The ATM at the Airlines

I won't go so far as to say the airlines are all in trouble, but surely a few of them are, and those that aren't in trouble are currently hurting very badly.  It's no wonder why, really.  The cost of jet fuel, much like the cost of gasoline, has put a serious crimp on the entire airline industry's ability to maintain a steady stream of profitability.  So, what are airlines to do?

Discussions continue to move forward on the part of Northwest (NWA) and Delta (DAL) on the prospect of a merger.  These discussions have been ongoing for months, and it remains to be seen whether or not the domestic airline industry has the ability and resources to pull through this difficult time, merger or not.  Personally, though, I'm rather disappointed in the efforts of the airlines to try to make this a viable industry in such a difficult time.  American Airlines (AMR), for example, decided that they were going to make up for the cost of jet fuel by adding a surcharge to bags checked at the curb, thus penalizing skycaps at Logan Airport whose tips were significantly reduced as a result of this fee.  (See full story here.)  Although this stance was later repealed as the result of a lawsuit, airlines still seem to be up to the same kind of tricks, but now, instead of cheating their skycaps, they are cheating their customers.

United (UAUA) and US Airways (LCC) both began charging $25.00 for a second, and each additional, bag of luggage.  Delta was not far behind. Midwest, Continental (CAL) and Frontier (FRNT) were quick to follow suit.

One has to ask a serious question about this, though:  Do passengers enjoy being nickel and dimed to death?  Wouldn't it make more sense for the airlines to *GASP* raise their airfares rather than trying to convince their customers to go somewhere with all of these hidden fees and surcharges?  It sort of reminds me a bit about going to an ATM these days.  If you happen to be at one not sponsored by your financial institution, you'll probably be charged twice for the "privilege" of withdrawing your own money, once by your bank and once by the ATM owner.  That has got to be great business for ATM owners and banks, and possibly a strong selling point for ATM manufacturers like Diebold, but by the same principle, the customers are the ones getting screwed.

Do airlines and ATM owners enjoy screwing their customers as a regular part of doing business?  Perhaps all of us need to wise up and take our business to companies that actually care about delivering a service to us at a reasonable price that is both up front and reliable.  For the airlines, that means charging more as a base price for tickets and doing away with "surcharges" and "fees".  For ATM owners, why not sell Google advertising on your ATMs for the duration of time it takes to process requests?  At the very least, you have a captive audience and I'm sure people would be delighted to look at the advertisements if it meant not paying any ATM surcharges.  (By the way, if you decide to use this idea, I demand payment of $100 per ATM in which you utilize this strategy for providing the idea.)

If the ATM owners and airlines both do what is right by their customers, they might be surprised to find out that their bottom line will improve with customer loyalty rather than customer complaints about fees.  And heck, if customers are happy, that's usually a great sign that a business is doing well.  When customers complain, as many are fond of doing now with the airline industry and which they have been fond of doing for a long time as a result of "convenience fees" assessed by ATM owners but which are not convenient to customers, watch out because brand loyalty doesn't exist when customers are not happy with a product or service.  If customers can go elsewhere for either better service or better prices, invariably, they will.

In the end, the best airlines will be left standing.  I expect the rest will be long forgotten, just as they have managed to forget the value of their own customers.

Disclosure: none

Comments

[Yemmi]

What was the point of this article? You spent how long forming your thoughts only to finally bring it back to the ATM analogy. Put a little more effort into your next attempt.

[legalalien]

Both ATM fees and various fees imposed by airlines are fees for service.

Being able to withdraw cash anytime, anywhere is not a right, it's indeed a privilege (no quotes needed). I fail to see how customers are getting screwed. Don't like ATM fees? Carry enough cash or drive to your bank.

Same with baggage check fees, buy on board meals, drinks, headsets, etc. These items have never been free, as I'm sure everyone realizes. Prefer to pay one price that includes 2 checked bags and one can of soda? Fly Southwest. I pack light, don't drink soft drinks and don't like subsidizing fellow passengers who fly with their golf clubs and ask for two full cans of diet coke, so I fly US Airways, but only if their bottom line price is lower. Let the more popular approach win.

[dsgjax]

The fundamental problem with the airlines is the use of regional jets. Consider the economics of operating three 50-seaters, three times per day instead of one 150 seater once per day. 3 crews versus 1; 6 jet engines sucking fuel instead of 2; 3 planes to maintain instead of 1; more mechanics, more gates, etc. Southwest operates one type of plane. Even if they did not have the huge advantage of hedged fuel prices (something $60 barrel for this year) they would still have a lower cost operation.

Eventually someone will figure out that if they fly the biggest planes less often it will cut costs and overhead. Fares might still need to go up but that's good. It'll get the riffraff out of the TSA line and off the airplane and improve the overall travel experience.

[BioInvestor]

I too am struggling to find the point of the article.

Just one point of information: I checked on the comment made on Continental Airlines. To date, CAL hasn't followed the lead set by AMR in charging for the first or second checked piece of luggage. The latest information from the airline is that they are studying the issue. Here's a link to a report on the topic: www.sfgate.com/cgi-bin...

I have never been a big fan of argument by analogy. If the concept is applied to shed some light on an issue by viewing it from a different perspective, that's one thing. If, on the other hand, an attempt is made to develop a parallel argument, in a different sphere, leading to the desired outcome on the topic of interest, other issues spring to mind. For example, how analogous are ATM machines and their owners when compared to airlines--not very. One could develop an argument using another analogy, say restaurants, and conclude that people actually like lots of choices and prices!

I think there's no question that, given a choice, rational people want to pay a lower price for the same good or service. Having said then, it doesn't take a lot of investigation to show examples of airlines in different parts of the world that really disaggregate pricing by charging lots of different fees, but at the same time, they realize strong passenger loads and growth. Moving from "not liking" to "not paying" is a big step. Time will tell if AMR's move is a good one. Banks have found that ATM fees work: customers pay them. They may not like it, but they do it.

Finally, the mandate to raise fares has been offered by many people posting on this website. It should be clear that, given the option, any business will try maximize revenues. Airlines are no different. In fact, airlines are constantly seeking ways to raise fares; however, these companies are price takers not price makers. The quantity demanded is highly elastic. In the past, at least, attempts to raise fares have failed. Carriers have been more successful this year, but there's simply no way that any carry can raise its fares today to the point where they're profitable and expect load factors to be unaffected. Airlines are doing the next best thing: reducing capacity. They can't affect the demand curve; they can change the supply. That's the way to raise fares.

[Stock Miser]

First of all, I'm the author. My "comment name" is Stock Miser.

legalalien, I wasn't suggesting that such services were actually "free". As with anything else, there are business costs associated with all aspects of running a business. My gripe is that these are extra charges imposed by the airlines in an attempt to prop up their sagging bottom line. Why are they penalizing passengers who wish to fly with them? If they raised their ticket costs by $25 per one-way fare, they could make the same amount of money (possibly more) and not, at the same time, leave an unexpected hole in the wallets of their passengers who won't know it if they don't read the fine print (and we all know that most people do not read the fine print, which is how businesses get away with such fees in the first place). Furthermore, they would not be discriminating against people who are unwilling or unable to pack light. When you go on a trip expected to last a week or two, do you expect to wear the same clothes everyday? What about parents with infants, for which is is rather easy to need a significantly greater collection of luggage? It's easy to pack light, but I wouldn't want to be the one sitting next to you on the flight back if you chose to do so to avoid paying an extra service charge.

As for being able to withdraw cash anytime anywhere, do you know it actually costs banks far LESS money per ATM transaction (regardless of whose ATM it is) than it would for a person to go into a bank to see a teller to either cash a check or withdraw money from their account? People do banks a favor by going to the ATM. Banks should do more to reward their customers for helping to keep costs down. I don't consider an ATM service charge a reward. Given that it costs banks MORE money for a bank customer to see a teller in person, why don't they charge fees for that instead of ATM fees? Actually, some banks have tried, and very quickly reneged on the idea after massive protests.

User216242, the idea of "fewer flights + larger (same) planes = more profit" is a good one, but that doesn't effect the passenger experience. Passengers, or for that matter any consumer in any industry, don't like to feel like they are being cheated by way of unscrupulous pricing policies. Lets face it: passengers are paying to get themselves and their luggage to a destination. They shouldn't have to pay a price to get themselves there, and another price to get their baggage there. That just seems really underhanded of the airlines to try to sell two tickets (one for passenger and one for baggage) for the price of one passenger to fly.

[nultech]

As a frequent flier on USAir, I'm beginning to feel pretty unappreciated. In the last few months, USAir has:

* Instituted a $15 charge for 1st checked bag, $25 for additional ones.

* Eliminated in-flight snacks.

* Began charging $2 for sodas & juice in coach. Beer, wine & mixed drinks in coach are now $7.

* Eliminated mileage bonuses for elite fliers.

* Eliminated the 500 mile minimum mileage reward.

* Instituted high fees to redeem miles for "rewards".

* Reduced reward seats, so that redeeming is nearly impossible, unless one wants to pay double miles.

* Instituted high fees on "Buddy" tickets, used by airline personnel to bring friends & family on trips.

The sole value I see from being an "Elite" flier is the ability to bypass a long security line. I expect USAir to institute a fee for that as well, as soon as they think of it.

Meanwhile, Southwest, the flying bus, raises no fees. Granted they have done a fabulous job of buying oil futures to hold costs down, but where they really shine is, they're not sucking all loyalty out of their customers.

[BioInvestor]

nultech, the big question is, will you continue to fly US Airways?

US Airways is definitely taking the lead when it comes to fees: howver, the checked bag fee won't apply to frequent flyers--those that reach the threshold for elite status. Here's the link that gives more information: www.usairways.com/awa/...

[BioInvestor]

Stock Miser, I think you're ignoring some of the factors which govern the airline industry.


I don't see the argument against fees as being valid. Airlines that impose--or that plan to impose--such a tariff have targeted the occasional, non-frequent flyer passenger. Most of that group is motivated by price. Only time will tell if such passengers rebel against the concept of paying a separate charge for baggage. In some respects, if an airline is to lose customers, the price-sensitive, infrequent flyer is probably the group that should be targeted first. Passengers with elite status within a program aren't yet affected by the baggage fees discussed by some of the legacy carriers.

The suggestion to raise fares across the board by $25 each way is something that most airlines would love to do; they can't. Even a casual observer of the industry observes that airlines are price takers. They're currently slowly raising fares, but an increase of $25 across the board just won't work: prices are highly elastic. Fees on the other hand are tried and tested: fees work for meals; fuel surcharges have been effective. AA and others will try these baggage fees; if they work, they'll stick. If they don't, they'll disappear.

I don't see that the ATM analogy bolsters your argument. The first important point is that the cost of a good isn't necessarily the determinant when it comes to price. The market determines the price. It would be frankly dumb for a bank to determine a price for the use of an ATM based on its cost of service when it can attract a higher price from the consumer. ATM fees have actually worked very well for banks. Just like the various and sundry fees attached to credit cards, ATM fees are a good source of income. The success of ATM fees (assuming the analogy with airlines is valid) should be a source of solace for legacy carriers, not concern.

I think it's clear that passengers are paying for the transportation of luggage; it is an inherent component of the ticket price; it’s even discussed in the contract of carriage which governs the travel. I read your objection to a separate fee as meaning that you don't like the various costs, or a portion thereof, to be separated out. That's a personal preference. The airlines are doing an experiment right now to see if the preference that you appear to have stated is shared by the flying public. As I said, if it works, expect such fees to stay; if it doesn’t work, they’ll disappear.

[dandbear]

Yes, airlines and ATM owners enjoy screwing their customers as a regular part of doing business! Fees -- the government should mandate that these are rolled up into the base fare. I traveled on a same day trip RT from BOS/LGA to argue a case. My attaché was deemed too heavy and had to be checked (on one of the four legs) for $50.

I too think it's clear that passengers are paying for the transportation of luggage; it is an inherent component of the ticket price as you get all of me in that price. Bag -- Bags and all.

[BioInvestor]

dandbear, weclome to SeekingAlpha! Of course, I have been on many flights and never had a carry on that was deemed too heavy and had to be checked. Big deal. It makes as much sense for an airline to base its policies around me as it does around you. There is, however, a great site where people discuss, among other things, their experiences while traveling: www.flyertalk.com Individual experiences while traveling are interesting, but not really useful when analyzing companies.

Having the government involved in handling fees isn't going to happen. The trend globally is to have less government involvement in the business side of running airlines.

[BlueDog]

Airlines raise fees last because passengers screen for lowest fare, not for the add ons.

[Stock Miser]

BlueDog, thats part of my point. If I go and do my research on finding an airline to get me from point A to point B, and only later discover I could have flown for less net dollars on another airline not charging such fees or charging less fees because I couldn't read the 2 point font that says I was going to be charged such a fee, I would have surely flown a different airline. I'm not in the business of wanting to pay more for an equal level of service I can get elsewhere.

As a customer, I don't like the idea of fees attached that are not included in bold faced font on any contract I agree to sign, including one that guarantees me a spot on an airline (or compensation in case of overbooking) when I pay for a ticket. I don't like the current fuel surcharges, but I do realize that is a necessity for airline survival in these difficult times, but I wouldn't even mind paying a higher fuel surcharge because at least that isn't going to effect my ticket price when I get to the airport. As a customer, I think I should have the ability to make easy comparisons of price points between airlines. I can do that with banks, because banks are required to list all of their fees in a fee table or some other mechanism for my review, and I can do that with ATMs because laws require that if there is a fee attached to such a transaction, it must be either posted or clearly laid out in the process of my agreeing to withdraw money from somebody's ATM machine. Why can't I do that with airlines so easily? Do airlines enjoy making the process complicated for customers? If they do, surely, that will effect customer opinion of their business, and ultimately, airline passengers will likely take their hard earned dollars somewhere else where such fees are not the norm, or at the very least, are not laid out in a font size so small that it is impossible to read or decipher their amount before purchasing a ticket.

BioInvestor, I happen to disagree with your assertion that "Individual experiences while traveling are interesting, but not really useful when analyzing companies." If enough individuals complain, a company will either change it's policy to keep those customers, or will lose at least some portion of their customer base who will go elsewhere instead. In the event that they lose customers, that will invariably effect the bottom line of an airline, and if history is any guide, such effects on the bottom line are usually reflected in stock price per share over time. Very few airlines are currently operating in the black right now, and it shows from their stock prices. (I've been very tempted to buy a few airline stocks, but don't think the bleeding is done yet.) Those doing the best appear to be airlines serving international routes. British Airways, for example, continues to put forth some stellar numbers. Domestic airlines and international airlines are, I realize, completely different ballgames economically speaking, but the principles of customer service apply across the industry pretty much the same. As one wise business person I once spoke to said to me, "If you please one customer, they MIGHT tell another customer about the good experience, but if you screw up and don't make proper amends for it (and sometimes there are no proper amends) you can be sure that a thousand potential customers will hear about it, and choose to shop elsewhere accordingly."

So again, if airlines are making it very difficult for their customers to determine how much it is really going to cost them, and customers get upset, they will go elsewhere, and some airlines will suffer even more than they are now because of that, and those holding such airline company's stock will suffer with them.

[BioInvestor]

Thanks Stock Miser, you made my point. Individual opinions aren't that useful, but if there's a theme shared by many people, we’re no longer talking about a single opinion.

Complaining and leaving are two separate and distinct responses: businesses will listen to complaints but respond to the loss of customers. People who complain don't necessarily take their business elsewhere.

You might want to ignore that wise business person you cited, because there's no evidence that I have found to support the notion that a disappointed person will influence a thousand potential customers. Twenty people might hear a story, but certainly not everyone in that group is going to react.

[BioInvestor]

BlueDog--bingo! :)

[onesuperguy]

The way the airlines are going, it won't be long when then will start charging to use the bathrooms at the planes. It will probably be called "bladder relief fee" and yes, this tax won't be levied on our frequent flyer customers!

[Stock Miser]

BlueDog, thats part of my point. If I go and do my research on finding an airline to get me from point A to point B, and only later discover I could have flown for less net dollars on another airline not charging such fees or charging less fees because I couldn't read the 2 point font that says I was going to be charged such a fee, I would have surely flown a different airline. I'm not in the business of wanting to pay more for an equal level of service I can get elsewhere.

As a customer, I don't like the idea of fees attached that are not included in bold faced font on any contract I agree to sign, including one that guarantees me a spot on an airline (or compensation in case of overbooking) when I pay for a ticket. I don't like the current fuel surcharges, but I do realize that is a necessity for airline survival in these difficult times, but I wouldn't even mind paying a higher fuel surcharge because at least that isn't going to effect my ticket price when I get to the airport. As a customer, I think I should have the ability to make easy comparisons of price points between airlines. I can do that with banks, because banks are required to list all of their fees in a fee table or some other mechanism for my review, and I can do that with ATMs because laws require that if there is a fee attached to such a transaction, it must be either posted or clearly laid out in the process of my agreeing to withdraw money from somebody's ATM machine. Why can't I do that with airlines so easily? Do airlines enjoy making the process complicated for customers? If they do, surely, that will effect customer opinion of their business, and ultimately, airline passengers will likely take their hard earned dollars somewhere else where such fees are not the norm, or at the very least, are not laid out in a font size so small that it is impossible to read or decipher their amount before purchasing a ticket.

BioInvestor, I happen to disagree with your assertion that "Individual experiences while traveling are interesting, but not really useful when analyzing companies." If enough individuals complain, a company will either change it's policy to keep those customers, or will lose at least some portion of their customer base who will go elsewhere instead. In the event that they lose customers, that will invariably effect the bottom line of an airline, and if history is any guide, such effects on the bottom line are usually reflected in stock price per share over time. Very few airlines are currently operating in the black right now, and it shows from their stock prices. (I've been very tempted to buy a few airline stocks, but don't think the bleeding is done yet.) Those doing the best appear to be airlines serving international routes. British Airways, for example, continues to put forth some stellar numbers. Domestic airlines and international airlines are, I realize, completely different ballgames economically speaking, but the principles of customer service apply across the industry pretty much the same. As one wise business person I once spoke to said to me, "If you please one customer, they MIGHT tell another customer about the good experience, but if you screw up and don't make proper amends for it (and sometimes there are no proper amends) you can be sure that a thousand potential customers will hear about it, and choose to shop elsewhere accordingly."

So again, if airlines are making it very difficult for their customers to determine how much it is really going to cost them, and customers get upset, they will go elsewhere, and some airlines will suffer even more than they are now because of that, and those holding such airline company's stock will suffer with them.

That was the thesis I was trying to make with this article. Perhaps I didn't do that as effectively as I would have liked.

[BioInvestor]

On June 28 at 12:39 AM Stock Miser wrote:

BlueDog, thats part of my point. If I go and do my research on finding an airline to get me from point A to point B, and only later discover I could have flown for less net dollars on another airline not charging such fees or charging less fees because I couldn't read the 2 point font that says I was going to be charged such a fee, I would have surely flown a different airline. . .

I already read this post when you wrote it on June 27. I don't think there's any reason to repost my reply!

[sf94127]

I believe consumers would understand (but not like) a surcharge for rising fuel costs. Let this cost float with the price of jet fuel at the time they make the reservation. It may be a $400 flight has a $75 fuel surcharge; so be it. Get the cost out front, transparent, and get rid of the silly nickel and dime stuff which are just surrogates for real issue of high fuel cost.

[BioInvestor]

sf94127, I disagree that the baggage charge is something that should be removed. There are passengers that simply don't need to check baggage. I believe it fair to disaggregate pricing and assess a fee for those that want to check their bags.

I think that the idea of a fuel charge is interesting. Airlines have tried this option quite successfully. For the case of the airline, the advantage of a charge of food or baggage is that this charge could remain after fuel prices moderate.



On July 5, sf94127 wrote:

I believe consumers would understand (but not like) a surcharge for rising fuel costs. Let this cost float with the price of jet fuel at the time they make the reservation. It may be a $400 flight has a $75 fuel surcharge; so be it. Get the cost out front, transparent, and get rid of the silly nickel and dime stuff which are just surrogates for real issue of high fuel cost.