Bad comparison

This article reports that airline add-on fees have doubled in three years.

Airline management: “It’s an important part of our revenue.”

Customers: “We get nickel-and-dimed everywhere” and “It’s horrible!”

This article provides a good example of bad analysis.  Saying that add-on fee revenues have tripled says nothing.

Have fees added to revenue or do they just lower ticket prices and move some revenue over to the baggage fee line item?  Do they help attract and retain clients?  Do the fees cause a more economical use of cargo space?  Are there a lot of bagless travelers out there that are glad that airlines unbundled the baggage fee for them?  Have the fees caused people to choose other options like Megabus, Southwest, driving or not traveling at all?

Granted, it’s not always easy to answer these questions with a high level of certainty. There are usually too many factors to consider.  But I think attempting to do get a reasonable answer is better than just saying that fees have doubled over three years.

For me, one important true measure is what happened to total revenue in comparison to a reasonable control during the last three years to try to filter out some of the noise from from other factors.

For example, from 2007 through 2010, United Continental, the top add-on fee airline according to the article,  reported a 15% increase in total revenue.  Not bad, but not helpful unless you compare that increase to an airline that did not charge add-ons.  Southwest provides a good control comparison.  They are well known for not charging annoying add-on fees.  Southwest reported a 22% increase in revenue over the same period.

Based on these results, I’d say it’s not clear whether add-on fees have helped revenue and they may have held back United Continental’s revenue given that Southwest grew at a higher rate.

There still could be other factors that caused the disparity in revenue growth rates.  For me, the number one factor for the airline I choose tends to be the flight times.  Price is a close second, but only because most airlines are in the same ballpark on price.

But, given the statement that add-on fees have doubled, I might have expected to see a bigger disparity between United Continental’s and Southwest’s revenue growth rates.  Southwest’s results certainly proves that you don’t need baggage fees to grow.

As a customer who has flown Southwest and add-on fee airlines over the past several years, I can attest that the add-on fees have made the process more complicated.  I can also imagine that it has made the client systems for complicated for those companies.

I’ve also noticed that parking at the Southwest terminal of my local airport is usually filled, but I never have trouble finding parking at the terminals of other airlines.

Based on the revenue results and my own observations as a customer, I’d conclude that the add-on fees are likely a nuisance and, at best, they are are a lot motion that produce no real benefit.  Many large companies get stuck in this trap.  They do things to do things because they have no better ideas.

I remember reading long ago that an auto exec said that once a feature on an automobile becomes desired by about 70% customers, its time to make it standard and include it in base price, otherwise a competitor will and you will alienate your customers by keeping it as an option.

Hotel rooms come with a bed, shower, toilet, sink and TV included in the fee.  Hotels charge extra if you want to upgrade to a room with better amenities.

Car prices include a set of wheels and tires.  You can upgrade the set of wheels and tires for an extra fee.

It’s difficult for people to envision an airline ticket without checked baggage.  I would expect on most routes that 70% of people do check a bag.

Like hotels and auto sellers, Southwest has figured out ways tack on some fees without alienating everyone. They do so by charging extra for things that fewer than 70% of the customers expect and for things that have a clear value delineation for customers.

Want a guaranteed “A” boarding pass? It’s yours’ for a fee.

While that may produce a minor annoyance to folks who aren’t willing to pay, most folks understand that there are only 30 “A” passes.  I’m guessing that fewer than 70% (the auto exec’s rule-of-thumb) actually expect an “A” boarding pass.  They’ll take it if they can get it, but they’re not willing to spend money on it and they don’t expect it to be included in the ticket price.

And, getting on the plane first has a clear value delineation.  Some folks place a premium on maximum seat choice.  Maybe they want to ensure an aisle seat, or a seat near the front so they can get off the plane quickly to make a connection.  Or maybe they don’t want to hassle with finding space for their carry-on in the overhead bin.

The add-on fee airlines could learn something from Southwest and auto sellers.  Unbundling the basic package doesn’t do much except annoy folks and make it more complicated.  Save the add-on fees for those extra value drivers.

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