I'm very surprised that the airline execs actually thought this would help revenue. The demand for travel is extremely elastic, therefore any increase in the costs of travel is going to cause a decrease in demand.
Demand, in economics is represented as a graph of purchases versus price. By definition, a change in price does not change demand; it simply represents a different point on the demand curve.
What does change demand is customer perception that they're being ripped off. A $515 ticket and a $500 ticket are fairly close on the demand curve and probably don't represent a huge difference in sales. A $500 ticket plus a $15 checked bag fee is perceived by the customer as an attempt to conceal the true cost of the ticket.
Yes, I should have been more thorough in proofing my post. Demand doesn't change because of elasticity; the quantity demanded changes.
If calculated, they may not have been able to see the full effect of this change as the calculations (like you state) do not take into account customer perception. Although not seemingly a large change, the $15 change in price can make a huge impact in such highly elastic markets.
I've done this before, even if ticket prices are a little higher but there are no fees other than what I pay for initially. I hate getting to the airport and getting nickled and dimed at the check-in counter. There just seems to be something wrong with that.
What's wrong is that the total cost isn't being disclosed up front. It's just like advertising "$10 iPod" and then charging $200 in shipping and handling.
Since the fees are advertised (though not included in the fare), I don't think you can say that the total cost isn't being disclosed. Anyone who has traveled since early 2008 is presumably factoring the baggage fees into the cost of their travel (as I do).
What's really irritating (to me) is passengers who are using advanced check-in so they can go directly to the gate -- with their oversize bag in tow. Once there, they are told they will have to gate check the bag but most airlines don't seem to be charging for gate checked bags. I don't care about the airlines losing the revenue, but I do care about the hold-ups and hassles it causes during boarding.
The passengers gate checking bags aren't entirely innocent in the inconvenience caused, but I think the majority of the blame belongs on the airlines for trying to wring every last cent out of passengers.
Actually, I kind of do think it's like the $10 IPod scam - yes, the fees are disclosed, on another page, in small print. It's not like it's right there along with the price
"Only $50 each way, and, oh yeah, and on top of this, you'll be paying $25 per checked bag". Yes I know we should probably all be aware of it, but it keeps going up.
I wonder how long it'll be before they start charging "boarding pass handling fees", "seat cleaning fees", "oxygen fees", etc.
Your argument is that the airlines had a prescient view that their revenues would decline relative to their competitors, and before that happened implemented baggage fees to partially offset that fall.
With natural experiments like this it's painful to disentangle cause and effect, but with the timing (fees, followed by revenue declines) I'm inclined to see the author's explanation of fees being a more likely cause.
All large businesses try to predict their future revenue. An airline that predicts a future drop in revenue is more likely to add baggage fees to boost revenue.
This reminds me of companies who spam their customer email lists... They only look at the immediate results without being accountable for how many people are tuning you out.
[$669.5 million is] an attention-grabbing 275 percent
increase from the second quarter of 2008.
Anyone else get annoyed by this very useless factoid from the very first paragraph?
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The movie industry has the very same problem. This summer's blockbuster movie is created. Unfortunately, screenings reveal that the movie is terrible and no one actually wants to see it. So what does the industry do? Spend millions on advertising, hoping for a very strong first weekend showing.
And, like the airlines in the story, they wonder why (Avatar aside) sales are falling flat.
The two airlines that still don't charge for luggage (Southwest and JetBlue) are the ones that have no union workforce, no pension liabilities, and in the case of JetBlue, new and fuel-sipping planes.
But all of those are impacts on expenses, and therefore profits. This article is about a decline in revenue. Yes, you can make the case that the things you mention indirectly relate to people choosing Southwest and JetBlue over the other carriers, but I think that's a stretch.
Why do people have a problem with being charged more for using more services? Wouldn't a college kid flying home for the weekend with only a backpack like to pay less than somebody taking a two week trip with three large suitcases?
Let's presume that the airlines will price in a profit optimizing way and that, in the long term, competition will limit their overall take. So, compared to a model where all passengers pay an all-inclusive fee, those using fewer services will pay less under the a-la-carte plan.
We don't think that hotels should be required to include dinner in the cost of the room, but we get mad when the airline charges $5 for an in-flight meal. We're happy to pay per-lb to ship stuff via UPS, but we don't want to pay per-lb for the bags we check? I don't understand.
The service has stayed the same, it's the pricing structure that changed.
A year ago I could fly on the same airplane to the same destination and not face a baggage charge. Nowadays I'm faced with a baggage charge, when I got the exact same service for less in the past.
So no, the problem isn't with being charged more for using more services. The problem is being charged more for the same service.
And to expand on your hotel example, many hotels offer a complementary breakfast. If that were to be removed my appreciation of that hotel would fall based on that change.
I agree that overall price level increases are hard to swallow, but they seem indicative of a stronger airline industry that has newfound price-setting power.
Perhaps the issue is that Orbitz and others haven't incorporated the number of bags one plans on checking into the "total cost" figure presented in their summaries? If I know what the pricing structure is at the time I make my choice, I'm probably happier.
> We're happy to pay per-lb to ship stuff via UPS, but we don't want to pay per-lb for the bags we check?
I went on a trip recently. The combined weight of me and my luggage was perhaps 225 pounds. The combined weight of the young lady standing in line behind me and her luggage was probably 165 pounds. She had to pay substantially more to check two bags instead of one.
As I understand the reasoning, luggage prices increased due to the fuel cost increase of a couple of years ago. Yet somehow me being a foot taller, weighing 70 pounds more, and checking only one bag is cheaper for the airline? I don't understand it.
Agree. I suppose the Airlines, having seen the uproar of Southwest daring to charge really fat people for an extra set, decided that weighing passengers would cause an emotional reaction.
I think I should have to pay more because of my fat ass.
Yes! This annoys me to no end. I would be happy to pay per lb of transported goods, including me and my bag. There is no cost difference to the airline if me bag is 5lb over the limit or if I weighed 5lb more. There should be no cost difference either!
The general reaction I see to airline baggage fees is that people who frequently travel with no checked bags don't care (or think it's a good thing), whereas people who travel with checked bags are upset. That much is obvious, and it's kind of net neutral overall.
However, I think there is a far worse side effect of the change in pricing structure. The side effect is that nobody wants to check a bag, so the volume of baggage actually entering the plane's cabin has significantly increased. It makes boarding take longer, makes everything more crowded, and in general it's a huge hassle for everyone, including the luggageless travelers.
For that reason, I try to avoid airlines that charge baggage fees, even when I am flying with no bags at all.
I would expect some hits to profit margin as well. I'll take an airline with a baggage fee if I don't have baggage, typically a short flight / overnight trip. I'll take Southwest for long haul flights when I typically have luggage. The long haul flights have higher margins than the shorter commuter/feeder flights.
I had thought the point of these extra fees was to make it more difficult to compare pricing between airlines. Add-on fees that don't get displayed with the fare make the actual price hard to see, which is good when they're all providing essentially equivalent goods. It's like online stores that all display the same price for an item but have wildly different shipping fees.
31 comments
[ 5.8 ms ] story [ 184 ms ] threadWhat does change demand is customer perception that they're being ripped off. A $515 ticket and a $500 ticket are fairly close on the demand curve and probably don't represent a huge difference in sales. A $500 ticket plus a $15 checked bag fee is perceived by the customer as an attempt to conceal the true cost of the ticket.
If calculated, they may not have been able to see the full effect of this change as the calculations (like you state) do not take into account customer perception. Although not seemingly a large change, the $15 change in price can make a huge impact in such highly elastic markets.
What's really irritating (to me) is passengers who are using advanced check-in so they can go directly to the gate -- with their oversize bag in tow. Once there, they are told they will have to gate check the bag but most airlines don't seem to be charging for gate checked bags. I don't care about the airlines losing the revenue, but I do care about the hold-ups and hassles it causes during boarding.
I wonder how long it'll be before they start charging "boarding pass handling fees", "seat cleaning fees", "oxygen fees", etc.
GBP 40 for turning up to a Ryanair flight without a boarding pass: "http://www.guardian.co.uk/money/2009/may/14/ryanair-online-c...
And it's GBP 5 to check-in online at home: http://www.ryanair.com/en/questions/table-of-fees
If memory serves, the penalty was either 7 euro or 12 euro per kilogram.
With natural experiments like this it's painful to disentangle cause and effect, but with the timing (fees, followed by revenue declines) I'm inclined to see the author's explanation of fees being a more likely cause.
--
The movie industry has the very same problem. This summer's blockbuster movie is created. Unfortunately, screenings reveal that the movie is terrible and no one actually wants to see it. So what does the industry do? Spend millions on advertising, hoping for a very strong first weekend showing.
And, like the airlines in the story, they wonder why (Avatar aside) sales are falling flat.
The two airlines that still don't charge for luggage (Southwest and JetBlue) are the ones that have no union workforce, no pension liabilities, and in the case of JetBlue, new and fuel-sipping planes.
Let's presume that the airlines will price in a profit optimizing way and that, in the long term, competition will limit their overall take. So, compared to a model where all passengers pay an all-inclusive fee, those using fewer services will pay less under the a-la-carte plan.
We don't think that hotels should be required to include dinner in the cost of the room, but we get mad when the airline charges $5 for an in-flight meal. We're happy to pay per-lb to ship stuff via UPS, but we don't want to pay per-lb for the bags we check? I don't understand.
A year ago I could fly on the same airplane to the same destination and not face a baggage charge. Nowadays I'm faced with a baggage charge, when I got the exact same service for less in the past.
So no, the problem isn't with being charged more for using more services. The problem is being charged more for the same service.
And to expand on your hotel example, many hotels offer a complementary breakfast. If that were to be removed my appreciation of that hotel would fall based on that change.
Perhaps the issue is that Orbitz and others haven't incorporated the number of bags one plans on checking into the "total cost" figure presented in their summaries? If I know what the pricing structure is at the time I make my choice, I'm probably happier.
I went on a trip recently. The combined weight of me and my luggage was perhaps 225 pounds. The combined weight of the young lady standing in line behind me and her luggage was probably 165 pounds. She had to pay substantially more to check two bags instead of one.
As I understand the reasoning, luggage prices increased due to the fuel cost increase of a couple of years ago. Yet somehow me being a foot taller, weighing 70 pounds more, and checking only one bag is cheaper for the airline? I don't understand it.
I think I should have to pay more because of my fat ass.
However, I think there is a far worse side effect of the change in pricing structure. The side effect is that nobody wants to check a bag, so the volume of baggage actually entering the plane's cabin has significantly increased. It makes boarding take longer, makes everything more crowded, and in general it's a huge hassle for everyone, including the luggageless travelers.
For that reason, I try to avoid airlines that charge baggage fees, even when I am flying with no bags at all.
Failing airlines added new fees and then continued to fail. Not sure you can blame the fees for that.