It’s a fools errand for airlines like American or United to offer a lowest common denominator product. When a business produces a commodity product, the lowest cost producer wins. Spirit is at a great advantage because American and United will always have higher costs.
Given their cost structure legacy airlines need to earn a revenue premium. Delta, for its part, is trying to differentiate their product and earns a revenue premium. This is because of a generally more reliable operation, moderately better product (for instance 9-across seating in coach rather than 10-across on Boeing 777s), and friendlier staff who seem to want to be at work. The only outlier seems to be SkyMiles which gives customers less value than competitors.
Historically customers have largely made decisions based on schedule and price. As a result investments in product haven’t mattered as much. Delta’s incremental investments, correlated with their revenue premium, seem to suggest that high yielding passengers do seem to have a preference beyond just schedule and price.
At Delta’s investor day they they believe brand is key to the revenue premium they’re attracting — and also key to growing their co-brand credit card.
Three slides from the airline’s investor day deck make this point clearly.
In the future the importance of inflight experience for passenger buying decisions is going to grow significant. Until now customers have been choosing airlines based on schedule and price because the information presented to them during the buying process has been… schedule and price.
However that’s beginning to change. Google is already presenting richer and more customized data. For instance, what’s the price of an airline ticket if you want to bring a carry on bag on board? That’s forced American Airlines to give up its carry on restriction for basic economy fares.
There’s rich data on a flight-by-flight basis available through RouteHappy. Is there food available on board? Not just internet, but high speed internet? Seat power?
The big question about the future of airline products is, as customers are presented with more than just schedule and price through better online tools what decisions will they make? Google may drag along online travel agencies like Expedia (and its subsidiaries) and Priceline/Booking.com.
Even without this data consumers figure out what they need and who has it. That’s been true for years. Frequent flyer programs were designed to take a commodity product and give customers a reason to have a preference and even shift their schedule a few hours in either direction to stay loyal to an airline.
Internet became a real differentiator — I avoid flying United Airlines largely because of unreliable internet compared to Delta and American, and then-US Airways President Scott Kirby (ironically now in the same role for United) explained the 2012 decision of the airline to add internet: they held off because they didn’t think they’d make money offering it, until they realized they were losing ticket sales by not having it.
Despite the experience with wifi Kirby still believes what matters is schedule and price, and airlines don’t make money with a better product which is why United squeezes more passengers into a Boeing 777 than Delta does.
Kirby believes in investing in a product that’s good enough not better than competitors and that simply flying more should earn his airline its ‘natural share’ of business and that airlines deserve higher prices regardless of product.
Already customers who matter to an airline’s bottom line, frequent customers and higher yielding business customers, make decisions on more than schedule and price. The vast majority of passengers don’t fall into either of those categories, and may not be familiar with the differences in airlines assumign they’re all the same. However when it becomes easier for them to see that every flight offered to them isn’t the same, the differences in flights will increasingly matter to their purchase decisions.
British Airways revealed at its investor day that 25% of the consumer buying decision is now based on brand and not schedule/price. Their brand has been decimated, so they see this insight as giving them upside.
Ultimately it’s not a profitable strategy to bet on making money on consumer ignorance. Lowest-cost carriers can earn a return purely on schedule and price. Higher-cost carriers will need to offer a better product to attract higher revenue.