Rafi Mohammed

The Wacky World of Airline Pricing

Posted on April 14th, 2010 (1 Comments)

“Oops, we probably should not have said that in public.” Last week the New York Times broke the story that United and US Airways are in merger discussions. A merger would make this entity the second largest airline in the United States.

A major roadblock to this merger is price…of course. A key criterion for the U.S. government to approve a merger is for the engaged entities to demonstrate why consumers will benefit from the merger. According to the Wall Street Journal, CEOs of both airlines have “loudly championed” the need for airlines to consolidate and cut capacity…which will lead to increased fares. Government agencies don’t take kindly to higher prices – not exactly a consumer friendly outcome.

Excess capacity is indeed resulting to ridiculously low airfares. With airlines offering 9 non-stop flights a day from Boston to Los Angeles, last minute fares have dropped to $119 one way. In an ongoing game of “chicken,” no airline wants to cede turf by pulling out of potentially lucrative routes. Airlines continue flying in the red hoping that rivals will throw in the towel…best of luck with that strategy.

“Stop the madness.” I am a big advocate of charging people for the services that they use. My old advisor and long time supporter, Alfred Kahn, used to tell a story about usage of free telephone directory assistance. Back in the day, directory assistance was handled by live operators (thus there was a true service cost). Since users were not charged for calling directory assistance, there was no incentive to look up a phone number in the White Pages. Professor Kahn implemented a new pricing structure that rewarded customers who made no more than 3 directory assistance calls per month and surcharged those who heavily used directory assistance. Makes sense, doesn’t it? As a result, 84% of New York’s 5.5 million customers curtailed their directory usage to 3 calls or less per month.

In a similar attempt to influence costly consumer behavior, European discount airline Ryanair is set to start using coin operated bathrooms on its flights. It will now cost one British pound (about a $1.50) to visit the restroom. A Ryanair spokesperson reportedly told London’s Daily Mail, "By charging for the toilets we are hoping to change passenger behavior so that they use the bathroom before or after the flight."  

Coming up next…charging passengers by their weight. 

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From Steve on April 15th, 2010
Nowadays with the airlines merger=higher cost to consumers. Checked bag fees, carry on bag fees (a fairer alternative from the standpoint on on time efficiency) - you can make a good cases for these. Same with large passengers paying for a second seat (ever been next to one of them?). Use of the bathrooms is not an option when your on an airplane. There are all sorts of people with maladies that affect urination. What about older passengers? Wait until somebody injures themselves trying to last it out for a flight. Absolutely the most boneheaded idea I've heard yet.