The Good Side of Fees: Paying for Convenience
[This is a guest post by Evan Konwiser.]
With American Airlines' (AMR) announcement that it would offer "Express Seats" for an additional fee along with other "Your Choice" options, it joins United, Continental, and US Airways among US airlines offering the ability to pay for a better seat. Some might argue this is just another revenue driver, a way to raise revenue without actually raising the base fare. While this is true, the market segments ancillary fees into two different categories: Fees for things that used to be free and fees for new services, and that's an important distinction.
The former, fees for things that used to be free, are well documented and discussed in the press. The most obvious is baggage fees. Prior to the first legacy airline baggage fees in 2006 (Ryanair led the way, as it so often does), generally up to two bags per person were checked free of charge on any flight. A second example is food. Passengers used to expect a meal on board any flight of a certain duration. Airlines took away free meals, and instead provided buy-on-board service, starting on the carrier-within-a-carrier airlines like Delta's Song and United's Ted in the early 2000s. Continental, the last holdout, removed free meals from its airline earlier this year. In all of these cases, airlines disingenuously tried to spin a new fee as an added customer service benefit. For baggage fees, it was the reduced overall fares for those not checking bags. For food, the change was to provide higher quality food choices, at a price of course.
There's a difference, however, when you look a fees for services that had not previously been offered. Can the media fairly criticize airlines for these fees in the same way? They sure have tried, but the sentiment is misplaced. Many travelers view these as added benefits. Through the economics lens, these are examples of airline attempts to extract a higher willingness to pay from certain customers. In the same way they extract higher revenue from those who book business class or refundable tickets, there are also those who are willing to pay a little bit more than discounted economy to achieve a slightly better product. The catch here is that this is not something that was previously free.
The best example of this is Economy Plus on United. Existing for more than a decade (although it didn't start charging until later. It originally was just for high-fare economy tickets and elite fliers), Economy Plus allows any coach traveler to upgrade to more legroom on any United flight for a fee. Standard economy legroom is equivalent to that on any comparable airline, and Economy Plus has an extra several inches of space. Did the media accuse United of scamming its customers when it introduced Economy Plus? No, it has always been viewed as a net positive and many travelers prefer United (myself included) because they have the ability to pay for more legroom. Elite travelers love United because they get automatically seated in Economy Plus.
During the ancillary revenue boon of the last few years, United has led the way with more "Travel Options", like passing through the elite security line, express boarding, or access to the Red Carpet Lounge. Paying for access to things that elite travelers get is a great to way attract customers and revenue. Even Southwest joined the game with Early Bird Boarding. People are willing to pay an extra $10 to make sure they can get on first and get their preferred seats, regardless of when they book or check-in.
These are not artifacts of devious revenue creativity or nickel and diming the customer, these are true customer service benefits that make for a better travel experience and people are willing to pay for them. In fact, when you ask travelers 6 months later about their flights, they're more likely to remember the hassle-free experience and extra legroom than the $100 extra they paid for it.
Going forward, airlines should focus on using fees as a product segmentation that favors customer willingness to pay for a better product, not unbundling things they used to get for free. This maintains the revenue stream they need while also providing a customer service benefit. If only their PR firms were as good as their revenue management, they may have already been able to communicate this to the public.
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Evan Konwiser is the co-founder of FlightCaster, an travel technology company that uses cutting edge analytics to provide data insights and platforms to the travel industry. Evan currently resides in San Francisco, where he hikes, bikes, and skis whenever he's not on a plane. You can find his blog at blog.flightcaster.com
Photo via Flickr user WexDub, CC 2.0