Three economics tips for airlines, and why a baggage charge does not make sense

Everyone is now aware of the much criticized move by American Airlines to charge $15 for the first checked in bag, and $25 each for subsequent bags – a perfect example of the knee-jerk reactions we are getting used to from airlines. This is a one-way street for the passenger. What if oil goes down to $100 in two months? Surely the baggage fee will not be reduced. Sounds like a perfect recipe for disaster for customer confidence (if there is any left now).

Photo courtesy of http://www.worldrider.com/

Surely, there are better ways to deal with externalities than to squeeze out every nickle-and-dime out of the already exploited passenger. Airline executives in the US can learn some things from their counterparts in Asia (who’re still doing well in this environment) and also take some lessons in Economics. Here are three tips to get started:

1. For a business to make a profit, revenue should ideally be more than costs (simple right?). But the airlines seem keen on charging unrealistically low prices for the ticket, and then trying to sell $5 pretzels on board to break even. Here’s a simple piece of advice – improve the service and charge realistic ticket prices, reflecting the real costs. Most customers who cherish quality will not run away (as brought up in the CNN discussion – see link below).
2. Reduce executive pay in tough times. According to an article in the Boston Globe (see link below), American Airlines’ CEO got a pay rise last year, and made $6.6million! Even a 10% cut in his pay would reduce costs more than the baggage fee fills the coffers. If airlines have been taking good care of employees, they wouldn’t run away at the slightest cut in pay – especially those at executive levels.
3. Loyalty matters. One of the key economics principles is that you should always look at the total revenue per customer, over time, and not just for the first time. For airlines, this means building a strong relationship with their customers so that they come back. Given how homogeneous frequent flyer programs have become, airlines should be coming up with some innovative ways to increase loyalty. For some fresh ideas, check out the article where I reviewed the top frequent flyer programs.

At the end of the day, if the basic economics of running the business doesn’t make sense, then airlines will keep hurting themselves, and in turn, their customers. It’s time they go back to the basics.

Ponder that!

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Links:

1. Is The AA First Bag Charge Really Going To Work? – An insightful discussion on Airliners.net
2. What do you think of the new airline fees? – CNN’s Talkback page
3. Flying to new heights of absurdity – The Boston Globe