In recent years, airlines have become adept at charging customers for ‘extra services’. These extra services include:
- Seats with more leg room.
- Choosing a seat earlier
- Paying a penalty to check in at airport (budget airlines)
- Priority boarding
- Checked in luggage (budget airlines)
- debit /credit card surcharges (Ryanair)
Economic concepts involved
- Price discrimination/price targeting – charging different prices for relatively similar goods
- Allocative efficiency – charging a price equal to marginal cost of providing the good.
The logic for these extra charges is that they enable a more ‘efficient’ allocation of resources.
- Customers who are willing to pay for premium services gain the services they desire.
- Airlines raise extra revenue, which in theory enables lower average ticket prices.
- Customers who are very price sensitive gain cheaper tickets and can reject all the extra charges.
For example, if you don’t particularly want an airline meal, it is inefficient for the meal to be included in the price and then have a wasted meal. It would be allocatively inefficient if the value you gain from meal is less than marginal cost of providing you with the meal
If airlines charge for meals, consumers will only pay if you really value it. Those who want a meal can pay for one, those who prefer cheaper tickets can bring food from home.
Charging to book tickets in advance or pay for premium seats means airlines are implementing a widely held practice. If you go to a concert of a sporting event, you can expect to pay to gain a better view. Not all tickets are the same.
Charging for extra services allows customers who value these services the most to get them. For example, a tall person has an incentive to purchase extra legroom, to make the flight more tolerable. Someone of average height doesn’t feel the need to pay extra.
Extra charges raise revenue
There is no doubt that reservation charges and ancillary extras have been successful in raising revenue for airlines. For example, reservation changes netted U.S. airlines $2.38 billion in 2011, according to the Bureau of Transportation Statistics. (Eoghan Macguire, “Airline Charges.” CNN 18th February 2013)
Without extra charges, airlines would have to increase the basic price of tickets. Which is preferable, being able to choose which extras to pay for, or paying a higher average ticket price?
In recent years, many airlines have struggled to make a profit. These extra charges could be the difference between staying in business and going under. It is not in the consumer’s interest for firms to go out of business as there will be fewer flights and – with less competition – higher prices.
Charges which are over the top
In the UK, some airlines charged a very high price to purchase a ticket with debit card/credit card. These charges of up to £5 or £6 were much higher than the actual cost to the firm of processing the credit card. It was a method to reduce the headline price – encouraging people to buy, by the time they got to the purchase, they reluctantly had to pay this charge. The only alternative to avoid paying was often having credit card a pre-approved and pre-paid airline card – something few customers had. However, after an investigation by OFT in 2012, airlines agreed to end the practise and this £6 charge is now included in the headline price.
Ryanair once toyed with the idea of paying to use the toilet, though the idea was dropped as being a step too far. See: “Ryanair drop plans to charge €1 for using toilet.” (CNN)
Charging to have a spare seat next to you
Etihad has recently announced a new type of airline charge – allowing you the right to bid to have an empty seat next to you (see: article at Economist). Those customers who really value having an empty seat can pay for the privilege. Again it could be seen as a market mechanism for increasing efficiency. Airlines gain revenue and customers who value empty seats the most – get the chance to fulfil their desire. If you don’t mind sitting next to people, in theory, it may enable lower average ticket prices.
However, as the Economist notes, it has the potential for creating customer dissatisfaction. Suppose you pay for an empty seat, and you get on plane and you see there are many empty rows. Also, it can cause problems. If you spy empty seats, you can often ask to sit in them for free. But, now air-stewards would have to say no. This person has paid to have empty seats. Some people may feel social embarrassment at being the person who paid for empty seats next to them.
Limits to airline charges
Consumers can become wary of too many charges. It can feel like we are being treated like a commodity. Also, it is worth examining an insight from behavioural economics that consumers use a system of mental accounting.
Suppose one ticket price is
- £300 (no extras) and another is
- £150 + £30 priority boarding + £30 book seat in advance + £10 meal + £5 wifi + £50 put luggage in hold + £25 to sit in quiet zone. (total £300)
Which do you prefer to pay? The second ticket can feel like a bigger mental burden because we feel we are paying numerous charges. This is different to paying once and then forgetting about the cost. We are more annoyed at paying an add-on charge of £5, then a ticket price which is £5 higher in the beginning.
Moral limits of markets
Another element is the potential costs of prioritising economic efficiency as ultimate goal.
There used to be a certain egalitarian principle to the queue. Now, if you have more money you can pay to jump the queue and be guaranteed a better seat. It means when are waiting in airline departure gate, we are reviving an old class system between those who have more money. In Moral Limits of Markets – Michael Sandel raises concerns about implementing the remorseless logic of economics into every aspect of life. He argues economic logic has the potential for having detrimental effects on less tangible concepts such as social cohesion and the feeling of all being in it together.
In recent years, I have started to pay airlines for:
- Extra legroom (I’m 190cm)
- and priority boarding.
I’ve spent a lot – extra legroom on flight to New York is around $80-$100 return. I justify this to myself on the grounds that on airline flights I write economics. As I value time, this additional cost can be justified through higher productivity (also because I pay for extra legroom I feel I should try to make use of it rather than waste time). In this sense, the extra airline charges have enabled an increase in efficiency. My welfare is higher due to being able to pay for different seats.
However, it was interesting going on holiday with several friends. We were waiting in departure gate, and then as aircraft boarded, I left my friends and went through the priority line, while they waited with the ‘second class’ passengers. We made a big joke of it; I claimed it was market research for writing an article on the ethics of jumping queue. But, it made me aware of the two-speed service and impact of this price discrimination on non-economic factors.