A few weeks ago, in a discussion of Ryanair’s latest fee (a charge to generate a boarding pass), reader Mike offered this challenge for anyone criticizing the airlines for “nickel and diming” their passengers:
You have a cut throat competitive industry, with bloated infrastructure costs, the inability to raise prices in line with inflation and a customer base which expects 5 star treatment. If you put your business hat on – what would you do?
What would you do, indeed? It’s easy to bitch and moan about fees, luggage charges, inflight merchandise sales, and the rest of the ways airlines try to boost their revenue. (And I do!) It’s admittedly easy to complain.
So let’s do something harder:
If you were an airline executive, what would you do differently? How would you increase revenue and profitability, in light of all the challenges facing airlines? Can you be profitable and treat customers with dignity, in today’s marketplace? Is there a better way?
Got an idea? Want to play airline CEO? Show them how to run things. Hit the comments.
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June 3rd, 2009 at 7:31 am
I’d have a policy that if your plane is 25% late (i.e. 1 hour for a 4 hour haul) you’d get that as a refund. I’d also offer planes with more leg room.
These little amenities would increase fares a bit (maybe 10%) over other airlines flying similar routes, but I think people would pay for them.
I don’t think it’s a matter of coming up with something new. Airlines should charge people for things they want, not things like checking baggage and drinks.
June 3rd, 2009 at 8:18 am
More transparent and stable pricing of the trip itself. Though this may be like GM’s Saturn problem where people complain about pricing of tickets, but enjoy getting that bargain.
June 3rd, 2009 at 10:17 am
The biggest problem airlines have is the cognitive dissonance created by their marketing and what they actually deliver on. The commericals make it seem like luxury travel and full service. Then you get on board, no or very limited food, no pillows, unclean planes, etc. Before you get on board, you are nickled and dimed to death, made to wait in several long lines and treated like cattle…the proverbial death by a thousand cuts. Southwest is largely successful because they deliver on what they promise: getting you economically and safely from point A to B.
June 3rd, 2009 at 2:06 pm
1. I would do a better job focusing on price discrimination. The airlines already do this with fare prices, generally speaking (refundable and last minute fares different from typical tourist fares, etc.), but my focus would be on amenities rather than just fares. Your typical business traveler has far more say over airline choice than most businesses would like to admit, and given that a business traveler isn’t spending his or her own money, I would focus on attracting those passengers and building the costs into those parts of the ticket that are fully reimbursable. I would also tailor my ticketing structure to enable business travelers to pick my airline, notwithstanding any corporate contracts or internal business guidelines. For example, none of the seats in a 2-class aircraft would have a first class fare code, because business travelers find that hard to justify. Likewise, no charging for better seats (hard to expense that). Instead, all of this gets built into a full-price fare. To the extent I can, I would also focus on owning the early morning and late afternoon flight slots (and charging accordingly), since those are the flights that would allow business travelers to justify deviating from a preferred carrier.
2. I’d do a much better job using derivatives to hedge my fuel and food costs. Granted, everyone knows this now, but few are doing it well. This would entail hiring a whole Chicago-based deriviatives staff to do nothing but get me good deals and set me up to screw over my competitors when they make a mistake.
3. I would focus more heavily on direct flights over the hub-and-spoke system. This would allow me to cut fuel costs by using smaller planes, and would also allow me to charge slightly more, given passenger preferences.
4. If I had enough money, I would restructure the company more along the lines of a shipping company than an airline — i.e., the focus would be on door to door passenger delivery, rather than on airport to airport. Long-term, this would mean joint ventures with busing, railroad, etc., with the objective to offer passengers the quickest, smoothest and most comfortable trip from where they left to where they are going. (As a start, I’d focus on the most obvious and economical — sort of like how in Hong Kong you can link up with a boat to take you the Shenzhen through your airline ticket.) This would also insulate me somewhat from the vagaries of the airline business, since I could shift around the means of transportation according to the economy.
June 4th, 2009 at 10:16 am
I’d put all my R&D money into making a device that can control the weather. With it, I would revolutionize plane travel, punish my competitors into extinction, and generally rule the world.
June 4th, 2009 at 12:40 pm
Marv and RJP -
Fantastic ideas. Marv, I completely agree that the airlines are not selling what they are marketing. Ryanair over here is the same way. People know what you get with Ryanair, but when BA makes you think you get the royal treatment, and then you get an old plane, with the same lines, baggage fees and such, it makes you really upset.
RJP. Completely agree. Have never thought about focusing on the expenses angle, but I have been denied many times for spending that extra $10 for a better seat or $75 for the upgrade. Also, direct flights are best.
People today are interested in getting to their destination on time, safely and for a reasonable price. Southwest, EasyJet and Ryanair all follow this credo. This is what Business people and Leisure people want.
My additional points:
1) Stop the daily price fluctuations. Like deflation, if people expect they can get a better deal tomorrow, they won’t buy today. It sets a vicious cycle in motion where people wait until the last minute to buy expecting you to drop your prices. I very rarely buy tickets more than 3-7 days in advance anymore because they are often cheaper than 4-12 weeks in advance. This would get people to think in advance and plan accordingly.
2) I would get rid of 1st class and have only business and coach. Very rarely will people pay over $10,000 for a ticket. If you can spend that much on a ticket, you can often afford to fly privately.
3) I echo the public transport angle. Invest in rail links to airports like they did in Europe.
4) More radical, but charge people by their weight. I know this has been discussed, but weight is the single biggest factor in fuel usage, so why does a 5 year old who weights 40 pounds, pay the same as a 300 pound 30 year old? I know that people do get emotional about this topic, but I think it is a completely fair thing to discuss.
5) Don’t oversell the plane. It only pisses people off
6) All tickets are non-refundable, with change fees (with reasonable health exceptions). $25 for time changes on day, $50 for day changes. Of course, all subject to availability
7) Web only check in with bag drop offs.
9) Free water, coffee, tea, milk and soft drinks.
10) Charge for all food (no peanut or trail mix snacks)
11) Kids packs. When I was young, you used to always get wings or some sort of toy which builds loyalty (I think we forget how awe inspiring flying is for children) Delta is still my favourite airline because of this. As far as I am aware Lufthansa is the only airline left who do actively hand out kids stuff. Guess what airline my children love best – Lufthansa.
12) Marketing – Focus on time, safety and efficiencies of staff. Not luxury or amenities
13) Pay respectable wages for Pilots and Flight Attendants. (I am not saying break the bank, but I would not hire anyone to sit in a cockpit for $25k a year) As much as we hate it, remuneration drives behaviours. If people feel they are undervalued, they will act accordingly, but if they feel they are valued (both in terms of $ and attention) they will deliver that attitude to customers. Again, you don’t have to be the highest paying as lots of factors impact employee experience, but you need to be aware of this (I think SouthWest does a good job of this)
June 5th, 2009 at 8:31 am
Hi,
Some fascinating ideas above. Here’s two more ideas:
First, Find a way to use auctions for internal purchasing decisions, for infrastructure decisions and slots, and for selling off unused inventory.
Google has proven the value of auctions. See this article by Wired:
http://www.wired.com/culture/culturereviews/magazine/17-06/nep_googlenomics?currentPage=all
Google “even makes its own divisions bid for servers by auction.”
Second, Get anti-trust exemptions for the parts of your business where auctions fail to provide sustainable profits.
June 5th, 2009 at 11:34 am
Sean-
Auctions is a fascinating idea for an airport to determine slots and such. Could they do this on the fly somehow … ala Google?
Could an airline use auctions for seats?
This would solve the business person “expense” issue because no seats would have classifications. Anyone could bid on a seat and the airline could set minimums depending on the seats location. In theory, it also solves the deflationary pressures faced by the daily re-pricing because it flips the equation on the consumers side as the consumer wants to get the best deal before someone else….
June 6th, 2009 at 6:05 am
RJP-
Here is the article i referenced to in your 4th point http://www.usatoday.com/travel/columnist/grossman/2009-05-19-airlines-future_N.htm.
Essentially it supports your idea that Airlines are “shipping” (or as the article states “getting people together”) businesses rather than the flying business. Airlines should focus on meeting/conference rooms at airports and swift ability to get out of the plane to that final point of call. Make airports destinations for meetings (steal away business from hotels?) thus insulating yourself from high fuel costs and other economic issues….
June 7th, 2009 at 2:07 am
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June 7th, 2009 at 3:16 am
Offer old-school quality at old-school prices. Focus marketing on ruthlessly mocking the lower-priced competitors with the “you get what you pay for” line. Basically what Midwest ought to be doing right now but aren’t.
June 7th, 2009 at 11:44 am
To be honest, if I were an airline, I’d sell and get out of the business! (only half joking)
One thing I’d do is strive for efficiency and simplification. In an industry where millions can be saved by a few less olives on the salad (overexaggerated example), my airline would ruthlessly fight internal costs instead of trying to charge customers for toilets or what not.
June 7th, 2009 at 3:41 pm
Andy, most airlines already understand the efficient sourcing aspect of their business (which is why so many don’t give you a full can of coke on your flight — cuts down on costs and weight if you give someone half a can, then top it off if they ask for more). They’ve also tried squeezing labor costs. The problem is there is only so much blood in that turnip. They could do a better job on the more complicated sourcing (such as using derivatives for commodities), but the easy stuff has already been done and done by everybody. It’s the business model that needs changing. They need to identify a type of customer who isn’t that sensitive to price, find a way to convince that type of customer to buy their services, and find a way to allow that type of customer to buy their services. (The problem often is that airlines assume that those last two elements are actually the same problem. They very much aren’t.)
June 8th, 2009 at 10:44 am
I’m getting a bit obscure here, but one thing I’d consider is addressing Cost Indices. For those who don’t know, the Cost Index is a number that the pilot enters into the aircraft’s flight management computer, roughly the ratio of time-based costs to fuel costs, to allow the FMC to maximize the cost-efficiency of the flight. Although I won’t claim to have anything more than just a small bit of knowledge about this subject, it’s my understanding that at least a few carriers specify one or two CI’s to be used for each aircraft type, rather than tailoring the cost index to minimize the cost for each individual flight. I’d be interested to know if significant gains could be made by developing a program to calculate an ideal cost index on a per-flight basis, using up-to-the-minute time-based and fuel cost information and taking into account the planned route. This program would be run by dispatcher, then the recommended cost index would be handed over as part of the preflight paperwork to the pilot.
Is there anybody out there with more experience in this subject that could comment on this? Are there carriers out there that already use this sort of approach? Are the gains worth the cost of developing the program?
June 15th, 2009 at 5:04 pm
I know this doesn’t directly address the question, but….
There is a real role for government regulation in airline fees. The government already has a number of non-safety related requirements (they must have free blankets and pillows, they can’t charge for water). If it was required that the purchase of a ticket automatically came with the option of checking one bag, getting a snack for a flight under 3 and a meal in one over 3, I think it would considerably raise costumer satisfaction with the industry. The airlines would adjust ticket prices up slightly, but that would be far outweighed by a considerably better travel experience.
Airline executives always make the argument that their consumers would “rather just pay for what they get” but I think that’s not true. I would rather not have to use a calculator and a legal pad every time I wanted to find the least expensive ticket. I also would like to know that I was going to receive some minimum services for my money. Before you know it, they’ll charge a surcharge for a recently cleaned seat.