Airlines fees testing elasticity of passenger demand

by Charlie Leocha on August 12, 2008

Passengers are being faced with a spiraling list of airline fees for everything from a bottle of water to a charge for a blanket and pillow. Seemingly small handouts that were once taken for granted, now come with a fee attached. Experts feel some of these fees will stick and others may be rescinded.

Daniel Petree, dean of the College of Business at Embry-Riddle Aeronautical University in Daytona Beach, Fla., quoted in the Wall Street Journal Travel Blog, feels that airfares will not drop dramatically even with the recent drop in the price of oil. Airlines use one excuse to raise prices and other to hold back on dropping prices.

… Petree says that “to some extent” the recent rash of fees and gradual increases in fares among carriers might be a way for airlines “to test the elasticity of demand.” Translation: They might be pushing to see how much you’re willing to pay to fly.

In an earlier column, I also suggested that passengers shouldn’t look for airfares to drop.

Passengers shouldn’t plan on seeing any dramatic drops in fuel surcharges until the airlines begin to see costs stabilize. As oil prices drop, there is probably a better chance for peripheral add-on charges not matched by all the legacy carriers, like the first-checked-bag charge, to be eliminated before passengers see fuel surcharges evaporate.

Now other analysts are beginning to sound similar notes. TheStreet.com analyst, Ted Reed, focused on the first-checked-bag fee. He suggested that the airlines may have to backtrack on that fee first. Firstly, the major airlines are split on the fee with Southwest, Delta and Continental holding firm with no first-checked-bag fee and American, Northwesst, United and US Airways lining up on the side charging the first-checked-bag fee. That makes airline tickets, in effect, cost $30 more for each of those airlines when compared to the first group.

Continental CEO Larry Kellner, on an earnings conference call this month said, the carrier wants to see if travelers “don’t distinguish between carriers charging and not charging,” or if they book away from carriers who have a first bag fee. If the former is true, “we can’t afford a $30 fare differential,” Kellner said, speaking of the round-trip implication of a $15 fee.

The airlines are watching carefully to see whether passengers are smart enough to book away from carriers charging $30 more for essentially the same service. In this case, the airlines are testing the pricing intelligence of the US passengers as well as their price elasticity.

Since airline executives know that approximately 50 percent of passengers used to check an additional bag, they can measure whether baggage checks decline and whether there is a migration to airlines not charging these first-checked-bag fees.

While the jury is still out on this question and on the question of fees, Southwest is forging ahead with a marketing campaign that is highlighting these differences. Southwest is making a millions-of-dollars bet that passengers are intelligent enough to move toward lower airfares and fees. If passengers do not respond to the no-fee marketing campaign, Southwest would be foolish to continue without fees. (More coming on the Southwest no-fee marketing in a future column.)

Though passengers complain, in many cases they end up meekly paying the fees and end up not complaining at all after their first encounter with the fees. If passengers, look elsewhere for airlines that do not charge these fees, the fees will disappear.

The bottom line from a collection of analysts is that airline passengers should not look for lower airfares, but rather towards lower additional fees as oil prices drop. One of the fees that seems to be most vulnerable is the first-checked-bag fee because the industry is not united and the fee requires difficult structural changes.

Print Friendly
Be Sociable, Share!

  • Joe Farrell

    Here is the problem with testing the elasticity of demand; permanent changes in consumer behavior.

    The oil nations will learn very soon that by supporting high prices and not increasing production, will mean much lower prices in the future.

    Look, Americans can afford the wealth drain for high oil prices, China, India and other nations cannot. The Euro nations right now are living large, when the dollar comes back, as it will, they will share in the exchange of wealth for oil. Americans are using almost 1 million bbl a day less oil now than we did 3 years ago. That’s 115 million less per DAY to oil producers.

    If the airlines raise prices and annoy their customers, their customers will change their buying habits – they’ll drive more, take a bus or train despite the inconveniences – fly only on long haul trips or on holidays. They will fly less. Same forces at work. Testing the elasticity of demand is a HUGE risk for a seller in any industry. Good luck – then – good riddance.

  • Pingback: Recent Airline Fee Articles From Top Publications « AirlineFees.org — Compare Airline Fees & Flights. Save!

Previous post:

Next post: