The Alchemy of Airlines - making money from nothing

This blog should start with a disclaimer. I love going places, but getting there is not fun. For me it’s the destination, not the journey. Airline travel since 9-11 has become one of the most inhumane experiences we have to endure in our private and professional lives.

Even though I travel often for business and occasionally for pleasure (this picture was taken by my daughter on a trip to Paris), I don’t have a preferred airline. Airlines are usually defined by which ones I hate the least, rather than the ones I like the most. Typically I make my travel plans based on routing preferences, which are usually airport related. For example if I can switch planes in Philadelphia I will choose that over Newark any time. Ottawa or Toronto Pearson? Ottawa please. Munich is the choice over Frankfurt.

With that background I would like to introduce the topic of today’s blog – my grudging respect for the airlines’ ingenuity at adapting to the changing marketplace. They have mastered the art of alchemy - turning base metals into gold.

Like most businesses, airlines are faced with mounting costs and low customer tolerance for price increases. The airlines have been ingenious, developing a range of solutions that create new revenue streams while leaving the base fares relatively stable.

One particularly successful tactic has been to simply start charging for services that used to be free:

• Previously complementary alcoholic beverages and meals are now fee-based on most domestic airlines in Canada and the United States.

• Advance seat selection carries a price tag.

• Checked bags come with a fee on most domestic flights and flights to the USA from Canada.

I observed that the checked baggage charges resulted in a change in customer behaviour. Passengers started bringing more and larger suitcases as carry-ons. Rather than enforce the established limits, one personal item and one small suitcase per person, airlines have figured out how to create a revenue stream out of this problem. In the old days, First Class, Business Class and loyalty card premium members would board first. Next, the plane was boarded by row and seat number starting at the back. This rational practice has been abandoned in favour of zones. Premium passengers board first of course. Then everyone else by zone, which is not row-based but attached to the fare you paid. People in the last zones have a hard time finding a place to stow their baggage. Airlines now charge passengers to board early (by being placed in a preferred zone) which in effect ensures you are able to stash your carry-on near your seat.

Concurrent with this, airlines have also made seats smaller and lighter so they could cram more people into the cabin (without a corresponding increase in storeage). Of course passengers don’t like it but Business Class isn’t an option for most people. The airline solution? Premium Economy, offering passengers essentially the same space and amenities they used to receive at the base level for free. This fare class is much more accessibly priced than Business Class or First Class. Premium economy inclusions vary but typically include priority boarding, free meals and drinks, upgraded entertainment, and more leg-room.

So if you want a more humane travel experience you are able to buy little bits of the Business Class experience to help you on your way. I guess it is a win/win as airlines are able to monetize more of their activities and passengers can buy the aspects of comfort that matter most to them personally. My most frequent travelling companion likes having the option of paying more money to board the plane first. This does not work for me. I resent being asked to pay to bypass a process that was made intentionally inefficient to generate more revenues. That said, although I think it is gross and takes advantage of customers, I have a grudging respect for the ingenuity on display.

There is a cost benefit analysis involved in any decision we make as consumers. I think Premium Economy, which addresses most of the experience issues (space, food, priority), offers better overall value but the cost of the upgrade and inclusions vary widely by airline and by available inventory. Business Class comfort and quality has eroded over the years on most airlines operating in North America. Most business class lounges are completely lacking in atmosphere and amenities. Because access to lounges is for sale, they are as overcrowded as the main waiting rooms and have lost that feeling of exclusivity. (I think the airlines are a bit too greedy and have devalued the premium Business Class experience). It is difficult to rationalize the investment in Business Class when the experience is not vastly better, making Premium Economy a really strong option.

There’s a lot businesses can learn from airlines in terms of finding ways to make money out of nothing. They can also learn from the mistakes airlines have made so they do a better of job of keeping customers happy and loyal. Airlines still have a lot of opportunity to improve their relationship with passengers. I am still waiting for a North American carrier that I look forward to travelling on.

#CustomerExperience #OperationalEfficiency