30th June 2018

Calculated Misery

Paul Clark

Bringing you insights into the latest happenings in the world of airline fleet planning and aircraft manufacturer strategies.

How Airlines Squeeze Our Pockets As Well As Our Knees.

Picture the scene: You take your partner to a popular restaurant for an evening meal. Naturally, you book ahead to guarantee a table. You walk through the door, and a fawning Maître D’ checks your name in the register. ‘Would you kindly follow me to your table. I will seat your partner in just a moment.’ You are bewildered and stand stock still, but the Maître D’s obsequious grin never falters. ‘But I booked a table for two!’ you protest. With a slight bow and raised eyebrows, he replies, ‘Oh, you want to sit together? Well, sir, there is an additional fee for that particular service.’

Sounds far-fetched? But this is exactly what airlines are doing to us in Economy Class. No wonder there are so many complaints about declining standards in the back of the aircraft. It’s not just the shrinking seats that irk us. We are being asked to pay upfront for all those little creature comforts and extras that we used to love and take for granted. Do you want a bottle of water? Then pay up. You want to check that bag? That’ll be extra. Extra legroom? A seat near the exit? An additional carry-on bag? You name it, and airlines will stick a price tag on it.

So-called ‘ancillary revenues’ have been around for a good while. Originally invented by the low-cost carriers, ancillaries have now spread to all airline business models. The LCCs did a good job in changing passenger expectations. What is worrying is that these policies are being applied by legacy airlines as well. Have our airlines lost the motivation to improve customer service for extremely price-sensitive customers sitting at the back of the aircraft? Can it be true that airlines no longer need to keep people happy to make money?

The theory of calculated misery

Tim Wu, a professor at Columbia Law School, thinks so. He has come up with an interesting explanation for this trend. Wu says that airlines have worked out how much misery we Economy Class passengers are willing to put up with before we are resigned to dig into our pockets and stump up the money to avoid the agony. Wu is not suggesting that airlines actually want us to suffer. Nor is he saying that calculated misery is a concerted strategy concocted by evil airline pricing analysts. But the most basic level of service appears to have been degraded to the point where people are definitely willing to pay extra to avoid the pain of basic or at least reduced service.

Ancillary revenue is no longer considered a nice-to-have additional stream of ready cash. According to IdeaWorks, ancillaries were estimated to be worth $82.2 billion in 2017. That works out at around 10.6% of global revenues. Just seven years ago, ancillary revenue amounted to just $22.6 billion.

Airline profits depend upon ancillaries

The reality is that global airline profitability depends upon ancillaries. It is a startling thought that in 2017, a year of virtually record profits, the industry would have lost money if ancillary revenues had not existed. IATA estimates ancillary revenues as $20.14 per departing passenger in 2017, less than the net profit per departing passenger of just $15.43.

It’s a drug

Delta Air Lines’ operational results for Quarter 4 2017 reveal that profitability would have been marginal without ancillaries. Yet, United Airlines and American Airlines would have been making losses without the boost of ancillaries. Two ultra-low-cost carriers, Spirit and Allegiant, are utterly dependent upon their ancillaries to make a profit. This is the airline equivalent of a Class A drug. And airlines are not about to go into rehab.

What next for ancillaries?

Carriers that historically have considered themselves ‘full service’ are facing increasing competition from the burgeoning long-haul low-cost sector, especially on lucrative North Atlantic routes. The fightback from established carriers depends upon offering a certain number of basic seat prices to stem the flow of highly price sensitive travellers to these upstarts. Cabins are being divided into new and innovative fare classes.

Virgin Atlantic, for example, used to offer Upper, Premium and Economy Class. Simple, but not likely to tempt a price-sensitive soul like me away from a long-haul low-cost competitor. Now, the choice is widened. Upper Class remains unchanged, but Premium Economy is now branded as, simply, ‘Premium’. Do not be fooled into thinking that ‘Premium’ is anything like a true business class although it does offer good value.

Economy Class is now divided into Economy Delight, Economy Light, and Economy Classic. ‘Delight’ gets you a 34-inch pitch seat, along with advanced seat selection, checked baggage and priority boarding. But don’t expect an invitation to the Virgin Clubhouse. ‘Classic’ offers broadly the same trimmings but with a 31-inch seat. ‘Light’ is really a hand baggage only product, and you pay for everything else. To be fair, this is a very good palette to choose from. And it does seem to be a style that airlines are adopting more and more. At least airlines are offering a choice, depending upon your willingness to pay, or, as Tim Wu might say, avoid some misery.

So, why am I so aggrieved?

To be fair, I do applaud the greater choice on offer from full-service carriers. But, my real problem stems from the unavoidable fact that those happy, happy days when I used to fly everywhere First Class (paid, admittedly, by my employer) are long gone. It’s the back of the bus for me. But maybe this is a good thing, as I am now more conscious of the rigours of long-haul flying on a budget.

I just hope that airlines know when to stop. I am prepared to pay for water, meals and even modern ‘essentials’ such as WiFi. But just don’t ask me to pay to look out of the window.

See also: Crammed Like Sardines: The Hidden Risk of Flying