Coyote Blog

Between the liquids ban, long lines at security, the new full-body x-ray thing, reclining seats (I'm 6'2"; if you're in front of me and recline you get my knees), this new bag thing causing even longer lines at security, and the possibility of having your data storage devices detained for weeks upon international reentry, I'm considering not flying ever again.

Let's look at what got us into this situation in the first place.

From the 1930s until the early 1980s, domestic air fares were government regulated. Routes were awarded to ailines based on bureaucratic formulae. The only way airlines could compete against each other was by the level of service they provided in exchange for the fixed fare. Level of service was almost uniformly good, employees were almost uniformly well paid, and air travel was almost uniformly expensive.

Post-deregulation, the incumbent carriers were thrown into a world where price suddenly became paramount. Waves of airlines went bankrupt (Eastern, Republic, Pan Am, Braniff, etc.) and were replaced by low cost, no-frills airlines, most of which went bankrupt in their own time.

The computerized ticketing services, first Sabre, then the Internet, made competitors fares visible to all market participants, giving almost perfect knowlege to the market.

It was the largest airlines that packed the most people into each plane that stayed alive. Now that airlines are running pretty much at maximum capacity, the only way to be the most profitable is to extract the most revenue per passenger after their ticket is paid for.

SuperMike,

You forget that for every checked bag, there's at least a dozen workers that have to handle it from the check-out counter at your departure point to the luggage carousel at your destination. Plus, the more luggage handled, the more luggage lost (like that lonely, green, hard-plastic suitcase I saw sitting against a wall this morning while on the bus between Philly's C and F Terminals).

"I agree that companies shouldn't be coerced into bundling their fees, but it does make it awfully hard to look at a few different fares and weigh the options."

That's the point... Because the base airfare is the typical driver of purchasing decisions for many consumers, they know that having a pissed off customer at the gate paying $15 per bag may be better than charging $5 more per ticket -- then not having a customer at the gate at all.

Airlines are in a business that is less than zero sum historically. They try one trick after another to win fares, and few seem to care about customer loyalty (largely, I suspect, because customers book by price and availability, not airline, with notable exceptions).

One of the most successful tricks over the years has been the rewards programs, which take advantage of an externality - the winner of the award is usually paying for the trip with his employer's dollars (note that if the employer is paying, you can check that bag at their cost, but you probably didn't pack much anyway). But as rewards programs became competitive, they also became huge financial liabilities.

As a long time user of Southwest's rewards, I was horrified to discover that they have recently changed their program to have two levels of awards - one revenue managed (seating limited) and another not. I had to convert two rewards into one just to get seating for a mundane trip. And Southwest has always been the best (as noted above) in behaving well towards customers. Well, there go my personal and Southwest Visa cards.

When one of the first discount airlines started, it showed price was very important. But the big airlines struck back with what is called "revenue" or "yield" management. American (or was it Delta) drove their competitor out of business, while charging higher fares, by using this technique. The way RM affects pricing has been driving people crazy ever since. Have you ever wondered why you paid $400 for a ticket and the person next to you paid $50? Pricing transparency is there, but only by the second. The fares change continuously and have been for a couple of decades.

The purpose of revenue management is to optimize the passenger revenue for a flight (or a hotel room, or a rental car). The key is that it is better to sell a seat (bed, car) at anything over non-recurring cost than it is to leave it empty. I have worked in automation of the hospitality industry, and there it pays to sell a room for anything over about $35 rather than leave it empty. In other words, the cost of selling the room is laundry and maid service. The cost of not selling it is foregone revenue but fixed costs (capital, staff, energy).

Revenue management systems use elaborate computer models to estimate the demand for a perishable commodity (seat on a flight, car on a date, room on a date). The reservation systems then compare the demand to the estimate, and if the demand is lower than expected, reduce the price; if the demand is higher, increase the price. The time lags in this process range from a day to a millisecond - most systems have both.

So, the airlines are used to driving customers bananas. Furthermore, all the ancillary hassles of traveling by air are only marginally increased by what they do to you at the gate (or apparently so they figure). Hence they are cherry picking revenue (and cost reductions) like mad.

Personally, I think they are making a mistake. People don't like to feel nickle-and-dimed. They don't really see it with revenue management, because it is not transparent to them (could be if they wanted to keep watching prices, but they don't). But hassling people over checking bags leads to nightmares at boarding time, and that leads to an even more miserable flight.

I'll stick with Southwest where I can. They recognize the value of less-frustrated customers - even if they have broken my favorite rewards program (and also added an annoying preferred boarding ticket category).

BTW, while the other airlines are causing people to pack the overheads with what they would have checked, Southwest recently figured out a way to reduce the hassle of their A,B,C boarding system - by giving out boarding order numbers, and providing markers at the line up points. This means you no longer have to camp in line waiting for departure.

I don't think the charge for checked luggage is to reduce labor costs in baggage handlers - it's partly to reduce fuel costs from the higher average weight of the checked stuff (no data on this, just thinking it's likely), and partly what another Dan referred to above - the airlines are competing to be first on the sort by price option in the web travel sites.

Look for the travel sites to provide user profile options for number of checked bags, average consumption of soft drinks, pillows and blankets etc. Then we can have "sort by real price".

Another guy named Dan: "They came into the business after the end of the regulated period, so they don't have any legacy union costs. ...By their business model, they're a jet fuel trading company that operates some airplanes."

Not sure where you got your knowledge about Southwest, dan. I have a very different understanding of Southwest's labor costs and its business model.

First, Southwest started operations in 1971. Airline deregulation was enacted seven years later.

Southwest is the most unionized of all the U.S. airlines. it also has the
http://www.iht.com/articles/2007/11/28/business/hedge.php" rel="nofollow">highest wage rates.

"Southwest also has the highest labor rates in the industry because it was the only big airline that had not demanded deep wage concessions from its workers."

It is true fuel hedges sharply increased Southwest's profits the past two years. But the company would have realized operating profits in 2006 and 2007 even without those hedges. Even more significant, hedging was not responsible for the company's industry-leading profits for the twenty years before 2006.

Southwest Airlines' critical success factor is the high utilization of its aircraft and its flight crew. From the earliest days of the company, the focus has always been on fast turn times at the gate. Southwest recognized that keeping expensive planes and expensive pilots in the air earning revenue would ensure profitability. Many of the airlines other strategies - such as high respect for employees and rejection of the hub and spoke model - arose out of the initial high utilization strategy.

If spun off, frequent flier programs may be the most valuable asset of some airlines.

Hard to see how such a valuable asset, which could keep airlines out of bankruptcy courts, can be considered a huge liability.

Happyjuggler,

I'm not sure that Southwest Airlines has the highest labor costs. But I'm pretty sure they have labor wage rates which are as high as any other U.S. passenger airline.

As I understand it, Southwest Airlines crew are used much more efficiently. Southwest pilots incur far fewer non-flying paid hours than do pilots at other airlines.

Like other airlines, Southwest has many senior pilots at the top of the union wage scales. But they have more less experienced pilots because they continue to grow their fleet and their crew. Most other large airlines have - through poor management decisions - been forced to furlough their less experienced pilots who were at the lower ends of the pay scales.

The statement I quoted about Southwest's labor wage rates is contained in the International Herald Tribune article Southwest Airlines gains advantage by hedging on long-term oil contracts

You can find pilot pay rates at the web site Airline Pilot Pay Rates

American Airlines pilot union last year compared pilot labor costs in AA Domestic vs Southwest. Note the much higher aircraft utilization Southwest manages to achieve: 11.4 block hours per day compared to AA's 9.6. Another revealing statistic is the hours flown per pilot: Southwest pilots fly 21% more hours annually.

happyjuggler,

All true. Flying only one aircraft also:

- reduces the inventory carrying costs for aircraft parts;
- reduces the training costs for mechanics;
- reduces the size of the maintenance engineering dept;
- reduces the spare aircraft requirement;
- reduces the size of the Purchasing department;
- reduces the number of purchase orders, material receipts, and invoices which must be processed;
- reduces the training time for flight attendants;
etc, etc.

There is a risk, of course. Should the FAA ever ground all 737's due to some risk which must be eliminated, Southwest would lose all its revenue during the grounding period. I don't see that happening wuth this aircraft, but it did happen in 1979 with the DC-10.

I have seen several writers of the progressive ilk all up in arms about these extra fees.