Add-On Airline Fees Actually Make Flying Cheaper
Airlines are reporting record profits, but cramped flights and mounting fees make passengers increasingly grumpy. Some carriers try to be different. Southwest Airlines LUV +1.39% boasts its Bags-Fly-Free policy and has made it the focal point of its advertising campaign. “We don’t nickel and dime our customers,” says Southwest’s CEO Gary Kelly. “We call that ‘transfarency.’” And, indeed, their clients are delighted. Southwest is at the top of the industry in customer satisfaction.
As every flier knows all too well, most airlines now make passengers pay for services that were “free” not too long ago. Baggage is only one example. People pay for food and beverage on board, to get advance seating assignment or head-start boarding, to avoid the middle seat, to bring a second carry on, to book a flight over the phone, and even to print the boarding pass at the airport. Ryanair, a British discount airline, once floated the idea of charging to use the toilet in flight—pay to pee—but eventually tossed it. These fees add up to hefty income for airlines, and breed resentment among travelers. Spirit Airlines, which charges extra fees for everything—even water on the plane—is ranked dead last in customer satisfaction.
But what if these fees make the basic airfare cheaper? The reality, of course, is that they do. No-frill airlines are cheaper, and for budget travelers they surely provide the best value. This is a basic economic fact true in every market—low quality products cost less, and many consumers are wise (and happy) to choose them. “Free” extras are never free: They are packed into the price, which would have been lower otherwise. Baggage fees account for about 3% of ticket price, so it only takes a small decline in base fares to offset the added charge. Again, Southwest airlines is a case in point. It used to be a low-cost airline—the namesake of “the Southwest Effect” which meant lower fares and increased passenger traffic in every market it entered. But the low-price effect of Southwest is eroding. Perhaps in part because bags fly “free” on Southwest, the relative base fare it charges (even without counting “early bird” check in) is higher than it used to be. Southwest can no longer claim lower fares, so it celebrates instead the greater transparency of it fares.
Ironically, and despite the fact that airline a-la-carte features mean lower base fares, customers continue to resent these charges. Since people are not upset about the fact that business class seats are more expensive, the hostility to fees must be in part due to the stickiness of old habits—the longing for the simple all-inclusive price. But since people are also no longer surprised by the potpourri of fees, the negative sentiment is not for being tricked. Most likely, it is an irrational response, probably due to the cognitive glitch of “framing.” A low base fare plus fees is deemed by people as more burdensome than a high base fare with “discounts,” even if the total sum is the same. This is why many retailers post sham Manufacturer’s Suggested Retail Prices (MSRP), artificially inflated, and then highlight their “deep” discounts. Framing the transaction this way makes their customers feel that they are offered genuine bargains. The same framing illusion plays also in reverse: offering deeply discounted posted prices and then adding on charges makes customers feel cheated.
The resentment against airlines’ add-on charges is irrational for another reason. If passengers who fly with two bags or more leg room pay more, this means that passengers who fly with no checked bags and packed like sardines in tight rows end up paying less for travel. In other words, once the baggage charges are introduced, light-cargo travelers no longer have to cross-subsidize their heavy-load fellow passengers. There are winners and losers, and the overall effect is a wash. And there is at least a plausible fairness argument that people who fly with less cargo and impose less fuel costs on airlines should pay less. Especially if they are also relatively less wealthy.
Media reports about airline “hidden” fees give the impression that these sum up to a large profit source for airlines, totaling somewhere between $3.5 billion to $6 billion in 2015. This may be the total sum of the charges, but it is surely not a measure of extra profit. Airlines perhaps made extra profit from latent fees only when consumers failed to anticipate the fees and naively paid more. The reality is that by now, several years into the new normal, people traveling with bags or those who want front-of-the-plane seating know all too well that the price tag will exceed the posted bare fare. It is indeed telling that, as the revenue from “hidden” charges grows, the revenue from base ticket sales has been falling. Southwest collects fewer charges and so its tickets sales have to account for 93% of its revenue. Spirit airlines, in contrast, piles up the junk charges but ticket prices are so low that they account for only 59% of its income.
The lesson: as charges grow, base prices fall. For anyone who likes to customize the package, the unbundling of the airline fares is good news.
Reported by: Forbes.com
As every flier knows all too well, most airlines now make passengers pay for services that were “free” not too long ago. Baggage is only one example. People pay for food and beverage on board, to get advance seating assignment or head-start boarding, to avoid the middle seat, to bring a second carry on, to book a flight over the phone, and even to print the boarding pass at the airport. Ryanair, a British discount airline, once floated the idea of charging to use the toilet in flight—pay to pee—but eventually tossed it. These fees add up to hefty income for airlines, and breed resentment among travelers. Spirit Airlines, which charges extra fees for everything—even water on the plane—is ranked dead last in customer satisfaction.
But what if these fees make the basic airfare cheaper? The reality, of course, is that they do. No-frill airlines are cheaper, and for budget travelers they surely provide the best value. This is a basic economic fact true in every market—low quality products cost less, and many consumers are wise (and happy) to choose them. “Free” extras are never free: They are packed into the price, which would have been lower otherwise. Baggage fees account for about 3% of ticket price, so it only takes a small decline in base fares to offset the added charge. Again, Southwest airlines is a case in point. It used to be a low-cost airline—the namesake of “the Southwest Effect” which meant lower fares and increased passenger traffic in every market it entered. But the low-price effect of Southwest is eroding. Perhaps in part because bags fly “free” on Southwest, the relative base fare it charges (even without counting “early bird” check in) is higher than it used to be. Southwest can no longer claim lower fares, so it celebrates instead the greater transparency of it fares.
Ironically, and despite the fact that airline a-la-carte features mean lower base fares, customers continue to resent these charges. Since people are not upset about the fact that business class seats are more expensive, the hostility to fees must be in part due to the stickiness of old habits—the longing for the simple all-inclusive price. But since people are also no longer surprised by the potpourri of fees, the negative sentiment is not for being tricked. Most likely, it is an irrational response, probably due to the cognitive glitch of “framing.” A low base fare plus fees is deemed by people as more burdensome than a high base fare with “discounts,” even if the total sum is the same. This is why many retailers post sham Manufacturer’s Suggested Retail Prices (MSRP), artificially inflated, and then highlight their “deep” discounts. Framing the transaction this way makes their customers feel that they are offered genuine bargains. The same framing illusion plays also in reverse: offering deeply discounted posted prices and then adding on charges makes customers feel cheated.
The resentment against airlines’ add-on charges is irrational for another reason. If passengers who fly with two bags or more leg room pay more, this means that passengers who fly with no checked bags and packed like sardines in tight rows end up paying less for travel. In other words, once the baggage charges are introduced, light-cargo travelers no longer have to cross-subsidize their heavy-load fellow passengers. There are winners and losers, and the overall effect is a wash. And there is at least a plausible fairness argument that people who fly with less cargo and impose less fuel costs on airlines should pay less. Especially if they are also relatively less wealthy.
Media reports about airline “hidden” fees give the impression that these sum up to a large profit source for airlines, totaling somewhere between $3.5 billion to $6 billion in 2015. This may be the total sum of the charges, but it is surely not a measure of extra profit. Airlines perhaps made extra profit from latent fees only when consumers failed to anticipate the fees and naively paid more. The reality is that by now, several years into the new normal, people traveling with bags or those who want front-of-the-plane seating know all too well that the price tag will exceed the posted bare fare. It is indeed telling that, as the revenue from “hidden” charges grows, the revenue from base ticket sales has been falling. Southwest collects fewer charges and so its tickets sales have to account for 93% of its revenue. Spirit airlines, in contrast, piles up the junk charges but ticket prices are so low that they account for only 59% of its income.
The lesson: as charges grow, base prices fall. For anyone who likes to customize the package, the unbundling of the airline fares is good news.
Reported by: Forbes.com
