Why Airlines Are Not Typically Greedy

by / 2 Comments / 120 View / June 3, 2014

The American airline industry is perhaps one of the favorite targets of consumer angst and distrust.  Booking and taking a flight has gone from a pleasurable taste of the power of modernity for the whole family (imagine the black and white pictures of 1970s airplane cabins) to a Kafkaesque nightmare, in the public mind. Gone are the days of no-charge checked bags, reclining seats in coach, and friendly cabin crew. Gone are the days of “free” meals and complimentary drinks on transcontinental flights. Gone is the romanticism of the industry, for many.

More than anything else, many lay-consumers sense an overall feeling of being nickel’d and dime’d every time they fly. Whether it being that they sense they are paying too much for what they see as sub-par service or specific policies they find objectionable, dissatisfaction among airline customers is a common feeling.  But where does this service originate and what is the purpose behind these policies? Do airlines really charge more for additional bags just out of greed, or is it for a deeper reason connected to guaranteeing the best service to the most customers? To whom do airlines have obligations? There are a few insights we can turn to to understand these policies and standards of service.

Unfriendly flight attendants, overpriced drinks, and a complete lack of meals are common observations made by nostalgic airline customers, but these complaints don’t really have much grounding in reality. Today’s flights may lack full-service meals, but airline tickets are cheaper than ever, when adjusted for inflation and costs (e.g., jet fuel), and services are always increasing. Many domestic flights today have better entertainment systems available to every seat – in the form of satellite television and radio, as well as route maps, and video games — than many people had in their entire homes a decade ago. More and more flights offer in-flight wireless internet service, which is constantly improving in its quality, and a wider variety of drink choices.

A favorite target of airline customer dissatisfaction is the hated baggage fee. Whether it be the charge to check a bag or low-cost airlines’ carry-on fees, customers feel entitled to be able to check a bag for the price they are paying. Though it may be true that a customer who pays $500 for a ticket on one airline that requires them to pay an addition $25 for a checked bag may be able to pay $400 on another and check a bag for free, this dissatisfaction isn’t necessarily (purely) grounded in a desire to nickel and dime you. Rather, it’s basic economic price discrimination. The airline is charging you more for the bag because they don’t want you to bring it in the first place.

This discrimination is best illustrated in the case of low-cost airlines, such as Frontier Airlines, RyanAir, and Spirit Airlines. These carriers are known for their ultra-low fares, but also for charging customers not only for checked bags, but also for carry-ons, something that would be unheard of at a traditional airline.

For these airlines, time really is money. Their business models emphasize full flights and very quick turnaround times at gates.  Customers who have a bag under their seat and a bag in the overhead will take longer to get off the plane than customers who simply have a bag under their seat. Not only will they take longer to get off the plane, but they’ll also hold up other customers behind them, turning what could have easily been a 10-minute deplaning into a 15-minute deplaning.  Factor in the additional time to get a cargo-load full of bags off the plane, and then another one on, and a flight can easily run 10 to 15 minutes behind schedule, even if everything on the flight deck and at the gate are going to plan.

An on-time flight means less money having to be spent on labor and fewer logistical messes. On-time flights mean fewer missed connections and fewer lost bags. On-time flights mean, more than anything else, lower ticket prices for the consumer.

There is, of course, the fuel consideration. A heavier plane burns more fuel, but this is a minimal cost consideration (and compensated in baggage weight limits, anyway), when put in light of the time-cost of additional bags.

airline mapFurther, Airlines expect almost every flight they operate to be full or near-full.  Some analyses estimate that an airline loses money on a flight when one seat is empty (definitely a debatable claim from US Airways, but regardless profit margins from flights are small). Tickets are priced and marketed to reflect this expectation. Seats that aren’t filled oftentimes go to airline employees who are commuting (and are an investment on the company’s part anyway) or their families (part of the benefits package of working for the airline). These seats are assigned at the last second to non-revenue passengers, or to customers from earlier or later flights.

A basic lesson in economics is that consumers’ stated preferences very rarely align with their revealed preferences. People will say they want one service, but when offered that service, opt for another. Airlines are no different. Consumers are understandably (at least on the face of it) upset about poor service, but if spending habits are any indicator, consumers prefer lower quality service for a lower price, than higher quality service for the associated higher price.

Take two example airlines: Spirit and Virgin America.

Spirit’s model is a no-frills, get-you-there-safely product. Planes are packed full of customers, little is offered in way of in-flight service, and consumers are charged more for each additional frill. Tickets are cheap, and the service reflects that.

Virgin America’s model is quite the opposite. Inspired by the Jet Age, the Virgin airlines aim to embody high-quality in-flight service, with everything from friendlier flight attendants to a specific aesthetic of the product and in-flight entertainment. Tickets are costlier, and the service reflects that.

Virgin America is oftentimes rated the favorite domestic airline by consumers; Spirit oftentimes the worst.

Here’s the catch: Virgin America is bleeding money, while Spirit has the biggest profit-margins in the country, and is experiencing huge growth.

Consumers say they want better service, but they aren’t willing to pay for it. The policies they do oftentimes decry are the things that made affordable air travel possible, and they have the option to choose against these policies in many cases, but fail to do so.

Works Cited
“Episode 517: The Fastest Growing, Least Popular Airline In America.” Audio blog post. NPR. N.p., 14 Feb. 2014. Web.
Hunter, John. “Stated Versus Revealed Preference.” Curious Cat. N.p., 9 July 2013. Web.
Lubin, Ashley Lutz and Gus. “Airlines Have An Insanely Small Profit Margin.” Business Insider. Business Insider, Inc, 15 June 2012. Web. 03 June 2014.
Yglesias, Matthew. “The Failure of Virgin America and the Hypocrisy of the American Air Traveler.” Slate. N.p., 1 Nov. 2012. Web.
  • Maria

    So then how do all these airline companies make millions of dollars if they’re barely making 100$ of off every flight?

    • Zak Slayback

      Economies of scale.

      Airlines that haven’t achieved it don’t make millions of dollars.

      Virgin America is one example.

      Regional airlines tend to be another.