Air fare

Airline pricing: Why it's all wrong

March 8, 2012: 11:01 AM ET

A coach flier might pay more for extra services, if only they weren't offered in such an aggravating way.


FORTUNE -- It's hard to think of a more amazing product with poorer presentation than air travel. Despite the fact that airlines provide an incredible service (they let us fly, in the air), we love to hate on them, in part because they confuse customers. Most unpleasant of all is how airlines obfuscate what, exactly, their customers are purchasing.

The cost of fuel will be high for the foreseeable future, and jet fuel is the airlines' greatest expense. To boost profit margins, companies will need to squeeze more money from passengers. Recently, carriers have tried to do this by offering economy passengers the lowest possible prices on flights and charging fees for other services. That strategy has ticked off fliers unused to paying for services such as meals or exit row seats.

But it doesn't have to be this way, says Paul D'Alessandro, a global practice leader at PwC. On the contrary, if executed correctly -- and that's a big if -- the strategy that many airlines are already pursuing could make flying more pleasant.

The key is in the coach cabin. Traditionally, the largest companies, also known as legacy carriers, have sought profit by going hard after their most frequent fliers, mostly with rewards programs, to hoard their purchasing power. To attract all other passengers, airlines have played the price game, often de-bundling services that were previously included in the ticket price, pushing the advertised fares down.

But there's evidence that offering services in an intelligent way to cost-conscious customers might be a better strategy than focusing almost exclusively on elite fliers.

MOREAmerican Airlines is better off flying solo

Coach fliers are valuable. Airlines who bill themselves as low-cost carriers tend to do better when the demand for tickets decreases, says Adam Shapiro, an economist with the U.S. Bureau of Economic Analysis. (His opinions are his own, not the Bureau's.)

During a bust, Shapiro says, the price of legacy carriers' most expensive tickets fall dramatically, whereas low-cost carriers don't experience the same drop in top-paying customers. "A lot of the low cost carriers weren't really selling to these high-willingness-to-pay consumers," Shapiro says, "so they're perhaps more prepared for a bust." More

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