New Airline Fees Are Great for Customers

Last week American Airlines(AA) rolled out yet another fee (or as I prefer to call it, a new "choice") for passengers to consider paying. For an extra $19 to $39 each way, passengers can choose to sit in the first few rows of coach.

So what's the value of sitting upfront? You get off the plane faster and are among the first to board. Is it worth the premium for these privileges? Not for me, but the beauty of offering a la carte pricing is that consumers get to decide whether each option make sense for them...or not.

Given that I work in the field of pricing, whenever an airline further unbundles their service, irate friends call me with a "can you believe they are doing this" tone of voice. The trend in airlines is to offer a la carte, instead of all-inclusive, pricing. American, for instance, also charges $20 for phone reservations, $25 for the first checked baggage ($35 for the second, and $100 for each additional item) as well as offers food for purchase. Other U.S. airlines charge up to $109 each way for "extra legroom" seats. "Why don't they just include all of these services in their price," many fuming consumers are roaring.

I agree that few of us enjoy being "nickeled and dimed." However, there are two ways to view this unbundling trend. First, airlines could present prices as they currently do: $250 for a Boston to Los Angeles round trip and then additional fees for a phone reservation (+$20), checking two bags (+$120 rt), refreshments (+$20 rt), and a preferred seat (+$100 rt), for a total of $540. Alternatively, airlines could implement an "all-inclusive and discount" model. Thus, the Boston to Los Angeles round trip could be advertised as $540 with the opportunity to save up to $290.

$290 in discounts sounds a lot better than $290 in extra fees, don't they? So why don't airlines use this "all-inclusive then discount" pricing strategy? The reasoning is pretty straightforward, since air travel is fairly commoditized, advertising the lowest price is important to consumers. If you were checking Boston to Los Angeles airfares on Orbitz.com, which price would pique your interest, $250 or $540? Most of us would immediately click the $250 option to further investigate. A la carte pricing it is!

Choice is good for consumers. Instead of unnecessarily paying for every service, now we can choose only those that we value. The savings from a la carte pricing can be significant. In the above Boston to Los Angeles travel example, the "fully-loaded" price is over 100% higher than the "stripped-down" experience. No matter what, airline prices today are generally an absolute bargain. It costs me $60 for a five mile roundtrip cab ride from my house to the airport to board a plane that I paid $250 for a 5,000 mile round trip flight to the west coast. Now that's excellent value.