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Airlines Fees

Fighting airline fees: Will passengers vote with their wallets?

David Grossman,  Nov 03, 2008

At Cleveland Hopkins International Airport yellow strips of tape, like you might see surrounding a crime scene or a dangerous construction zone, are draped across the guide ropes at the Southwest Airlines ticket counter queue. Similar yellow strips are taped to the floor in the gate areas. If you cross those lines you have entered a "No Hidden Fee Zone" according to this yellow tape, referring to a growing list of fees for checked luggage, seat selection, fuel surcharges and more, tacked on to the price of a ticket by most U.S. airlines these days.

Posters, banners and reels of yellow tape at airports across the country comprise Southwest's latest marketing campaign. The signs boast that Southwest has no fees for checked luggage, no fees for ticket changes, no seat selection fees, no curbside check-in fees, no phone reservation fees, no fees for snacks, and perhaps most importantly these days – no fuel surcharge fees.

While other airlines un-bundle their pricing and serve up a menu of a la carte prices for many services that were formerly built into the price of your ticket (see recent related article on a la carte pricing), the airline that has always dared to be different is at it again, holding the line on new fees and surcharges – at least for now.

While other airlines struggle to eke out a meager profit even in the best of times, Southwest has always found a way to make money and grow rapidly. While airline passengers fume over escalating airline ticket prices and add-on fees, Southwest is betting that disenchanted customers of other airlines will jump ship to fly the no-fee skies of Southwest.

But will this new and daring strategy really work? Capturing other airlines' customers may not be a simple task. Preliminary indications show little evidence that unhappy passengers are leaving their fee-happy airlines and switching to the no-hidden-fees skies of Southwest. With the summer travel season behind us and an uncertain economic future ahead, travel demand has plummeted, with six of the top seven U.S. airlines flying 14% to 20% fewer passengers in September than in the previous month.

With a 75% load factor in August, lowest among the top seven U.S. airlines, Southwest was uniquely positioned to capture customers from other major airlines. In addition, while the other six major U.S. airlines trimmed their available seat miles by 11% to 24% from August to September, Southwest only reduced their available seat miles by less than 6%. But from August to September, Southwest carried 18% fewer passengers. As a result, their load factor sagged to 63%. These numbers are not indicative of an airline winning away angry passengers fed up by the nickel and dime tactics of add-on airline fees and surcharges.

Some managed business travelers working for large corporations cannot switch airlines because their employer has negotiated corporate discount rates on other airlines. Some airlines waive these fees and surcharges for their best customers or elite frequent fliers. Some travelers can't switch because they reside in a city dominated by another airline. And perhaps many people don't yet know about Southwest's no-hidden-fee structure. But with all the griping and discontent over unjust airline fees, I would expect perhaps just 5% or 10% of travelers might actually vote with their feet or their pocket books and walk away from airlines charging fees and surcharges.

Perhaps it is too early to call because many fees were only recently imposed, but history doesn't anticipate a massive behavioral shift to reward a travel vendor offering lower costs or superior products. Witness the failure of the American Airlines "More Room in Coach" campaign a few years back. To address airline passengers' common complaints about cramped coach seating, American removed seats and reconfigured all its aircraft to give all passengers a few extra inches of legroom. Unfortunately, I must have been the only passenger to fly American every trip to get that more room in coach. With no bump in market share or load factors, other airlines decided to ignore American's offer and the airline was forced to rescind the offer and reconfigure the planes when times got tough.

Similarly, American and Delta each tried their own version of rationalized or distance pricing, based on customer complaints that airfares made no sense. Unfortunately customers did not support these efforts, no other airlines followed suit, and American and Delta both abandoned their distance pricing experiments.

We all like to complain, but when it's time to back our convictions with decisive action, we often seem to fall short and continue complain and suffer.

Southwest has been the most successful airline in the U.S. in the last 30 years, but times are changing. Through bankruptcy or other painful restructuring, the legacy airlines have all lowered their costs dramatically over the past few years. As a result they are better equipped to compete against Southwest today than in the past. Meanwhile it has become more difficult for Southwest to continue its long running profitability streak.

For the most part in recent years, Southwest's fuel hedges have helped the company retain its profitability. While everyone else was paying $150 per barrel for oil just a few months ago, Southwest was paying $51 for most of its fuel needs because of its hedging program. But now fuel prices have plummeted and suddenly Southwest's hedges no longer provide such a competitive advantage. Southwest was forced to take a write-down of $247 million on its fuel hedge contracts in the third quarter of this year, leading the company to post its first quarterly loss in 17 years.

If airline passengers don't support an airline that has refrained from assessing many fees or surcharges – and so far they haven't – other airlines are unlikely to drop their fees and surcharges. So, like "More Room in Coach" and distance pricing, might Southwest eventually have to abandon its "No Hidden Fee" zones and impose its own fees and surcharges in the face of the tough economic climate? You may control the answer to that when you next purchase an airline ticket.

Fighting airline fees: Will passengers vote with their wallets?
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