Airline seats used to be thought of as interchangeable. You have a seat that gets you from A to B. In many cases you have to connect, through a hub, and most of them have similar degrees of efficiency. Airlines pretty much competed just based on price, and given how technologically advanced pricing is the price of a trip on most airlines is going to be about the same. Sometimes airfare will vary for a given flight but there’s usually a reason — either that flight is mostly sold out, or perhaps there’s competition with a low fare carrier… so the major airline matches the price only on their flight that’s running at about the same time as the competition’s, while charging more for flights at different times throughout the day.
That’s a terrible business to be in. Airlines are capital-intensive with huge fixed costs. Barriers to entry are low, with the exception of slot-controlled airports (the government won’t allow more flights) and airports where all the gates are locked up in long-term leases (but even then there’s a secondary market where new entrants can get access to those gates). And airlines face hugely variable costs (fuel, and hedging isn’t an obvious solution, United Airlines tried and lost hundreds of millions of dollars that way). Plus they’re heavily unionized and heavily regulated and heavily taxed.
There’s a reason behind the old joke about the quickest way to become a millionaire — start out with a billion dollars, then invest in an airline.
Three seemingly unrelated developments over the past six months lead me to think that the airlines are finally making progress to change all of that.
- Frontier Airlines will begin instituting carryon baggage fees for customers booking the cheapest fares through third party websites.
- American Airlines has filed new fares that include waived change fees, bonus miles, checked bags
- RouteHappy – a new online booking engine – has launched which will help customers pick the best flights for them based on factors like better than average legroom, inflight powerports, and wifi.
Taken together these developments point to product differentiation being achieved in the industry in a way that hasn’t ever happened before. Most customers don’t realize it yet, there’ll be a real lag before the airlines achieve consumer awareness, but it’s no longer true that every airline seat is the same, no matter where you buy.
Differentiation: Frequent Flyer Miles and Benefits
An early mechanism to differentiate an otherwise almost-identical product was the frequent flyer program. It gave consumers a reason to select one airline over another at the same price point, and even sometimes to do so independent of price. If you’re a member of one program and not another, there’s a mental bias against joining more programs and spreading out your miles even if in the US there’s been no cost to join (in some parts of the world frequent flyer programs have historically had joining fees!).
Regular consumers earn status with an airline and get better treatment from that airline, whether in the form of upgrades or priority boarding (no need to gate check bags), plus bonus miles (a bigger rebate from one airline than from their competitors).
But since the advent of alliances, those airlines which have joined are able to compete with global redemption options beyond their own flight networks — somewhat diminishing the competitive advantage of miles. And with status match opportunities, alert consumers have been able to circumvent the lock-in nature of elite programs and switch carriers despite the special benefits they receive from their incumbent carrier.
Differentiation: Qualify of Inflight Product
JetBlue and Virgin America offer greater than average distance between coach seats throughout their aircraft. American tried and reversed course on “More Room Throughout Coach” — finding that they weren’t earning a revenue premium, customers didn’t realize there was a differentiated product or didn’t care enough to push bookings over to American because of it. United pioneered ‘economy plus’ extra legroom given to a subset of their customers.
Delta offers the most extensive online internet throughout its domestic fleet, covering not just mainline jets but also regionals. American offers extensive wifi as well. Virgin America has the greatest uptake amongst its customers, with San Francisco – Boston seeing on average about a quarter of its customers logging in (admittedly with degraded performance as a result).
Of course some of these first-mover or wide deployment advantages get competed away. US Airways was late to the wifi game but realized that while wifi itself wasn’t profitable (usage fees didn’t cover costs) they were losing bookings because some of their customers demanded it and realized they didn’t have it and would book away from them as a result. So they’ve gotten into the game.
First class products differ as well, even though domestically those are mostly filled with upgraders. US Airways doesn’t serve meals on most flights under 3.5 hours yet they have a pretty good snack basket. I find Alaska’s first class seats generally uncomfortable. While a bigger seat is most important, the product isn’t just, in Spirit’s words, the “Big Front Seat.”
Differentiation: Ancillary Fees, Unbundling, Available Extras
Different airlines bundle different products into their ticket price, or unbundle things from that price. Spirit charges for soft drinks, US Airways tried to do that same, and now it looks like soft drinks will become unbundled from the cheapest fares out of Frontier. You used to be able to bring three bags onboard a plane — your choice how to distribute those between carryon and checked (up to 2 carryon). Then post-9/11 the carryon limit become one plus a personal item ostensibly to speed up the (increasingly belabored) screening process. Then Spirit started charging for some carryons.
It took a disastrous downturn related to the Great Recession for airlines to finally realize that they were giving away for free some items that were limited in availability but that customers valued — things like exit row seating or seats closer to the front of the plane — and that they could charge for these things. Some of it wasn’t just a lack of consciousness, the development of new technologies made it easier to manage these sales as well.
Some of it’s driven by the tax code, once you have a system in place to manage checked bags the incremental cost of an additional checked bag is very low so you wouldn’t expect to unbundle bags. But there’s a huge incentive built into the tax code — domestic airline tickets are subject to a 7.5% excise tax, but money you can pull out of the base ticket and charge separately for is not. That’s why I’m surprised to see American’s new move bundling bags into the fare, since the higher fares are subject to the excise tax.
Frontier made it clear back in the fall that they were going to ‘punish’ bookings made through channels other than their own website, since of course those bookings are costly to Frontier. The problem is that on an airline’s own website they can control the environment and disclosures. On third party website it isn’t always clear what extra fees an airline may charge. Frontier now says there may be a $100 carryon bag fee for third party booked tickets. But that’ll be a surprise to most customers booking through those channels.
Spirit Airlines is the king of fees in the US, there are ‘annoying’ fees for everything (including the ‘convenience’ of online ticketing — it’s less expensive to ticket at the airport!) but nearly all of the complaints they get about fees are from customers who book elsewhere. No one is surprised by the fees when they book at SpiritAir.com.
Spirit is a meaningfully different product targeting different consumers than American Airlines. And consumers who book through the Spirit website know what they’re getting.
Towards the Singularity in Airline Booking
All of these changes have made travel more complex. Things were much simpler back when customers could get a Ford Model T in any color they wanted, as long as they wanted black. When airline seats were just commodities, there was no meaningful choice to make. Now the world is much more complex, tons of variables, but that also means there’s an opportunity for entrepreneurs to become our guide through all of the variables.
In the 1990s and early part of the last decade, te commodity product went online and drove down distribution costs, squeezing out those middlemen. But guidance was lost, just as travel started getting even more complex. I’ve written before about how Google is stepping into that breach.
In addition, the new RouteHappy helps you figure out ‘happiness’ and compare it to price, figuring out how to get the best deal for you based on what you value. It recognizes that airline products are different.
But it doesn’t yet give you the full picture of price — ‘total trip cost’ — how much can you expect to spend on each airline for the little extras you might want. How much are buy on board meals? How much are checked bag fees? If you’re flying to a secondary airport, is the savings in airfare worth the extra cost or hassle in transportation to and from the airport?
We haven’t yet reached the singularity, but new tools are beginning to emerge that will help guide consumers as they begin to realize that what was once a commodity product is actually more distinguishable than ever.