Incentives And Unintended Consequences…
I’m a huge fan of economics and psychology, and recently I saw something that mixed the two together.
As you have probably heard, many airlines are now charging you if you check ANY bags. I was on United a few days ago and had to pay $15 to check my one bag. I can see how this puts a bad taste in your mouth as a customer. Getting nickel and dimed isn’t a good feeling.
Obviously, the airlines put this in place to try to make some extra money, especially as fuel prices are skyrocketing. (Not that they were making money before, but that’s another story… don’t even get me started.) Right now the airline executives are probably patting themselves on the back for implementing a new way to increase revenue.
Here’s the interesting part.
Whenever you change the economics of a situation, there are always secondary consequences. For example, one college was having a problem with rats. So they came up with a "brilliant" idea. They would ask the college students to kill any rats they found, and bring them in and get a $1 reward. That way every college student is helping! Well, a few months later they had a LOT of rats turned in by students, but the rat problem was actually getting worse.
They found that college students were actually breeding more rats so they could get paid more money! Woops. There are hundreds of stories like this.
Back to the airlines. What do you think will happen when you start charging for checked bags? Well, people are going to check less bags. They still need to bring their stuff with them, and customers are not stupid. They know you can bring one bag on the plane with you and put it in the overhead bin or under your seat.
So now a much higher percentage of people are bringing bags with them on the plane, even though the amount of space in the overhead bins has not increased.
As I was getting on the plane last week, I noticed that it was taking FOREVER for everybody to load. People could not find spots for their luggage. It was full even though only half the people were on the plane. People were moving bags around, shoving bags in tiny spots, moving up and down the aisle looking for a spot, and the finally asking the flight attendant for help. I even took a picture with my phone:
The pilot actually came on the loud speaker and announced that we needed to "hurry" and get loaded because we were now already 15 minutes late for takeoff.
Being behind schedule costs the airlines a lot of money. Airlines need their planes to be in the air as much as possible, rather than sitting on the ground where they are not performing any service to customers.
Also, I wonder what the costs are to customer loyalty and satisfaction? How many customers are now upset about the extra fees, slow loading and irritation when trying to find a place to put their bag, and late arrivals?
It is my opinion that airline executives will see the positive side of their new fees (higher revenue per passenger), but will be scratching their heads when they lose even more money. They can’t see these unintended consequences on their financial reports. But they are there.
Southwest doesn’t charge any extra fees for your first two bags. They are promoting that everywhere ("You’ve entered a no-hidden-fee zone!"), which is smart. Southwest is one of the only airlines that "gets it". It’s all about the customer! You would think the other airline executives would catch on one of these days….
September 29, 2008 at 3:55 pm
Spot on, Ryan.
Understanding the big picture/long term effects and customers first!
So, I wonder how many times Bodybuilding.com has been used as a positive business case?
-Jeff
September 29, 2008 at 4:03 pm
Look how annoyed the people look sitting down waiting for this poor guy. And all he is trying to do is save a couple bucks by squeezing his oversized bag in the overhead compartment. Looks to me like I am flying Southwest from now on! Sorry ignorant airline companies I don’t give my goods and services to poor business ethics.
September 29, 2008 at 4:59 pm
Yeah, you’re dead on! I don’t fly NEARLY as much as I used to, and that might be a good thing! Not only are airlines playing the nickel and dime game with luggage & food, you also have to deal with disgruntled flight attendants who (no joke) have “I have no idea why I work here” LITERALLY pinned on the front of their uniform (http://bbilanich.typepad.com/success_common_sense/2007/11/upbeat-and-posi.html - talk about projecting negativity!!!); being an MVP of an airline which is supposedly second only to Southwest in quality of service (Alaska) and STILL waiting for over a month to get a response from customer service; and being told by Northwest Airlines that they COULD get me to Chicago to make the Internet Retailer Conference on time (on American Airlines) after my Northwest flight got canceled but that they WOULDN’T because bad weather in the Pacific Northwest is what caused my plane to be late (and ultimately canceled). Luckily, an airport agent didn’t follow the NWA policies to the letter, and he put me on a fairly empty American flight & I got to Chicago in time for the conference. I didn’t want to write in and commend his service, though, b/c I knew he broke the rules and would probably get in trouble. Sick, isn’t it?
There is only one reason for all of this – these companies REFUSE to look beyond the upcoming quarter. There really is no reason an airline can’t be profitable, even with the price of fuel being what it is (hasn’t it been this high or higher in Europe for quite some time, and Virgin Atlantic is trying to expand service!). The reason they aren’t is, like you said, they have lost the customer focus (if they ever had it to begin with), but also, they are so foolishly tactical in everything they do.
Be honest with yourself, though – do you blame them? They have millions of shareholders to whom they have to report every quarter. If they are losing money, they’ll lose shareholders, the value of their company will go down, and they’ll be bankrupt in no time. For all the talk investors do about sticking with investments for the long term, they sure are pretty impatient when it comes to looking beyond quarterly results! If an airline came up with sure-fire a plan to fix all of this, would make the company more profitable, etc., do you think they’d do it? You would think yes, but what if they know it’s going to take two years and that they’ll incur quarterly losses until then. . . do you think they’d survive beyond Q2 if they went forward with it? I don’t!
However, keeping our customer focus as our top priority NOW will keep us out of that no-win situation so that if and when we do decide to go public, we won’t HAVE to spend two years (or more) rebuilding our business with the customer in mind. We’re already there!
So wow – never get me started on the airline industry, Ryan! And just for the record, Alaska Airlines DOES have some of the best customer service out there. They just don’t have enough people working in customer service, unfortunately.
Keep the customer (not the customerS) in mind, always!!!!
October 9, 2008 at 11:31 am
The central problem with creaking old legacy carriers like United and American is that they’re run entirely buy operations guys who measure success mostly by what they can trim from costs. It’s 6 Sigma on steroids. They can’t quantify how much money is made by keeping customers loyal and happy, but they can quantify how much is made from luggage fees, or how much is saved by removing pillows and blankets.
What they don’t get (and what carriers like Southwest and Jetblue do get) is that they are in a service business. Which means providing… you know… service.
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October 9, 2008 at 12:22 pm
Southwest can afford to be more innovative like that because they hedge their jet fuel prices at a flat rate to avoid the negative implications of fluctuations in the price of fuel. Southwest has lucked on speculating on fuel costs. Everyone likes them because they have good profit margins and therefore don’t need to bother with silly cost-cutting gimmicks to increase revenue. Unfortunately, if they screw up and fail to lock in a good fuel price or fail to get one locked period because they are raping their energy suppliers, Southwest’s public image may turn into the typical image of most airline carriers.
October 9, 2008 at 3:53 pm
the reasons airlines aren’t profitable in the us is that they must pay unreasonable wages because of the unionization of their employees. You should not make 14.00 an hr. to load bags from a trailer to a conveyor belt.
October 10, 2008 at 6:37 am
realist,
Jealous much? What’s stopping you from unionizing to get a wage you deserve? You know, instead of whining about other people’s good fortune.
Besides, you’re also wrong about airlines. Profitable Southwest is the most unionized airline in the industry. They were smart enough to have bargaining agreements tailored to their own workers and operations, instead of relying on a national scheme.
October 11, 2008 at 12:50 pm
Our family recently flew AA, who tried to ding us 15 bucks for the first bag and 25 for the second. Even though the spousal unit was pretty sure we shouldn’t have been charged.
We carried everything on, and decided we’d start flying SouthWest from now on.
In short, screw AA.
There’s your unintended consequences, Mr. Arpey.
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