The airlines business is a complex one. The pity is that most airlines
reflect the complexity in their business onto their dealing with passengers.
Passengers like me hate it.
I am planning a trip to the East Coast (I live in the San Francisco Bay
Area). The trip is a 3 city trip over 4 days. I generally prefer to do my
own travel planning. When I was at Infosys, I would talk to our company travel
agent. Now, in a startup, I find it easier and cheaper to do my own
travel bookings on the internet.
So far, all my trips to New York have been on JetBlue. They have convenient flights and low prices. This time I
need to go to Boston and Chicago as well and so JetBlue won’t work. So
I go to Expedia.com and check out the flights. My conclusion after 45 minutes
of research and copious note-taking – if I want to minimize my travel cost, I
will have to travel on 3 different airlines and fly in and out of different New York airports.
For most airlines, pricing is a game of revenue maximization. Here are some
tricks of the trade:
1. If you book your travel early you get a cheaper fare. Everyone uses this
one, including Southwest Airlines.
2. Refundable tickets cost more than non-refundable. Again, very widely used.
3. Take a hub, dominate traffic in and out of it and charge the earth for it. New York to Boston round
trip from two different New York airports can be $200 or $600 based upon the competition on that sector.
4. Round-trip fare is heavily discounted versus point to point.
5. Saturday night stay-over reduces the fare quite a bit.
There are countless other tricks that are all designed to maximize revenue.
Optimization engines and pricing rules in the innards of airline pricing
systems are some of the most complex you’ll find in the business world.
As a passenger I hate this whole system. I hate it that it takes me 45
minutes to do my tickets. I hate it that even after that, I don’t know if I
made the right choices. I hate it that I can’t travel back on a different
airline that has more convenient flights without paying a hefty premium for it.
And I cannot develop a trusting relationship with an airline who charges my
$600 when an equally good (or equally bad, depends on your perspective) airline
is charging a $200 fare for the same itinerary.
So here’s my question to these airlines. Do their fancy price optimization
algorithms put any value on what I can only call torturing the customer? I’ll
bet they don’t because they have no way to measure it or put a value to it. The
reason simplicity in business is so rare is that there are no good ways to
measure the cost of complexity. And so your finance types in the company can’t
put it into their cost-benefit analysis spreadsheets.
Complexity costs. Customers like simple products – simple to use, simple to
understand. They like simple pricing models where the price is linked to the
value they receive. This is not just true about simple-minded consumers. Business
buyers like simplicity as well.
Southwest Airlines is a company that I truly admire. The genius of Southwest
Airlines is in how they have become the most important airlines in the US by
simplifying it for their passengers and for themselves. In the morass of
complexity that is the American airlines industry, Southwest Airlines is a
shining beacon of hope. Not only is their pricing dead simple, everything about
the airlines is that way. They fly only Boeing 737s. This simplifies, crew
scheduling, training, aircraft maintenance and spares. They have only one class
– coach class. There is no seat assignment. It’s first come first serve. And
their frequent flier program is a tribute to simplicity – 8 round trips and you
get a free roundtrip to anywhere they fly. You would need a full book to fully
document the frequent flier program of United Airlines.
No wonder Southwest Airlines has delighted customers and a growing business.
Its market cap at $12.64B is way above much larger airlines like American
Airlines and United. They understand the virtue of simplicity. They understand
that it not only makes for happier customers, it also makes operations run
cheaper and faster.
Now if they’d only fly to the airports I need them to fly to.
6 am pacific 
I fully agree with you about the secrets and the simplicity of pricing part.
Only that pricing an airline seat is complicated given its economics, and my guess is that most are national airlines and vastly underestimate the true value of a customer.
LikeLike
I worked for a startup company dealing with GDS data. Airlines like AA , United & Delta have made the systems so complicated that it would take ages for they to make the whole reservation process simple like what southwest has. Hope they learn from the success & growth of Southwest and change or else one day they have to park their planes in the desert of Arizona / Nevada.
LikeLike
Hi,
I fully agree with your comments. It seems like Airlines like American,US Air ways, United are passing their high operational cost due inefficient operation and legacy systems(people) to end customers. Competetiveness is almost NIL in certain routes and airports as there is no option for you.
We deperately need a law to identify tier-1,tier2 routes and make ateleast 2-3 airlines available. This way the old monster will move and care about customer satisfaction and value for the money.
My esp. with Southwest and Airtran seems to be very positive and they are flourishing because morre and more customers are frustrated with “traditonal” airlines.
regards,
venkat
LikeLike
simplicity is a very contradictory and complicated virtue in today’s world. Something that cannot start or stop at ones own will – and convenience. Its all or nothing.
LikeLike
I fully agree with you about simplicity, In life also all those who have adopted simple life style generally have experienced least problems under any circumstaces.
LikeLike
Hello,
A very good example to show how simplicity works for a customer. I really do get frustrated when i go into a coffe shop and they have a myraid of choices listed down for you and expect you to know what they mean.
For eg. You say coffe, should it be large, regular, small
b) With milk with out milk
c) if with milk, should be skimmed milk, semi skimmed milk or whole milk
d) cream or no cream
e) choclate or no chocolate
etc. etc….
All you wanted to have a hot cup of coffee…isn’t it?
LikeLike
@6am: While Southwest has simplicity in pricing, they treat you like cattle while boarding – with no assigned seats and the need to go to the airport with 4 hrs to spare! That’s not good at all.
@Balaji: Yes, simplicity is a virtue. And I agree they have choices that get out of hand sometimes… but how else would you define how much milk, sugar, cream or chocolate you want? YOur idea of sweet may be different from mine. And if you dont want to choose, you can always tell them to make it like they always do – or ask them to surprise you. Either of those work.
LikeLike
Excellent article (and love reading your other articles detailing India’s amazing transformation).
Pricing optimization can add huge amounts of profit – even for airlines. But naive optimizations wind up frustrating customers and killing the brand.
It’s entirely possible Southwest also optimizes, but does it more carefully.
LikeLike
Well I am in the business of making things simple and so advocating it makes sense to me.
However, I often find people who seek simplicity in one aspect of life don’t remember the same when they go about creating something in their own area of expertise.
Is this just simple oversight, or a more deeper failure to control one’s urge to apply expertise? – I wonder.
LikeLike
Excellent and thought-provoking piece. I’m weighing in rather late, but I can’t resist sharing my thoughts on this really interesting topic!
It’s a very good insight that simplicity is rare in business because the cost of complexity is difficult to measure.
Some more reasons why simplicity is a virtue found rarely in business:
– Complexity tends to be associated with intellectual sophistication. People want to feel they are doing a job that needs highly specialized and esoteric knowledge.
– Complexity often feels safer (if what we’re doing is simple, can’t it be easily commoditized / copied ..?)
– Complexity also usually makes things foggier to customers /suppliers etc., and this information asymmetry can be used to set pricing or other features of the product to the company’s advantage.
The complexity is often a result of internal disagreements regarding how the product is to be designed, made or sold. For example, sometimes the only way to call a truce between warring departments is to find a solution that “nobody will object to”. It’s hard to keep everybody happy, and still be simple and direct. (this is why diplomats speak some of the most complex language on the planet).
It is also true that customers value simplicity. However, the simple but inescapable reality seems to be that – sloganeering about the customer being King notwithstanding – for most businesses, the customer just occupies a very low position on the mental map.
Thus, even if those finance boffins could factor the cost of complexity into their spreadsheets, I’m not entirely sure they would – my guess is that they would factor in the portion of the cost that is borne by the business, but not the portion of the cost of complexity that is borne by external entities (including the customer)!
A recent experience that shows how companies are unwilling to bear even a tiny cost to make things easier for the customer: Last month my wife and I had a reservation to fly from Frankfurt to Bangalore. To our surprise, when we reached Frankfurt airport to check in, we discovered that the airline had invalidated my wife’s reservation! The reason, we discovered, was that we didn’t take a flight from Rome to Frankfurt 8 days earlier (we had decided to take a train instead and see the countryside). It appeared to defy logic that an airline should assume that you won’t board a flight you have reserved from city B to city C, just because you didn’t board the flight from city A to city B 8 days ago! I wrote to them indignantly and they have come back with a rather complicated and long-winded explanation and I have to admit that the explanation appears to make some sense (or at least the parts I could grasp in a rapid reading appeared to make some sense!). In any case, I am not questioning the correctness of the policy: my reason for mentioning this here is that, if a company must have a policy that is so difficult for customers to understand, the least they can do is put in some extra effort to minimize the impact on the customer! In this case, the airline had my contact nos, email and also those of the travel agent who had done the booking. Would it have been difficult just to inform me before taking such a step?!
Of course, the reason why companies place so little weightage on cost to the customer is not anything nefarious. The simple reason is that most companies are just poor at seeing things from the customer’s point of view. An example: I recently received a long letter from a senior executive of the bank whose customer I am. The letter spoke glowingly of the bank’s dedication to customer service,and extolled their high quality products etc. I was quite impressed, until I saw the designation of the executive who had written it: Head – Retail Liabilities. It was only then that I realized that holding a savings account with that bank makes me a “liability” to them! Now, I am sure if they paused to think about it for a minute they can come up with a perfectly good title such as Head – Retail Banking or whatever. It’s just that it has probably never occurred to them that customers may not relish being thought of as “liabilities”!
LikeLike