90-Pricing in Highly Competitive Marketplaces

Ancillary fees saved the margins of the legacy airlines while they were in Overcapacity and in the fight of their lives against discounters. But the worm has turned. In 2026, these ancillary fees are helping the ultra-low-cost airlines survive. Margins are high in the airline industry. The top four airline competitors simply do not compete against each other on price. In fact, if there is a price difference from one top competitor to another, the gap is a defensible premium.

Posted 3/23/09

For the most part, the airline industry has been in overcapacity and hostile operating conditions since it was deregulated many years ago. During that time, the industry produced many pricing schemes and even more competitors. Over the last few years, the competitors have decreased, while the pricing schemes have burgeoned.

Many competitors fell away as the industry learned the difficult lesson that all airfares have to be the same or customers will choose the lower cost airfare. TWA, Eastern and Pan American were major carriers who disappeared in intense price competition. Nor did this price competition spare discount airlines. People Express no longer exists, nor does Presidential Airways, among many others.

But the industry learned something a few other industries have also learned. Most customers focus only on the quoted price. They don’t always consider the fees that might accompany their purchase. The airline industry developed an extensive list of add-on benefits for which they charge an extra fee. The list is long and growing. There are fees for checked bags, oversized luggage, priority seating, pets, unaccompanied minors, additional leg room, meals, drinks and snacks. Most of these fees are new over the last three to four years as airlines have found creative ways to increase their revenues by offering a la carte pricing. (See the Perspective, “Discovering Hidden Pricing Power” on StrategyStreet.com.)

These fee revenues have helped the airlines but they have a down-side for the airlines as well. When fees are not transparent, customers learn to distrust the answer when they search for the price of airline tickets. Many customers have learned that the quoted fare will not be the final price they must pay. (See the Symptom & Implication, “Customers are more price sensitive” on StrategyStreet.com.)

Abhorring a vacuum, several companies have rushed to offer information to the consumer about these often hidden fees. Today, companies such as TripAdvisor.com and FlyingFees.com, offer tools to calculate fees for various options a customer may choose while flying. These current tools have limitations. But the travel industry heavy hitters are about to join the battle. The giant, Sabre Travel Network, is about to introduce a broad-based suite of products that will enable travel agents and consumers to specify the services the consumer anticipates using and then see the full price of the ticket, plus the fees, the customer will incur. Further, travel companies are working to standardize the way that airlines include fees in their reservation systems. Some people expect these pricing benefits to be available within the next year. This is very similar to what has happened in the automobile rental industry. An auto renter can easily determine the total cost of the rental before signing on the dotted line.

Until now the airline industry has been able to charge different fees for the same service. For example, a consumer sending an unaccompanied minor on Southwest Airlines pays no additional fee. The same service on Air Tran brings a fee of $39. The service at Continental, Jet Blue and Alaska Airlines costs $75. If you want to fly an unaccompanied minor on the legacy airlines, Delta, American, United and U.S. Airways, the fee is $100.

Much of this pricing freedom is likely to erode as the travel companies bring more pricing information to the consumer. Most consumers will continue to operate the way they have in the past. They will ignore the fees and search for the lowest fare. However, enough consumers will pay attention to the full cost of the airline trip. These people will move their business if prices seem too high for the extra benefits they prefer to buy. This is likely to commoditize the price of these extra benefits.

The airline industry has done the consumer a service with its fee-based pricing innovations. Those customers who wish to fly for the lowest possible price can chose options that have few benefits. Those who want more benefits can chose those and pay for them accordingly. This is a sensible and helpful pricing strategy in a hostile market, for both the airline industry and the consumer.

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Update 2022:

Pricing for ancillary services has succeeded in the airline industry because all competitors have copied them. Of course, one airline, Southwest Airlines, continues to underprice its competitors on ancillary fees and continues to gain share.  A decision to raise prices involves considering three separate choices. See HERE for these choices

For the major fee generating services, Southwest is always less expensive than the 3 other legacy airlines.  Those 3 other airlines price major services the same.  In 2019, here are some comparisons of fees charged by the 4 legacy airlines:

Change / cancellation fees:

American $200

Delta $200

Southwest free

United $200

1^st Checked bag fees:

American $30

Delta $30

Southwest free

United $30

Unaccompanied minors:

American $150

Delta $150

Southwest $50

United $150

There are also smaller services offered by airlines for a fee, including ticketing, seat selection, priority boarding and nonalcoholic drinks and snacks.  Again, Southwest is always the cheapest legacy airline.  The other 3 legacy airlines have not turned prices for these services into a commodity, where all prices are equivalent, but have allowed them to vary by route. This makes comparisons among airlines more difficult for consumers.  With high overall pricing for airline trips in 2022, there is little incentive for the legacy airlines to be price competitive with one another on the smaller services.

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Update 4/26

The airline industry is comfortably out of Overcapacity. The three legacy airlines have beaten back Southwest and the ultra-low-cost carriers. They did this by making multiple strategic moves over several years. See Blog 32 and Blog 52 for a more complete explanation of what the legacy carriers did.

During the many years of Overcapacity, the legacy airlines learned a powerful lesson: do not compete on price unless there is no choice. In 2026, there is little to no price competition among the top four companies. They are virtually identical to one another on charges for ancillary fees. The high prices for ancillary fees live with the ultra-low-cost carriers. Those companies must charge high fee prices to survive. The big four competitors do not attempt to underprice each other on their regular routes. Nor should they if they want to keep profits high in the industry. Across all routes, American charges an average of 15.14 cents per mile. United and Delta charge about 15.5 cents per mile. The differences are about 2.4%, more noise than true Price competition.

There are price differences though. They are premiums rather than discounts. For example, where an airline controls more than 70% of the traffic in and out of a hub, that airline charges significant premiums to the customers using that hub. The premiums can be substantial and may add up to 20-40% over the cost of another route with similar mileage. In other cases, there are up-charges for solo flyers. American is the most aggressive with this price tactic. It charges solo flyers a premium on more than 50% of its flights. United also employs this tactic, but on only 8% of its flights. These premiums can also range up to 50% per solo passenger over the per person charge for two people traveling together on the same flight. Some industry observers also argue that Delta charges a slight premium for its best brand reputation, a Reliability premium. However, Delta refuses to charge higher prices to solo flyers. That may constrain the spread of this premium pricing through the industry.

There is no other price competition among the top four competitors. They have succeeded in dividing the country into geographic spheres of influence through their hub networks and then charging nearly identical fares and fees where they overlap with one another. Of course, each of the leaders uses dynamic pricing where an algorithm may suggest a different price on some seats to extract maximum revenue per passenger. But, true price competition no longer exists.

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