Thursday, December 25, 2014

Why Airlines Compete on Price and Not Comfort

I'm finding that with a new baby in the house - my blog posts have to be EXTREMELY efficient! Not that I don't have free time anymore, but those brief windows of free time give me like 8 minutes every couple of hours, rather than a huge block of time. So, basically, I have to have any thoughts pretty well articulated before I sit at the laptop to type stuff up (but oh well, if nothing else it will force me to be concise).

I was reading an article the other day about air travel in the U.S. - and about how we really get the crappy experience we deserve.

The rationale is, while we as American travelers have the option of purchasing more expensive plane tickets that offer better treatment (e.g., better seats, better service, more amenities), we almost always just buy the cheapest one.

As evidence, the authors show that Spirit airlines (the poster child for nickel and dime fees for everything) is the nation's most profitable, and Virgin America, Richard Branson's much more comfortable experience-based airline, makes a lot less money.

And yes, that's an interesting idea. But when pressed for a rationale, the authors just offer the idea that well, a plane ticket is an expensive item and so relative price differentials "seem bigger", in part because there are fees that aren't shown on the sticker price:

One possible explanation for this behavior: When it comes to expensive items like plane tickets, the price differentials just seem bigger. I ran through some of the numbers on the phone with Kaplan. To keep things simple, we decided to compare two airlines at different points on the pricing spectrum: JetBlue and Spirit. In the latest fiscal quarter, the average flight cost $164.80 on JetBlue and $84.50 on Spirit. JetBlue also collected an average $22 in additional fees, or so-called ancillary revenue, from its passengers, and Spirit another $54. Looking at those numbers alone, the average fare on Spirit is about $50 cheaper than on JetBlue. But to truly compare the services, you have to make a few adjustments. For starters, flights on Spirit tend to be about 20 percent shorter than those on JetBlue. Spirit also crams 178 seats onto the Airbus A320, while JetBlue’s current layout accommodates 150. When you factor these things in, it turns out that JetBlue would have to take in about $196 on average just to make the same revenue per passenger that Spirit does. By those standards, JetBlue’s flights are actually a better deal. But based on sticker price alone, they don’t necessarily feel like it.

I'm a little confused as to why the author is making a point about revenue per passenger - because we're talking about price and customer's willingness to pay, but whatever. Regardless, this explanation fell a little short to me. Yes an airline ticket is expensive, and therefore people may be more sensitive to price because the absolute dollars are large...but there are entire massive segments of industries built on charging price premiums for 'better experiences'.

Hell, anything that could potentially market itself as luxury. Alcohol, fashion, hotels - there are plenty of industries that have major segments of 'luxury' - whereas for domestic airline travel, there really isn't a similar offer (technically there are private jets and NetJets etc., but my assumption is that's pretty small relative to things like luxury hotels).

So...what else might be driving that result in the market???

There's the idea that customers don't value a 'good' air travel experience - but that just seems overly simplistic to me. Let's think about some things that actual might impact a person's purchase decision:

1 - Purchase Channel: I think this plays a role. I don't know how everyone else buys airline tickets, but I buy mine online. Usually searching via Kayak (others use Orbitz, Expedia, Priceline, or airlines direct websites), and while you can filter for a couple dimensions like airports, airlines, number of stops, and takeoff/landing times - the overwhelming factor and automatic sort variable is price. It's the biggest number and as a default sort variable, it's effectively telling you that price is by far the most important variable. An interesting comparison is the world of hotels, when you search for a hotel you actually get a quality rating - this is true even on Kayak - where you can filter by the number of stars in a rating. Airlines have no such thing, even though you could argue Spirit is a low-star experience and Virgin America is a higher one.

2 - Delayed Consumption: I think another major issue that guides people to purchase based on price alone is the nature of air travel purchases and delayed consumption/gratification. Most people buy plane tickets pretty far in advance (I assume), as most trips are planned and last-minute tickets cost a fortune - exclusively for business folks and people looking to make grand romantic gestures. Now, if you're looking to have a nice evening out on a Saturday, you might be willing to make a reservation at a fancy restaurant - but you're going to have a nice meal later that night. If you're buying a plane ticket for 10 weeks out, that experience may feel much further away. Because it's so far off, maybe the internal discount rate you place on that experience makes your willingness to pay lower. If I told you that you could pay an extra $50 for a first class seat on a plane flight TONIGHT, you might be more likely than if I told you that you could pay an extra $50 for a first class upgrade on some flight in three months.

3 - Lack of Airline Control Over Experience: OK, let's say an airline really wants to make sure customers have the best possible experience. They want the best flight attendants, the biggest chairs, the deepest know what would happen when you got home after you're flight? You'd still complain about the crappy TSA security lines, really slow baggage handling waits, long taxi stand lines, and if you're flying out at LGA - the fact that they don't have any decent food beyond security. Those are just a couple examples - but reflective of the fact that providing a great experience when you're on the plane is only part of the overall trip, there's a whole bunch of absolutely crappy travel you're going to have to deal with anyway. Those levels of service are just good enough to keep people from skipping flights altogether (i.e., really awful), and in the case of TSA - has no connection towards making your experience pleasant. If those parts of the experience are going to be terrible, how can you expect any airline to try and make their experience plush and wonderful?

Those were the three things that initially occurred to me - but they all seem legitimate. And unless someone really presents a totally different class of experience that can outweigh all these other factors - I'd assume airlines will still compete to offer the lowest prices and therefore the most cost effective service possible.

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