Nickel and diming is comingBy IAG | March 28th, 2007 | Posted in air fares, southwest | No Comments
CEO Gary Kelly says the airline needs to generate more revenue without "nickel-and-diming customers" or raising fares again. But of course the speech he gave mentioned that the airline’s costs are up 25% in the past five years mainly because of higher fuel costs that need to be offset. Southwest is not going to raise fares 25%, but it will embark on a process to get a greater share of your wallet. The example US airlines are about to follow is Ryanair.
This means that Southwest’s customers can expect some new fees to offset these cost increases. Following the highly successful Ryanair, which has fees for many things that are free elsewhere, Southwest is about to embark on the same route. For example, a pre-assigned exit row seat for an extra $10. Consider this an upgrade.
Southwest is not the first US airline to go down this road. Spirit already did, by charging for checked bags. This is also something Ryanair has been doing. Once Southwest starts down this road, the other airlines will follow. Why? Because Southwest determines fares in every market it flies. It is flying in many markets now and has the ability to decide how the industry charges. It is that big an airline today.
The impact could be significant. While it is true that fuel costs are up again, with the US Navy and the Iranian forces playing a game of chicken, airlines are also being impacted by other costs. Particularly labor costs. For years airlines have hammered out labor costs, but there is no cost savings from labor anymore. The truth is, airlines need to be more creative on the revenue side. Following the Ryanair model is therefore a good thing. The days of cheap fares may be over in America.
American travelers may as well get comfortable with the menu of new pricing options. Given that so much of Southwest’s seats are sold online, it is relatively easy to add a button to click on their site to get the “upgraded” seat. It will be less easy for less web-dependant airlines, but it can be done. Similarly, adding a fee for a checked bag is not hard work.
If one assumes the typical fare costs $200, adding a bag charge of $10 increases revenue by 5% with no ticket price impact. This means that airfare displays can appear cheaper than the real cost. Add on a charge for food and drinks and one can quickly see the impact of "nickel-and-diming customers". Simply put, it works. It is quite possible that Southwest could create a 5% system wide revenue increase by adding fees for small things. Once this genie is out of the bottle, it will never go back.