The Ethics of Creative Pricing

Last week we had occasion to travel to California for a family event, and I found myself reflecting on the ethics of all of the add-on fees with which our airline was hitting its passengers. There’s the checked-bag fee, of course, but then you have things like check-in fees, which are cheaper online but still can’t be avoided on some carriers; carry-on bag fees, food-for-purchase fees, change flights and stand-by fees, even fees to board the aircraft sooner than other passengers or in some cases get a window or aisle seat, and don’t even get me started about premiums for an exit-row seat. On the face of things, these charges appear to be nothing more than the company gouging its customers for every little extra that they can – including a broad range of things that used to be included in the price of your ticket. But when you consider the actual face of the industry today, things aren’t quite that simple…

Before the Airline Industry was deregulated there were over 40 national carriers in the United States; more than any two other countries combined. Regulation limited the number of competitors along any given route, which kept prices relatively stable and prevented significant differentiation on the basis of price. Since airfares were going to be relatively homogenous, the airlines would compete on convenience, amenities, and any other value-added concept they could dream up; this included ads extolling the virtues of quality food and drink, comfortable aircraft, even attractive cabin crews. But once the industry was open to anyone who wanted to rent an airplane and publish a schedule, everything changed – and not necessarily for the better…

The rise of discount airlines transferred the basis of competition from a value basis to a price basis; having the lowest fare became the driving force in the industry. Lower prices plus increases in costs for fuel, labor, and landing rights forced the carriers to economize everywhere they could, and more besides, if they wanted to remain competitive and still obtain the highest available profits. Airlines began offering more and more self-service activities to replace things that had once been done by live personnel, and trying to pack as many people as possible into each airplane. The end result, which we are only now starting to see, is a basic product that is almost unusable unless you are willing to pay for additional services. As long as customers continue to make their purchase decisions based on the lowest base fare – the one they will find on any of the various travel web sites – it will not be possible for any airline to survive unless it offers the lowest possible fares, regardless of their actual value…

Personally, I have never had a problem with paying for value received, and that certainly holds true for air travel. If a given airline would offer several tiers of service, or even just ala carte pricing for extras like extra leg room, good-quality in-flight food, or clean places to wait for an airplane to arrive, I’d probably purchase them. But it seems clear that any carrier that does not emphasize having the lowest possible price is likely to lose out to their competition – which will not benefit the company, their stockholders, their employees, or you…

So let me ask you: do the airlines have any responsibility to offer ANY specific services as part of your ticket price? Or, to put it another way, if you were required to pay money for a checked bag when you weren’t checking a bag (which is all a higher price without a baggage fee really is), would you be okay with subsidizing all of the people who did check a bag? Would you prefer a higher basic fare that included all of the old services, or would you be more inclined to do business under the current model, where all you get is basic conveyance, and you can purchase anything else if you want to? If the airlines aren’t just attempting to screw more money out of their passengers (and a lot of them have gone under in the last 10 years; it’s not like they’re sitting around counting their excess profits, the way the oil companies have been), is there really anything wrong with them offering all of their services ala carte?

It’s worth thinking about…