Rafi Mohammed

Price of a Soda on US Airways: $2 if You are Nice, FREE if You aren't...

Posted on August 5th, 2008 (4 Comments)

Last week US Airways became the first major U.S. airline to start charging for non-alcoholic beverages. So instead of enjoying a bevy of non-stop complimentary Diet Cokes on my flights, I’ll now have to shell out $2 a can. This pricing policy change is expected to garner the airline $500 million in new revenues. There is one way to avoid these charges however, US Airways’ flight attendants union has stated that it will not collect money from fliers who “balk” at the charge. Just to be clear…I’m not advocating being anything but pleasant to flight attendants…they have enough stress in their lives.

It’s interesting, the number one issue that my friends want to discuss is this trend of unbundling airline prices in favor of a la carte pricing. “It’s crazy that they are going to charge me for a [insert complaint: good seat, soda, luggage and today there’ll be plenty of grumbling over JetBlue’s decision to charge for pillows and blankets]… just charge us more so we don’t have to pay these fees” they vent. Then, without missing a beat, they fret about how expensive it is to fly these days. C’mon guys…fuel prices have surged 71% this year (fuel now accounts for roughly 42.5% of operating costs, up from its usual 10% - 15%), Delta and American announced a combined $2.5 billion loss in Q2/08 and in just one week in April, three airlines shut their doors (Aloha, ATA, and Skybus).

Airlines have to make a profit too. The challenge is that especially in our current economic environment, we as airline customers are price conscious. For example, in response to consumers complaints about tight seating, in 2001 American offered extra legroom for all coach seats (by taking out seats) and charged a small premium. Four years later, they added back the 12,000 seats they had taken out as they discovered consumers weren’t willing to pay for more breathing room. The reality is most of us focus on a key price and pay scant attention to ancillary charges…this is why loss leaders are such a popular marketing strategy.

So if the lowest “key” price nabs the flier…it makes sense to offer the best price tethered to plenty of asterisks and small print. Additionally, travel booking sites like Orbitz present the lowest priced airline in the premium first slot – a valuable marketing advantage. Thus it’s understandable that if one airline unbundles its fares, other airlines have to follow suit or risk placing themselves at a competitive disadvantage.

This move to a la carte pricing is the last step to completing the deregulation of airlines. Up to 1978, airline prices were regulated. In other words, all airlines offered the same prices on every route. With identical fares, airlines competed by bundling in a wealth of amenities like unlimited champagne and fancy chateaubriand meals. A key result of deregulation is unbundled services.

With JetBlue’s new pillow and blanket charges…what’s left to charge for? My bet is a new asterisk is going to pop up for flashy discounts indicating: “this fare is for middle seats only.”

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Readers' Comments on This Blog Entry

From Bill on August 5th, 2008
I think that seating will be the next item. In the last year or so, British Air stopped assigning seats when the ticket is booked. You have to go on line 24 hours before departure to get your seat. How much more is it worth to get a seat assignment at the time of booking? For an 8 - 10 hour international flight, I'll be willing to fork over a fair amount of money to avoid sitting in a center seat. For a domestic seat, with the cuts in capacity announced last leek - airlines are cutting something like 160,000 seats a week to LAX, it may become important to have a seat assignment to avoid being bumped. It'll be good, better, best pricing for coach - ticket, ticket with amenities (bags, food, etc), ticket with amenities and guaranteed seating. And just like frequent flier seats, there will be limited availability on the low end price, yet on line they will show a competitive price
From Ross McDonald on August 5th, 2008
And on EasyJet and Ryan Air (both some of the first no-frills UK airlines) you now have to pay 10GBP per item of luggage you check. For a couple, this adds on 40GBP (about 75USD) to a "cheap flight" - not a small difference.
From Ivana Taylor on August 10th, 2008
Do you know if any of these airlines did any trade-off research (like conjoint) to find the ideal combination of price to "convenience?"
From David Damore on August 11th, 2008
The reduction of freebies is probably a good thing. As long as the prices of all the new services do not change 500 times a week. If one knows a Coke [or Pepsi] is $2, it should stay close to that price. It would be shady if it was sometimes $1 and other times $5. Some price variance is allowable. Different retail channels have higher and lower prices for the exact same thing. Convenience stores probably have the highest prices for 20oz soft drinks. They sell value based on speed and convenience. The consumer can make wise choices based on accurate input information. Some people have never taken any of the freebies, but they were paying for them the whole time. Prices are paid as a result of the value the consumer perceives they receive from the product or service. The airlines will probably obscure what their prices are for these extra services. Someone will create a business that unmasks that and delivers value to consumers.