The recent, and largely unpronounceable, Icelandic volcano eruption got me thinking about just how wacky the airline business has become. True, commercial airlines have perhaps the most unattractive business model of them all. I mean, you have to contend with airplanes that cost millions of dollars a month to lease, fluctuating fuel prices, huge labor costs, unions, disgruntled employees, and a customer base that's almost always in a hurry. That's a recipe for unhappy customers. Why anyone would want to start a commercial airline is beyond me (I'm looking at you Jet Blue). The risk vs. reward just isn't there.
Maybe their backwards business model makes it hard for the airlines to find clear thinking business analysts. Case in point, the $3 Diet Coke. Most of us can remember a time when the flight attendants passed out bags of pretzels and peanuts as if they were in endless supply. We didn't question the generosity because deep down we all knew that we were paying for those peanuts and 8 ounce beverages. We should have seen the writing on the wall when we were asked to pay to stay warm ($7 blankets!). But no, they just had to push us to the brink of exasperation.
Well, that happened to me on a recent Delta flight to Atlanta where I was prompted for $3 for my Diet Coke. I hadn't flown on Delta for quite some time. Being from California, I generally fly Southwest everywhere, where your 8 oz. beverage is included in the cost of your flight. I couldn't believe I was being asked to pay for a Diet Coke. It just didn't make sense. So, I got to thinking about how a big business that, presumably, employs lots of smart people could make such a dumb decision as to charge their passengers for a beverage when most other airlines don't charge.
This got me thinking about Customer Lifetime Value (CLV). A frequent flyer, such as myself, can be extremely valuable to an airline. Hence, all the frequent flyer/rewards programs. Let's just say that my CLV is $500k to an airline like Delta. Just how many $3 Diet Cokes do you need to sell to replace me as a lifetime customer? I'll tell you. You need to sell at least 166,666 Diet Cokes to replace ONE customer who has defected to another airline due to this violation of my perceived rights to a beverage. That's right, you need to sell almost 200,000 Diet Cokes to replace *one* customer. This doesn't even take into account the costs associated with procuring the Diet Coke from their supplier and the labor costs associated with transporting and delivering the Diet Coke to my cramped airline seat. When you account for those costs, Delta might need to sell more than 400k Diet Cokes to replace me as a customer.
When I asked a Delta representative for an explanation, he made the classy move (sic) of essentially blaming the customers for this change. In so many words he said that the price sensitivity of airline travelers and the high competition makes every dollar on the quoted fare price to be critically important. There's got to be a better way to streamline costs without having to nickle and dime passengers who expect a beverage to be included in their fare cost. RyanAir in Europe is completely transparent about their pricing model. You pay for everything and you might even be bombarded with advertising on the plane. In exchange, you can buy tickets from Dublin to Rome for less than $50. That seems like a more customer friendly model.
With all the talk here in America about "big government" and the perils of market regulation, I can't help but thinking that the romanticism of flying died after airlines were deregulated and allowed to run each other out of business. Maybe regulated markets are so bad after all. That is, as long as I get my Diet Coke at no additional cost...
Russ
Russ Hearl
CEO & Co-Founder
Sherpa Travel Exchange, LLC
601 Van Ness Ave, Suite E-208
San Francisco, CA 94102
www.staysherpa.com
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