some analyses estimate that an airline loses money on a flight when one seat is empty (definitely a debatable claim from US Airways, but profit margins from flights are small). Tickets are priced and marketed to reflect this expectation. Seats that aren’t filled oftentimes go to airline employees who are commuting (and are an investment on the company’s part anyway) or their families (part of the benefits package of working for the airline). These seats are assigned at the last second to non-revenue passengers, or to customers from earlier or later flights.

A customer who makes a second seat unusable for another passenger ultimate affects the bottom-line of the airline, either through denying another potential paying customer from purchasing a seat, or by possibly preventing a commuting employee from flying (commuters will check flight loads before deciding which flight to take in order to plan properly. If a seat on a later flight appears to be open, but isn’t, that commuter may have missed an earlier opportunity to get to work or to get home).

This is an obvious explanation, but there could also be a less-obvious one, akin to the price discrimination at play in baggage fees.

If a heavier customer takes longer to get settled on the plane (whether it be in actually getting on the plane, or in getting situated in their seat) and to get off the plane, they ultimately affect the turnaround speed for the plane. As noted above, slower turnaround speeds end up resulting in higher costs for the airline. It isn’t unimaginable then, that these policies may actually be designed with a desire to discourage these customers from flying in the first place. It may seem unsavory, but considering the airline’s obligation to stockholders to maximize profit, and the airline’s desire to make the flight the easiest possible for the greatest number, such price discrimination shouldn’t come as a surprise (an airline could easily respond to the void created in a market by such discrimination by appealing specifically to affected customers and not have such a policy, but they would pay for it in the ways above).

Stated Preferences vs. Revealed Preferences

A basic lesson in economics is that consumers’ stated preferences very rarely align with their revealed preferences. People will say they want one service, but when offered that service, opt for another. Airlines are no different. Consumers are understandably (at least on the face of it) upset about poor service, but if spending habits are any indicator, consumers prefer lower quality service for a lower price, than higher quality service for the associated higher price.

Take two example airlines, Spirit and Virgin America.

Spirit’s model is a no-frills, get-you-there-safely product. Planes are packed full of customers, little is offered in way of in-flight service, and consumers are charged more for each additional frill. Tickets are cheap, and the service reflects that.

Virgin America’s model is quite the opposite. Inspired by the Jet Age, the Virgin airlines aim to embody high-quality in-flight service, with everything from friendlier flight attendants to a specific aesthetic of the product and in-flight entertainment. Tickets are costlier, and the service reflects that.

Virgin America is oftentimes rated the favorite domestic airline by consumers; Spirit oftentimes the worst.

Here’s the catch: Virgin America is bleeding money, while Spirit has the biggest profit-margins in the country, and is experiencing huge growth.

Consumers say they want better service, but they aren’t willing to pay for it. The policies they do oftentimes decry are the things that made affordable air travel possible, and they have the option to choose against these policies in many cases, but fail to do so.

The truth of Louis CK’s line, “everything’s amazing, and nobody’s happy,” carries extra weight when changed to, “everything’s amazing, and nobody chooses to be happy.”

In Defense of Discontentment, Too

That’s not to say that discontentment doesn’t play a role. Almost all innovation comes from being discontent with the current service, including many innovations like personal in-flight entertainment systems. If free baggage, even-better service, and non-discriminatory pricing could be offered on an innovative new model, it would likely succeed. Until that model comes, consumers should count their blessings.

 

In Defense of “Greedy” Airlines

Leave a Reply

Your email address will not be published.