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ancillary charges

Apr 17, 2017

What would you pay for a restoration of airline quality?

Is 'sweating the asset' and screwing the customer really the way to lift airline profits?

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An extra $5 per seat per sector mightn’t have saved Ansett, but it’s an interesting concept

How much more will regular flyers pay for ‘enhancements’ per sector?

It’s a formidably difficult question to ask, but one that Virgin Australia for example, is clearly working on.

As this Fairfax report also reminds us, no one is in any doubt that the key figure in the story, John Thomas, will replace, most likely in an amicable transition, the current Virgin Australia group CEO, John Borghetti.

But there are inherent contradictions in the pursuit of lifting yields through ‘enhancements’ that risk making full service high quality carriers like Virgin Australia more like low cost carriers, like its Tigerair subsidiary, or the larger Qantas version of same, Jetstar.

It’s always difficult to make people pay for something they previously took for granted, even if they seldom used checked luggage for most of their flights, or rarely ate the airline food, a choice  recently reported to have been championed with his trade mark elegance, by celebrity chef Gordon “F*cking” Ramsey.

John Thomas will have to make those who never paid extra for anything willingly part with money they mightn’t be able to claim on their travel expenses without actually suffering the unintended consequence of making too many of them switch to Qantas, or Jetstar, or even Tigerair.

However, on his past record assisting American carriers rake in billions for checked baggage fees, Mr Thomas may well prevail.

Virgin Australia’s recent launching of Economy X, which offers lots of additional legroom for remarkably small amounts of money, is a case in point. It creates a much more favourable view of the Virgin brand than before, and at a time when most airline news stories are about the United attack on a paying passenger.

Back in the ‘90s, then Ansett chief Sir Peter Abeles, told this reporter (for The Bulletin) that as little as $5 extra revenue from each passenger boarded per sector, would turn the persistently unprofitable yet gold plated flying experience that it offered into a gold mine for its owners (News and TNT).

That $5 probably equates to $20 per head today, and with full respect to Qantas and Virgin Australia, neither offer anything remotely like the amenity of Ansett’s economy class, never mind in premium cabins.

Nor was Abeles right. It would have required a radical cost and efficiency restructuring at Ansett to deliver on the benefits of such a revenue boost. But the question still begs attention. Is a small premium for a superior product a better way to lift a full service airline brand?

Ancillary revenues also come with organizational and collection costs. Hands up all those who discovered the pre-ordered meal they paid for on a low cost carrier never eventuated, and the telephone number for seeking a refund either didn’t exist or was never answered? Or was in Singapore, or maybe Manila?

Perhaps the real solution to the desires of regular flyers for more amenity, and for airline owners for a profitable investment, is the one Abeles never managed to implement. Just charge a little bit more per seat per sector, and sell it as a branded virtue.

An extra $30 per head between Australian capital cities is less than $10 more than the cost of the Sydney Airport Domestic rail station gate pass on a return day trip, or a triviality compared to what you pay for a taxi or Uber, or terminal parking charge.

If the included meal fits on a full tray, like it used to, instead of in your palm as some sort of mystery pastry with yucky sugar crystals, the customer feels much better.

If the seat pitch is as little as three or four centimetres roomier (like it used to be) the customer is less likely to relegate flying to a chore instead of a pleasant experience, and if the ratio of seats to toilets is restored to a much friendlier level, views about the desirability of flying might also improve considerably.

At the moment, and particularly overseas, the managerial approach to lifting airline yields is getting the Tim Tam or other grocery product treatment of trying to hold the price the same but cutting the number of biscuits or quantity of the goods offered in the familiar package by around 10-15 percent and hoping no-one notices.

Imagine for a moment, a campaign by airline V or Q proclaiming “We cost $XX more, and we’re worth every cent”.

It might well work. Making full service products similar in discomfort and lack of quality as low cost brands might well not work as intended at all.

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14 comments

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14 thoughts on “What would you pay for a restoration of airline quality?

  1. comet

    All those extra charges and ‘gotchas’ are the main reason I avoid low cost carriers.

    It makes it very difficult to know what the final cost of the journey will be.

    It’s very sad that Virgin’s second in charge wants to be a real John Thomas by introducing this sort of thing to Virgin Australia.

  2. Socrates

    Economically when industries start getting into these competitive rounds of cost and service cutting, it is often a death spiral.

    As I said on another post, I do a lot of work travel but I find air travel is an unpleasant chore these days. There is surely a market in the huge gap between business and economy class for a more comfortable flight, as Virgin X demonstrates. This is even more the case for long haul. Try flying seven hours with your arms crossed.

    For domestic flights I think there is also a market for buying one off entry to airline lounges. Loyalty programs are all very well but I find myself switching between Virgin and Qantas on my employer’s policy so I may not have sufficient status points clocked up with both at any one time.

    If you want to know how much people will pay for a more pleasant experience, look at what high speed rail has done to short flights in Europe. They are not cheaper, but have killed airlines on any journey of one hour flying time or less.

    I think airlines may be acting irrationally on this point (telling themselves they will get top dollar for every sest) so perhaps there is a need for legal action. There is ample statistical evidence that humans are getting bigger, with design standards in many other fields modified accordingly. This is happening in all OECD countries, even Japan. Airlines surely have an OH&S obligation to passengers too. Will it take a court case to force airline to fit seats that accomodate an average male passenger without discomfort and potentially DVT?

  3. Deano DD

    If any Australian airline wants to know how to move forward, they first must understand why a person will book a flight on a particular airline
    Q, V, J and T all assume most will book through their website, while this is true, it is not the full story
    Most people nowadays will go first to a Webjet type site
    There they can see all airlines, times, prices and baggage allowances
    The first thing that people look at is flight departure and arrival times, then price, followed by which airline
    If it gets to the point of similar time and price, people will remember the last experience they had on a particular airline and make their final decision

    So if an airline wants to lift their game for a little bit more $$, its not a quick fix, rather a 3-5 year project
    For example
    Tiger has been doing a lot to to lift their game, particularly with an improvement of on time departures and far less cancellations
    But, anyone who flew Tiger prior to VA taking over in late 2014 may have a less than fond memory of their experience

    Some things need happen for that person to fly Tiger again:
    A ridiculously low fare on they day they want to travel
    No other flights on that day or time

    Then and only then, will that person almost be forced to give Tiger another try
    At this point, that person may in fact consider Tiger an option when next booking if they have a good experience

    This whole process may take several years
    Flying last on Tiger in 2013
    Flying twice a year on VA, Jetstar and Qantas
    It may end up 2-3 years before he is forced to take another Tiger flight

    A much easier solution would to offer a 3 class configured frame on all sectors
    On a 737 / A320
    8-12 Business
    50-60 Economy Plus 33″ pitch (1 checked bag + 1/2 price meals)
    80-100 Budget 29″-30″ pitch (pay checked bag + full price meals)

    Economy Plus charged at 20% above Budget, or pay, say, $30.00 at the gate for an upgrade
    On this format you could then roll Jetstar into Qantas and Tiger into Virgin as there would be no real need to offer a LCC alternative
    Massive cost savings for the airlines by eliminating duplicated costs
    Management
    Advertising
    Ground crew
    Maintenance
    And better flight scheduling to boot

    1. Dan Dair

      Deano DD,
      Isn’t that more or less what ANZ offer.?
      (not that I’m criticising specifically. I do think it’s a good idea)
      IMO it’s a great pity that both major airlines didn’t go down this road years ago.

      However, the marketing & advertising has to be right.
      It need to create the profitable base price-point,
      AS WELL AS generating the desire from the passengers to want the enhanced product enough to be willing to pay the extra for it.?

      I agree with your analysis of the upsides,
      though I think that the advertising/marketing budget would probably need to stay the same as the current ‘dual’-spend, to ensure that their new message gets across.?

    2. Socrates

      Deano DD
      You could sign me up for those Economy plus 33″ pitch seats any time and I average more than 20 sectors a year. I am familiar with the economic arguments but I think they are nonsense. The managers of our airlines are not very clever if the only idea of market research they do is on minimum price points. That is not all customers want. It is all they understand. Alan Joyce typifies the problem IMO. His only idea of good management is cost control.

  4. 2353

    I reckon it would work (maybe a scheme like forego the frequent flyer points or pay $10 extra). Which brings up another point, I was sitting on one of Brisbane Transport’s gas powered MAN buses this morning wondering why it seems I get more room for my knees on a commuter bus than I do on a Virgin or Qantas 737. It’s a interesting question.

    1. comet

      Because you are paying a premium (per kilometre) to travel on the city commuter bus.

      You’re paying​ less (per km) to travel on an airline.

      1. Dan Dair

        Comet,
        Whilst you are very probably quite correct about the seat cost per km,

        I think it’s much more likely that the size of the seat in a bus is specifically based upon how many seats can ‘comfortably’ be fitted into the bus.?

        Bearing in mind the much more wide-ranging nature of passengers & passenger groups on buses & a keenness by the bus-operators to encourage passengers to get on & off quickly so that schedules can be maintained, the operators want a reasonably ‘generous’ amount of leg-space.?

        Also, there’s no toilets or galley to shrink-down to enable an extra row of smaller seats to be squeezed in & there are maximum overall vehicle dimensions set down in law for all cities, so they probably can’t make a bus longer as it’s likely to be already at the maximum size permissible.?

        1. comet

          A city commuter bus costs more per kilometre than a first class air ticket to Europe.

          Now, a bus seat could be any size. But looking at cost per kilometre, it’s a wonder the bus seat isn’t bigger than it is.

  5. Rais

    They’re not going to increase the number of toilets Ben. But for you, as a favour, I’m going to tell you the idea I’m hoping to sell to the airlines. Toilet passes. Silver passes, free with your boarding pass, wait in line. Gold passes, for an extra $20, go to the front of the queue.

    1. Dan Dair

      Crocodile Chuck,
      The Matt Stoller piece seemed a bit of a Democrat ‘rallying-call’?

      I am actually a firm believer in a directed free-market (free-market socialism), so in principal at least, I am with Matt on that.
      However, I’m not sure that everything he said rang true.?
      How would Southwest be forced to ‘cave-in’ from fund manager pressure.?
      IF the business-model is sound & there’s money to be made, why would a fund-manager not want that to succeed.? In fact, it’s an anti-trust action for a fund manager to actively seek to avoid something advantageous to their trust.?

      Perhaps I misunderstood.?

  6. derrida derider

    For those with a taste for informal economic analysis, there’s a good little dissection at http://www.interfluidity.com/v2/6846.html of why the economics of commercial flight (high fixed cost per flight, very low marginal cost and information asymmetries about these costs) mean that most customers never have available to them the price/comfort tradeoff they actually want. They end up with the choice of either paying far more than the true cost of comfort (ie business class) or having much less comfort than they would actually be willing to pay for if it was priced at cost.
    The post also outlines an argument why deregulation has actually hurt consumers in the US market, though I’m less convinced by this.

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