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Make Me Smart with Kai and Molly

Episode 118: What's in a face?

Jun 18, 2019

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Add-on charges may wind up costing companies, too

Audrey Quinn Oct 19, 2015
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Harry Paul and Alex Thompson are heading to visit family in Haiti. The couple showed up at LaGuardia Airport with three bags between them, and so here’s what they found when they got to the Spirit Airlines ticket counter:

“It’s $160 for the three bags,” Thompson said.  

She said she had no idea the cost was coming when they bought the tickets online.

“I didn’t see it anywhere,” she said. “It’s the worst.”

This kind of add-on pricing may actually be just as bad for airlines as it is for travelers. That’s according to a new study by Xianjun Geng. He’s a professor at University of Texas at Dallas’s school of management. He and co-author Jeffrey Shulman, of the University of Washington, modeled how add-on pricing works for airline companies — he calls them firms.

“The firm is losing money on the base product,” he said, meaning the discount flight, “and is earning money on the add-on.”

But here’s the problem with relying on that add-on income: The people who are most attracted to the discount base fare are people flying on their own money — vacation travelers like Paul and Thompson. They’re also the ones most sensitive to high add-on prices. So airlines can lure those travelers in with bargain tickets, but they’re going to have trouble earning much from them in add-ons.

“Because if you charge a high price,” Geng explained, “those vacation travelers will go to another airline.”

And these days, it’s really easy to compare ticket prices online. If an airline were to go back to all-inclusive pricing, its higher ticket price would probably scare customers away, Geng said. That’s a lose-lose situation.

“I think that companies like Expedia themselves will eventually get smarter about how they present those things,” said Nikki Baird, a partner with the analyst group Retail Systems Research. She said if travel sites start showing the full price of the ticket plus the add-ons, customers can chose the better all-around airline deal.

If we get to that situation on a more regular basis, then the advantage of sort of nickle-and-diming consumers at every turn will go away,” she said. 

That could help make all-inclusive pricing popular again for both travelers and airlines. And in the meantime, Harry Paul and Alex Thompson said they’ve learned their lesson about choosing low-cost airlines with add-on prices.

“It’s not really cost-effective,” said Paul.

“Yeah never again, never again!” added Thompson.

Next time, the couple said they’ll check for baggage fees before they get to the airport.

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