Is it Nuts To Charge For Bags?

Southwest is still the only major airline that does not charge for first and second bags checked in. Recently United introduced a subscription plan for bags at $249 a year. I wrote why that is a good move for multiple reasons, strategically and tactically. Southwest’s blog “Nuts About Southwest” has a post on this fee that asks, “Why do they hate your bags?“.  Can South West continue to offer  “Bags Fly Free”? Barrons .com columnist Bob O’Brien writes,

Shares of the average stock in the sector have declined 2% in Thursday’s trading, nothing like the 7% setback that has been inflicted on Southwest shares

Southwest introduced  unbundled pricing, by charging a fee to board first. O’Brien adds that Southwest generated $10 million in revenue from other extra fees but may be hitting the wall on creativity.  Just how big is the opportunity for profits from baggage fees? From my previous calculations, rest of the airlines that charged for the first and second bags, took in a total of about $536 million.

Southwest is trying to generate more profit by cutting capacity in loss making legs. But how long  can it continue to ignore the size of the profit pool, facing declining stock price? They charge for the flexibility to board first, because it adds value to customers who are willing to pay for the flexibility.   If carrying bags adds value to the customers, shouldn’t they be charged for it?

British Airways – Charging for Seat Selection

Suppose you are traveling on leisure with your family, how much do you value sitting together with your loved ones?

How much do you value having our teenagers sit as far away as possible? (or how much do your teenagers value that?

You are a business traveler planning to catch up on the marketing deck or your sleep – how much do you value not sitting close to kids or babies?

While most airlines do not ask these questions, British Airways started implementing a pricing plan for seat selection. If a service adds value to customers (note that the value-add is not the same for all) then the marketer must get a fair share of the value add. That is the first component of effective price management.

What British Airways is implementing is an unbundled pricing, separating  a service that has always been offered and seen as a monolith into its components and charging separately for each. As a proponent of effective price management, I fully support and applaud such a move. But British Airways customers are not amused:

“This is fundamentally dishonest.

“It isn’t about listening to customers at all. It’s about getting extra revenue.

“It looks like those willing to pay will be able to jump the queue and this will force up the price.”

Of course the comments above are not those of customers but those of a politician. Nevertheless BA should have anticipated this. Unbundling pricing is about identifying revenue opportunities, by finding what each segments value and realigning prices to better match the value provided with prices charged. But it is not enough to have strategy, the marketer needs to understand consumer behavior and have an execution plan that will reduce customer backlash and increase acceptance.

We have seen before USAir backtracking on its $1.99 in-flight soft-drinks fee. I have studied and written in detail about unbundled pricing. One common pattern I found with customer backlash is that it results from marketer’s failure to manage customer reference price. Customers do not like paying for something that used to be free even if this adds value to them because they had never paid for this service before. In a controlled experiment for Airline unbundled pricing, I found that improving customer reference price improves customer acceptance of new charges.

Recently SouthWest, that still steadfastly refuses to charge for extras, announced its plan to charge for priority boarding.  SouthWest does not pre-assigned seats, customers find their seats when they board.  SouthWest realized that there exists segments that are willing to pay for the convenience of boarding early and finding seats they like and hence introduced this service. Unlike BA, they did not face customer backlash because this is a new service they started offering.

What should BA have done? BA should have offered options, say one option is to charge a fee for the flexibility to reserve seats three days before the flight  otherwise making it first come first served. This is just one example and I am not giving detailed options here. In any case the idea is to improve reference price before charging for something that used to be “free”.

I would like to point out another idea on what could be causing customer backlash – fairness effect. Mr. Reed Holden, author of Pricing With Confidence, wrote about the extra fees and whether customers perceive them as fair or unfair:

Whether to a general population or to specific segments, when those fees are viewed as fair—they can be effective ways to call out the special features and services that customers can receive if they want to pay.   When fees are viewed as unfair by an increasing percentage of the population, however, they can cause increased switching and a declining population of loyal customers–something that has to be monitored over time.

However, I posit that in case of unbundled pricing whether or not a customer perceive the extras as fair or unfair is contained within the reference price.  I will write more on the last point at a later time.

Pricing for “free” WiFi At Hotels – Effect of Reference Price

When I last stayed at W hotels, I was billed a separate $14.95 for a day of WiFi. Someone else was paying for my stay and had previously approved charges for Internet, so I did not think twice. But hotels that charge  $12 to $20 for WiFi now increasingly face consumer backlash who now come to expect the WiFi to be free. Even for business travellers it seems unfair to waste their employer money on what should be free. The New York Times reports on how even the economy  no-frills hotels offer free WiFi but not the premium ones.

The reason for customer backlash comes from their reference price, the price they paid for WiFi in most places. Most coffee shops, parks, airports, malls now offer free WiFi. So customers come to expect free WiFi in other contexts including hotels. Some of the economy hotels promote free WiFi in their messaging. Since customers used WiFi for free else where they feel pain paying $14.95. The interesting aspect is  the reference price is set from a completely different context, although customers do not balk at paying for breakfast in hotel restaurants.

Free WiFi came into existence as a way to attract customers. Coffee shops used free WiFi to attract customers in the hope that they will spend more in goods did not ever consider monetizing it. The economy hotels offer no differentiation and tacked on freebies like  continental breakfast to attract price sensitive segment. Moving from free breakfast to free WiFi was not a big leap.Premium hotels on the other hand charged for everything, from parking to high priced phone calls and did not give away breakfast. So charging for WiFi was part of their natural evolution – if it adds value, charge for it.

Should WiFi be free? I do not believe so, be it in coffee shops, parks or hotels. If the service adds value to customers then the service provider should capture some of the value created. How can hotels like W  can continue to charge for WiFi. I will cite my study of  managing customer percetion of Airline unbundled pricing. Following the recommendation I made in my previous study, hotels can offer options.  A free basic low-speed version and a premium high speed paid version. The presence of free version will match the reference price customers are used to and hence reduced their resistance. But those who value speed and reliability of connection will gladly upgrade to the paid version.

Trying To Stand Out Among The Airlines

Jay Leno, in his monologue, scoffed at Airline unbundled pricing.

At the rate they are going, in an emergency they will ask us to swipe a credit card before the oxygen mask drops out. Oh listen to this, a SouthWest airline plane landed in Phoenix with one its wheels on fire. If they are going to bill us for every little thing under the sun, may be they should give us some discount, like when the plane is on fire.

Unfortunately for SouthWest, it is the only one not charging extras but it got the bad PR. In fact
SouthWest is aggressively going after the price unbundling by other airlines. All their messaging is now focused on “No fees”. But when every airline but SouthWest is charging extras, does it help to be the one who does not? There is a pubic tendency to look at the Airlines as a collective, so it is not a good strategy for SouthWest.

Pricing Your Air Travel

The Dallas Morning News gives us the run down of the different charges Airlines make these due to their increasing costs:


Airlines are adding fees and charges aggressively as they grapple with rising fuel costs.

AMERICAN AIRLINES

$5 to redeem a frequent-flier award online, up from $0

$6 for a sandwich or liquor,

up from $5

$15 to check the first bag (each way), up from $0

DELTA AIR LINES

$25 for booking a trip over the phone, up from $20

$100 for an unaccompanied minor on nonstop flights, up from $50

$100 for transporting a pet in the cabin, up from $75

UNITED AIRLINES

$25 to check a second bag (each way), up from $0

$150 to change a nonrefundable ticket, up from $100

OTHER AIRLINES

US Airways: $5 and up for a window or aisle seat in the first rows of coach, up from $0

Northwest: $50 for each bag weighing over 50 pounds, up from $25

Frontier: $100 to transport antlers, up from $75

SOURCES: The airlines; Dallas Morning News research

Unbundling Airfares

Southwest Airlines took a full page Ad in WSJ to air travelers about the added costs of all other airlines. The side by side comparison shows Southwest charing $178 flat and the other airline charging extras over over the same $178. The Dallas MorningNews reports:

The message is that “Southwest is not going to do that to their customers,” said Melanie Mahaffey, senior manager at Southwest’s advertising agency, GSD&M Idea City. “They decided to do this marketing push to show how they’re different and not going to raise fees on their customers.”

Southwest chief executive Gary Kelly says the airline wants credit for not charging for such things as changing a ticket or checking a couple of bags.

“It’s not what customers want,” Mr. Kelly said after Southwest’s annual meeting May 21. “Nobody wants to be nickeled and dimed.”


There are two points we can deduce from this

1. Southwest cost structure is so so low that it can still make a profit $178, even after providing all the usuals (free bags checkin, free soda …). In other words, Southwest Bundled Price still makes money for them

2. Southwest by committing aggressively to an Ad strategy of speaking against all the fees and positioning itself as “nofees” gives up the option to every do unbundled pricing.

Either they expect their cost structure to continue if not improve or they rely on every airline doing unbundled pricing and transitioning to it without getting noticed. If it is the latter, then it does not make sense to differentiate themselves on this. So we should assume that they are continuously improving their operations and hence will keep their costs down.

It still look like they will be leaving a lot of money on the table if every other airline does unbundling.