The customer is not always right. $481M says so.

Everyone hates baggage fees. It’s a crime airlines don’t listen and let you stow aboard luggage for free, as much as you want, right?

Well …

In case you missed it, the airline industry is a tough business. One of the few bright spots helping them stay afloat in the 2009 recession was baggage fees, which drove $2.7 billion in extra passenger revenue to U.S. airlines. Delta came out on top with $481.8 million from such fees — a vital solution, since at year’s end Delta still bottomed with a net loss of $1.2 billion. Without the added charges, Delta’s loss would have been 39% higher.

Sure, customers say they hate fees … but imagine the alternative. If Delta didn’t hide charges until you got to the airport, it would have to raise its ticket prices 2% across the board — about $10 on a $500 flight. And you, dear savvy consumer, planning your trip at Expedia or Travelocity or, would likely click on the nearest Delta competitor flight to Austin to save $10 in your rapid-fire, e-commerce fueled impulse decision. Because when you’re shopping, you want the best deal, brand loyalty be damned.

Run the math, and the 1-2% of customers who really take enough offense at baggage fee surcharges that they would not come back are offset by the 10-20% of air flights that Delta would lose if it had to make all its passenger fees completely visible on aggregator travel sites, a click away from lower-priced competition. Disguising fees to make front-end purchase decisions easier is nothing new: your cell phone, cable company, magazine subscriptions, and even children give you low starter costs that hide whopping fee increases later.

The customer has strong opinions, and businesses should listen. But believe us when we say again, the customer is not always right.

4 thoughts on “The customer is not always right. $481M says so.

  1. In all of the sneakiness of these hidden fees, there is opportunity for one of these ecommerce sites to publish the ticket price and all of the extras charged by each carrier. Wouldn’t consumers flock to the site that really gives them the bottom line?

  2. Excellent post Ben – a lot of people (myself included) did not give much thought initially to the whole Kayak issue as the reason for the added baggage fee.

    One thing I’d add on though: I suspect a goodly percentage of these airlines fares come from business travelers who do not check bags – it’s a day trip, or an overnight trip– and so the extra fee is not an issue. It’s the leisure traveler, the family with 4 suitcases, for whom that number is an issue

    I still wonder if the airlines couldn’t have gotten a PR boost with a $20 credit for passengers who don’t check bags and positioned it as some sort of green initiative. Not sure if that would have offset the lost revenue though.

  3. Alan, your second graph above is spot on — which is why I think the strategy works. Business travelers who are loyal don’t pay the fee; they aren’t “hurt” by it since they’re carrying overnight bags; so no loss among the most valuable customers. Meanwhile the infrequent fliers 1x a year get whammed, but they’re likely disloyal anyway, shopping around on Kayak for their next trip 12 months from now.

    So in essence it’s a tax on the worst, most disloyal customers, with little repercussion and a big revenue upside. It may not feel intuitive but *not* listening to your worst customers may be good for business 😉

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