Posted by: Korry | February 28, 2012

The Truth About Bag Fees Is That You Asked For Them!

Picture this. Your best friend calls and suggests an amazing weekend getaway for you and your friends. Maybe it’s golf in Myrtle Beach. Maybe it’s a girls weekend in Las Vegas. Whatever. You call around to see who’s in and then eagerly turn on your computer to book the trip. You scour the web checking sites like Expedia, Orbitz, Travelocity and the one-stop-shop Kayak.com. Maybe you even visit a few airline websites to see if a “better deal” exists right at the source. After just a few minutes, you’ve located the best fare possible, effortlessly booked your trip and quietly said to yourself, “Isn’t the internet great?”

A few weeks later, you arrive at the airport, wait in line to check your bag and then quickly become incensed by the fact that the airline has the gall to charge you $25 to check your bag! What nerve!! You start saying things like, “It never used to be this way,” and “These airlines are totally out of control with fees these days.”

I’ll admit that there’s definitely a part of me that sympathizes with you. Air travel, despite being an incredibly efficient and cost-effective way to travel, is still expensive, and paying $25-$50 per checked bag quickly adds up–especially when traveling with your entire family!

The honest truth is this: bag fees are here to stay…because you asked for them! Today, I’m going to tell you why, and it has everything to do with the way you buy gas for your car.

Lets assume you’re on your way to work and you realize you need to get gas for your car. You pull off the highway and see two gas stations across the street from one another. Station #1 sells gas for $3.75/gallon. Directly across the street, Station #2 sells gas for $3.50, a full $0.25/gallon cheaper!

Which do you choose?

If you’re like most people, this is basically a no brainer: you choose Station #2. Gas is gas, right? It’s a commodity so you shop for price and select the cheapest gas.

The next obvious question is why on earth does Station #1 sell its gas for $0.25 per gallon more than Station #2? Isn’t this a foolish business practice?

I’d guess that either Station #1 is terrible at negotiating with its providers or–more likely–it believes there is an extra $0.25 of value in each gallon of its gas. For instance, maybe the road is really busy and the owners believe drivers will be willing to pay more per gallon in order to avoid needing to make a left turn. Maybe the station has a loyalty rewards program that makes the extra cost worth while. Maybe it believes consumers find the “super spectacular amazing performance blend” offered at Station #1 to be better than just the “Plain Jane” gas sold at Station #2.

The bottom line is that there is a segment of the driving population that believes “gas is gas.” They will choose the cheaper alternative every time. There are also other segments of the population that have brand loyalty, prefer the ease of entry in Station #1 or believe its blend is truly superior to Station #2 so they willingly pay more even when a cheaper alternative is right across the street!

It all comes down to the perceived value in the product being offered. It’s market segmentation, and that’s exactly what the airlines are doing when they explicitly charge you for checked bags, inflight entertainment, meals…or when they don’t. Welcome to the world of airline ticket pricing–a fascinating field called “Revenue Management.” (Yes, I’m a nerd–something I came to terms with long ago).

Thanks to the “wonderful internet,” consumers now have the ability to quickly and easily compare ticket prices, almost as though you had one airline on one side of the street and one airline on the other side of the street competing for your business. If all you’re worried about is buying transportation from A to B and two airlines can get you there, then why would you pay more for one over the other?

The answer is you wouldn’t. You’d choose the cheapest alternative you could find and you’d be happy…until you get to the airport and realize that what you bought (transportation) is not what you think you want or deserve (full-service airline)..even though you probably aren’t truly willing to pay for it.

You see, the airlines are getting really, really good at market segmentation and revenue management. They know that the value of a ticket constantly changes based on dozens of variables such as when you buy your ticket (three months in advance or three hours in advance), what day of the week you want to fly, what time of day you want to fly, whether you have brand loyalty or not, whether you want more space and service, etc.

They’re also getting exceptionally good at charging you for precisely what you want and not charging you for things you don’t want. So if you want simple transportation from A to B, we can give you a cheap ticket…and charge you ala carte for bags, meals, entertainment, etc. If you want full service and are willing to pay for it, we’ll include checked bags, lavish meals, luxurious accoutrements and complementary entertainment. And if you’re not willing to shell out the big bucks for first class but still want to at least occasionally have some of the nicer perks, that’s ok, too. We’ll sign you up for loyalty programs, give you frequent flier miles, allow you to earn upgrades, and lots of other frills to encourage and reward you if you are loyal and spend more money with us.

Look, nothing is free. It costs the airline money to handle a checked bag. They need complex equipment to move the bag from the ticket counter to the plane. They need employees to load the bags and track where they are. They need transportation companies to deliver the bag when it mistakenly gets sent to Omaha while you went to Orlando (Whoops! Our bad!).

All of that costs money, and it used to be that airlines would cover those costs by including them in the one-size-fits-all ticket price, whether you used those services or not. The system was simpler, but those who didn’t use the services were, in essence, partially subsidizing the cost of the tickets for those who did use the services. How is that fair to you, the leisure traveler, who carries your luggage on the plane and doesn’t use those baggage services?

Furthermore, when the airline knows you will pick your airline based on the price of the ticket, they know they need to offer you the best fare possible. They do that by charging you for products and services you want and not charging you for products and services you don’t want or use. You don’t pay for bag services if you don’t check bags. You don’t pay for an airline’s cost of installing inflight entertainment if you don’t find value in using that product. You don’t pay for meals if you don’t eat on the plane.

Today, you pay for what you use. The airline experience is being “unbundled.” Yes, it can be frustrating to pay $25 for a checked bag, but it’s really just giving you more choice! And that’s exactly what your purchasing patterns told the airlines you always wanted!

Do you still think bag fees are ridiculous? Leave a comment and tell me why.

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Responses

  1. I gotta disagree with you here, kind of. I think you are a little close to the situation on the airline side of things.

    There are several issues at play here. First off, you assume that the customer can pick and choose the airline they use. That isn’t entirely true. A customer is often limited based on the time of the flight and the location they live and where they need to go. So no matter what, to get from A to B in the timeframe they have available, they have to either fly the single airline that offers it, or not go at all. Maybe they have a little flexibility, but it isn’t likely, since most airports have a single major airline serving it, with the rest filling in the gaps with few flights, long layovers that aren’t acceptable to the needs, or multiple layovers that become too risky for a traveler to deal with given the time constraints. Driving isn’t feasible either due to time constraints (And my company is willing to have people drive up to 8 hours for a business trip). So in reality there is little to no competition.

    In addition, the example you gave is not realistic. Correct me if I’m wrong, but the majority of travelers, where the airlines make their money, are business travelers. The ones who most likely don’t care what they pay because their company covers it or they can pass the expense onto the client. They probably don’t even have checked bags. And due to business requirements, they also have to travel, and in a specific timeframe, so they are again a captive customer.

    Now enter the poor leisure traveler who may have some flexibility, but who has to deal with the repurcussions of 90% of the travelers being business travelers who have the ablity to pay far more than him. He has to shop around to be able to get to a price they can afford.

    So you have little competition and a captive customer. That is a situation that is ripe for abuse, and goes completely against capitalism. The bottom line is the airlines can and will charge as much as they can get away with and still fill the airplane to capacity in order to keep costs down and maximize the revenue.

    But the real issue is one of transparency. Customers have no idea how the airlines calculate ticket prices. I paid less for a flight from Harrisburg to Philly to Michigan than I would have paid for only the exact flight that was the second half of that leg from Philly to Michigan. Not knowing how tickets are calculated has led to mistrust. When the same seat is $500 for me and $250 for the guy sitting next to me, I can’t tell you how that was calculated since we use the same fuel and same services and dealt with the same competition. When the base price makes no sense, when we’re charged $25 for a bag or $15 to sit in the aisle, when we had never seen that before, of course there’s going to be complaints. And when it appears the quality is dropping to school bus with wings status, but the prices are still the same or higher, people are going to complain.

    If the airlines really sold a service that was based on actual expenses plus markup, they would charge for weight, bag weight, distance, etc and make the whole thing transparent. But instead they are charging based on some arcane formula developed by the revenue management department that is gouging a captive customer for as much as they can get. Or at least that is what it appears to be to the flyer. And when we don’t even know the actual price we’re paying when we purchase the ticket (for instance, a bag fee charged at the airport, or any other numbers of fees that weren’t disclosed) then you can understand why customers are upset.

    Would you pay for gas from the only gas station in the desert without knowing what it would cost until after you’ve filled your tank? You’d have to, and when it was 10 times more expensive the second time you did it, you’d be ticked off too!

    I understand times are hard for airlines. Travellers are flying less, fuel prices are up, other expenses are up, planes need repair, unions are fighting tooth and nail to keep benefits awarded when times were good, but instead of trying to find a way to reduce costs, it appears they just charge their captive customer more, or find ways to nickel and dime for profits and fool them into paying more after they are already committed.

    Note I said appears. I can’t tell for sure that is what is going on, but as a regular customer, that’s what it appears. If that isn’t the case, the airlines better move resources from revenue management to public relations!

    • Bill,

      Thanks so much for taking the time to write out such a thought-out comment!

      A few thoughts:

      First, on competition, you have a point for some cities and, more appropriately, city pairs. I’m thinking especially of places that are quite remote: the mountain west, secondary cities in the central plains, rural Alaska, etc. Beyond that, however, there is incredibly intense competition in the airline industry, especially since the cost of switching between carriers (whether that’s between legacy carriers or low-cost carriers) is incredibly low…you just book a different carrier the next time. Not exactly the same as switching from SAP to Oracle.

      Lets take your Harrisburg-Michigan example…how about we use Grand Rapids, a non-hub city much like Harrisburg. You could fly United or American by connecting in Chicago, Delta by connecting in Detroit, or US Airways by connecting in Philly. There may be even more options. Do the flight times change? Sure. Is there a convenience factor? Absolutely. And depending on whether you prefer direct flights vs. connections or convenient flight times vs. longer layovers, the “value” you place on each option changes…even if that option is driving.

      You’re right about the business traveler. I don’t know specifics, but I’ve heard numbers along the line of 60% of an airline’s revenue comes from 20% of its customers–those heavily valued business travelers who will pay full fare one day before the flight. (We thank you guys and gals by the way!!) Why is their ticket so high? Because they place incredibly high value on getting there on short notice…something they may not be able to do by driving. I would also guess you’re right that they don’t check bags as often. Their carry-ons still take up space and one of the big downsides to bag fees is that they have incentivised more people to carry on, causing overhead bins to often fill up thus requiring the airline to check bags at the plane’s door. There are a whole host of “unfairness” issues here, and I’ll try to tackle them on Thursday.

      As for transparency, again, I think you have a point. I’m a free-marketer, but I believe markets only work when people have the information available to make educated decisions. Travelers should have tickets and fees clearly explained so they can make educated decisions about their travel plans. The government seems willing to make some of those changes through legislation, so keep your eyes peeled.

      Revenue Management is definitely a complicated field to be sure. One of the most confusing parts is that the airlines don’t look at a city pair as necessarily the city a plane departs and the city a plane arrives. They look at city pairs as being Harrisburg to Grandrapids…not Harrisburg to Philly and Philly to Grand Rapids to keep with your example. So they reserve a portion of a flight’s seats for people who are using that flight as a connector, not a destination. So lets say the Philly to Grand Rapids flight has 50 seats. 30 of those seats might be allocated for Philly-Grand Rapids customers while 20 of the seats may be allocated to people going to Grand Rapids VIA Philly but originating in some other city…such as Harrisburg. If the 30 “direct flight” seats were already purchased when you bought your ticket, you would now have to pay more to compensate for taking one of the “connector” seats away. (Has your head exploded yet??)

      Ticket pricing is unbelievably complicated. It has at its heart maximizing the revenue it recieves with a consumers willingness to pay. Let me reiterate, that’s not necessarily what they DESIRE to pay, but what they’re WILLING to pay. If you want to learn more about this, study American’s former CEO Robert Crandall, and there may not be any better book than “Hard Landing.”

      Cost-plus pricing would be easy to understand, but it’s not good for the airline and it’s not good for the consumer. Just look at what happened in the industry before 1978 when the Civil Aeronautics Board regulated virtually everything the airlines did. Among other things, airlines would submit their costs for a certain route and the CAB (as I understand it) would assign a profit margin and then designate a price for the tickets. If you go back, you’ll see that people often paid more to travel in 1978 than they do today…hardly keeping up with inflation. The airlines simply had no incentive to keep costs low. For proof, just ask my colleagues who will constantly talk about how a Captain could afford a Cadillac every month…also hardly the case today, especially after bankruptcies and 40% paycuts. (Sully talks about this in his book).

      Pre-deregulation, the unions negotiated a new contract, the company sumbitted new costs to the CAB and the ticket prices went up. Today, the market sets the price and unions negotiate within those confines. Airlines try to maximize what consumers are willing to pay, just as any business does. The airline’s new reality is dominated by internet websites and stiff competition (even when it doesn’t seem like there is). Baggage, food and entertainment fees are simply the new reality and the way to stay in the black, not to mention a way to avoid taxes on par with tobacco and alcohol.

      We’re just getting used to this new reality of fees and there are definitely growing pains associated with them. On Thursday, I’ll provide a few suggestions I have on how the airlines can improve how these fees are implemented.

      Thanks again for your well thought out comments! I really appreciate you taking the time to share them with me and the rest of the Life’s Flight Plan community!

  2. This is an interesting post on the rights or wrongs of the industry.

    Bottom line is that bag fees have become a reality since we are unable to carry liquids on the flight and thus mandated the checked bags. Not a coincidence that fees started at the same time. Unfortunately this revenue was a great source for the airlines, at the pain of the consumer. The problem I have with this is that people who travel, must carry a bag. First bag should be free. The others…maybe there should be a fee. There are those passengers that know it’s cheaper to buy an airline ticket and check their bags than it is to ship boxes on Fed Ex.

    What is the answer? I like the concept of transparency. But anyone checking price points, can check their airlines to determine if there are bag fees. So they are transparent. Just not in the Kayak cheap ticket comparisons. Not in the price of the ticket, but the price is there somewhere… those thrifty shoppers can find it.

    I’m not sure if the analogy of the gas works for me. How different can gas be? But the flight…safety, maintenance, training, experience… yes, there is a difference. You get what you pay for. Sadly lives have been lost by inexperienced, poor maintenance, and bad decisions. Consumers should know that they get what they pay for. How important is it they get to their destination safely?

    How do the airlines make money? Do you remember when United stopped service olives in first class and how much they made in savings? Thousands. So now they’re adding more options.

    I have no problem with the airlines charging for aisle seats, first class, entertainment, meals, etc… Because these are things that people don’t “need” they just want. Luxuries of the flight. When we start charging to use the LAV…then we’ll have another discussion. Falling back to bags. People need to travel with a bag… first free.

    I like getting food on the flight. But… we don’t go to a restaurant and expect a free airline ticket. Perhaps we shouldn’t expect a meal on the plane. But a bag to travel? Yes… a must.

    The airlines are operating in the red daily. Fuel prices soaring. The real answer is re-regulating the industry. But until then, the airline will continue to figure out that revenue management you speak of.

    There was a time the airlines survived on the business traveler. But the business traveler is staying home with the availability of technology and world meetings from their office. Companies are getting smarter and paying less for their tickets because they can. But when we can intrigue them on our carriers, they are the icing. But no longer the guarantee they once were.

    The most important issue is safety. Can the airlines maintain a high level of safety when they are not able to make ends meet? Is the answer bags? It’s a multi-million dollar answer right now. Is it right? To an extent. But not to take advantage of a bad situation like 911.

    I am going to take a peak at that book, Hard Landing.
    Thanks for a great post!

    • Thanks for posting such a great comment!! I hadn’t actually put two-and-two together on the bag fees starting at the same time as the liquid restrictions. That’s a great insight. I also agree that people have to bring a bag; however, I’ll push back slightly and say that they don’t have to check that bag but they do need the chance to at a minimum carry one on for free. As I’ll talk about on Thursday, I believe the issue is ensuring passengers have a way of bringing at least one bag for free, even if that’s a carry on. Checking bags does require more manpower and infrastructure, and there’s a value in that…just like inflight food or entertainment.

      As for safety and getting what you pay for, I’m not sure passengers really know what they’re paying for. How many passengers understand that the pilots flying a United Express plane are not United pilots or that the pilots flight a Delta Connection plane are not Delta pilots? This definitely was an issue after the Colgan accident in Buffalo, highlighted well by the PBS documentary “Flying Cheap.” If the FAA certifies these carriers as meeting the standards, should the airline be expected to do even greater research and oversight of the partner carrier? I think so, or at least they should be easily able to do such oversight. The lives of their passengers–not to mention the reputation of their brand–are on the line with each takeoff and landing.

      Regarding business travelers, I had the opportunity to visit Cisco Systems in Tokyo a few years back. As part of the presentation, we were given the chance to experience one of their “Telepresence” studios. This isn’t just teleconference; this was like being in the same room. It was spooky. It was incredible. And the first thought I had was that this is going to be a major problem for airlines in years to come as technology gets better and better and even more mobile and cost effective than it is today.

      Thanks again for such a great comment! If you haven’t read Hard Landing, you will love it! It’s basically a history of the airlines post-deregulation. An exciting read and a must read for anyone who works in or just enjoys the airline industry. j

      Korry

  3. […] Tuesday, I wrote that the truth about bag fees is that you asked for them! Thanks largely to internet websites that help consumers find the lowest possible fair, airlines […]


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