One of the more vexing problems for airlines has been the $800 business traveler sitting in coach next to the $75 leisure traveler – same seats, same service and vastly different fares.
But the recent spate of new charges and fees is giving airlines a chance to better differentiate what that high-dollar traveler enjoys from what the bottom-dollar traveler gets.
By exempting full-fare passengers and elite members of frequent-flier programs from the new fees, the airlines are making it better to pay more – even if it is only through the absence of pain newly created for the bargain flier.
American Airlines Inc. executive Dan Garton says that the goal is to give every customer some things in common, such as safe flights, on-time arrivals, clean facilities and airplanes, and courteous and professional service.
But beyond that, American would like to charge the low-fare customers – often leisure travelers – for a lot of things they previously got at no extra cost and give its best customers more services and extra perks for free, he said.
For example, American and other airlines have implemented charges this year for checked bags – typically $15 for the first bag and $25 for the second bag. But full-fare customers in the coach section, passengers in first class and business class, and premium members of their frequent-flier programs don’t pay those fees.
Carriers in many cases are waiving other fees for the best customers, such as for phone reservations, frequent-flier ticket fees and other items that once carried no extra charge.
Mr. Garton, American’s executive vice president of marketing, said the Fort Worth-based airline is studying how to expand that differentiation to better reward the best customers – the lifeblood of airline profitability.
“There are features and products that we would like to go over and beyond that for people who either pay us more fares or fly us more often, in most cases both,” said Mr. Garton.
What does that mean for the elite customers?
“Our objective is to provide some enhanced level of experience from ‘cradle to grave,’ from the beginning to the end of their experience with us,” Mr. Garton said.
“So if they call our reservations centers, their calls are handled in a prioritized fashion; when they arrive at the airport, PriorityAAccess [special lanes at the airport] gives them a different queue at the ticket counter, at security and even to get on the airplane.”
One issue is how to give that best customer in coach a better experience.
Many airlines, including American, try to set aside enough of their best seats – the aisle and window seats toward the front of the cabin – to hand out to last-minute, higher-priced travelers. Others have begun charging for the best coach seats.
Mr. Garton said American has studied implementing similar charges and perhaps waiving the fee for full-fare and elite customers.
Getting the best seats “is still viewed to be one of the benefits of being a frequent flier or premium customer. So we would have to think very carefully about how you’d handle the revenue-generating aspects of this,” Mr. Garton said.
Airlines have undergone perhaps the most radical repricing of their basic services in the industry’s history in 2008, driven by a jet fuel emergency.
As the spot price of jet fuel soared from under $2 a gallon in early 2007 to over $4 in mid-2008, airlines scrambled to boost fares and generate enough revenue to cover those costs.
United Airlines Inc. arguably kicked off the fee-raising spree when it announced Feb. 4 that it would charge $25 for the second checked bag on domestic flights. American raised the ante May 21 when it announced a $15 fee for the first checked bag.
Most major U.S. carriers matched American, meaning that a two-bag traveler without special status would pay $80 more for a round trip in the United States.
Fees here to stay
With the U.S. airline industry posting enormous losses through Sept. 30, airlines began looking at all parts of their operations to find ways to raise money, from charging $2 for soft drinks (US Airways Inc.) to selling blankets and pillows for $7 (JetBlue Airways Corp.).
Having tasted the drug of ancillary revenue, airlines aren’t likely to go back. We’re talking big money – billions of dollars a year.
Speaking at a Credit Suisse conference last week, United Airlines officials estimated that new fees and charges will bring the airline an extra $1.2 billion in revenue in 2009: $250 million from the new bag fees, $600 million for ticketing charges, $250 million from “upselling” seats for premium seating in coach or upgrading to first or business class and $100 million from selling extra frequent-flier miles and offering baggage delivery service outside the airplane trip.
“The new products are designed to improve the customer experience while giving customers more flexibility, choice and control,” said Kathryn A. Mikells, United’s chief financial officer. “But they’re obviously also designed to add to our bottom line.”
United’s “award accelerator” is a good indication of how airlines are doing things now that weren’t on the agenda before. Under the program, the carrier allows a frequent-flier member to pay a fee to get more miles.
For example, a United passenger could pay $9 more on a 316-mile Cleveland-Chicago flight to double the number of frequent flier miles earned or $19 to triple the miles.
The award accelerator is already bringing in about $2 million a month, United says.
Doug Parker, chairman and chief executive of US Airways, worried aloud at the Credit Suisse conference that airlines will backtrack on all these new fees and charges, to the industry’s detriment.
The extra charges that US Airways has implemented are adding $400 million to $500 million a year to the carrier’s revenue, Mr. Parker said. But the new fees are also helping make the airline run better, he said.
Customers are checking 20 percent fewer bags, and US Airways, as a result, is handling bags better and faster, he said.
“It’s not just about the money,” he said. “It’s helping us all run a better operation.”
While most airlines like the new fees and charges, the costs are proving less popular with passengers, as traveler surveys have shown.
Tim Zagat, co-founder and chief executive of Zagat Survey, said the airlines’ decision to charge separately for services travelers formerly got for free is contributing to the low regard many customers have for airlines.
“I think à la carte pricing stinks,” he said. “I think it’s showing up in the financials. I think it’s showing up in the comments we get. I think it’s showing up in the ratings. I think people think airlines, with few exceptions, don’t treat them very nicely.”
Mr. Zagat said there’s a link between Southwest Airlines Co.’s good ratings on such issues as luggage and value and its policy not to charge many fees. It should eventually pay off for Southwest, “one of the few airlines that people really like,” he said.
At Credit Suisse, Southwest chairman and chief executive Gary Kelly said “time will tell” whether the Dallas-based carrier will pick up more passengers and revenue by not charging fees.
“It has to,” he said, “and if it doesn’t, then I would argue that we probably will have to change that.”
IBM Global Business Services found in a recent survey that 70 percent of travelers generally thought fares were reasonable, and 50 percent accepted fuel surcharges.
However, “a very high percent of people were concerned about paying for baggage,” said Bruce Speechley, partner and hospitality and leisure practice leader for the IBM unit.
Mr. Speechley said that as basic airline travel has become more like mass transit, passengers should not expect much beyond basic transportation.
“You don’t expect being fed and watered and all these things on Greyhound or a train,” Mr. Speechley said. “If you want them on a plane, then à la carte pricing is probably best for you and helps them keep down the price of the fares.”