32-Pricing in airline industry – Part 2

How and where you raise prices is an important question. The legacy airlines are doing it badly.

The legacy airlines are nickel and diming customers by charging fees for checked bags, and so forth. The reaction of passengers is to view these changes as petty nuisances. Many will try to avoid them by simply bringing even more chattel on board.

This additional demand for overhead space makes travel even more uncomfortable for the Heart of the Market business traveler. (See the Perspective “Cutting the Right Cost” in StrategyStreet.com/Tools/Perspectives) These valuable customers will have to put up with more crowded overhead bins and delays as people drag even more luggage on to the airplane. The major effect of these new service charges is to disappoint the industry’s customers.

Normally, a company “unbundles” its product and adds additional service charges on previously “bundled” services in order to make small improvements in margins. These changes would usually improve margins by less than 10%. The airline industry needs more than that…a whole lot more. Passengers know a big price jump is inevitable. Recent customer surveys bear this out. The legacy carriers should take advantage of this customer expectation and raise prices to levels that will allow solvency, at a minimum. If that doesn’t work and it knocks out too many leisure travelers, how big is the loss?

Posted 6/30/08


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