Originally Posted by bocastephen

And what makes you the expert? Do you run an airline? Have a degree in aviation management?

Setting the international and flag carrier market aside, as it plays by different rules, the US domestic market has a challenge - extract more yield from each seat mile.

If they invest in the product, the only way to reclaim those costs is by extracting more yield on the revenue side, which means higher fares.

Unfortunately, *most* (not all) customers are unwilling to pay more to get more - they go to online sites and look for the bare bottom lowest fare and flip airlines by their personal equation of money vs. time (do I spent $25 more for a nonstop?).

Loyalty programs are a good way for airlines to combat flipping - if you don't fly the airline whose program you belong, you "lose" something - miles, points, promotions, benefits or some other item whose perceived value is designed to outweigh the actual difference in fare a customer might be asked to pay.

The problem is, product differentiation in itself is not sufficient to stop flipping or attract new customers - it might encourage *some* to pay more, or some to buy their ticket on a particular airline, but not enough to make the investment in product worthwhile.

Whereas some airlines looked at this situation and say 'screw the customer' (i.e. USAir), other airlines made attempts at differentiation and failed (AA MRTC) because they didn't touch the right customer nerve. Larry looked at this problem in another way (and I believe we helped shape this vision) - spend $1 extra on product if it brings in $1.10 in revenue. Other ways he thought out of the box - the LiveTV arrangement which cost CO nothing.

So yes - running an airline and designing an airline product are difficult challenges when your planes are full (of lower yielding customers) and people are unwilling to spend more. I believe the concept of 'fees' began as a way to 'ambush' customers - it's really a form of bait and switch. Sell your customers a cheap ticket for transportation, but surprise them (many are still surprised) after-sale when they discover their bags will cost an extra $100 and they have no choice but to pay. This trend of 'unbundling' is designed to allow airlines to advertise one cost, and charge another - the 'transportation' cost covers you in the seat, and can be lower than it needs to be because if you want to take bags, eat, drink, watch TV or pee (Ryanair), it will cost you extra - and some experts have calculated that an airline can collect $300 in revenue from a passenger while still selling them a $200 plane ticket. If they advertised that $300 plane ticket, they wouldn't sell any seats because their competitor is advertising a $200 ticket (plus fees). Unbundling is a like a drug to a revenue-hungry company operating in a hypercompetitive market because it masks the true cost of the ticket.

So the bottom line is you can either join the herd (as most majors do), or figure out a way to stand out from it. WN found a way - instead of harping on fare differences, it attracted customers frustrated by ambush fees with their 'bags fly free' marketing campaign. It turned bag fees into an issue and capitalized on it. B6 developed a 'mystique' around its low fares - think jetBlue and you think 'low fares'. The truth is, B6's fares on many routes aren't as low as many think.

Continental needs its own issue to break out from the herd and capitalize - and that is the only way it can get fares up and yields up without losing ticket sales or constantly shrinking capacity.

AA found that extra legroom doesn't resonate enough. VX is now undercutting everyone with a tech and feature-savvy product while its able to maintain low Y fares as a low cost carrier.

I don't have an easy answer - but what CO needs is a visionary leader who can find that missing connection with frustrated or uncomfortable customers and tap into it. Riding the 'hub-hostage' horse won't work forever. They need to figure out what items they can spend a $1 on that will bring in $1.10 or more.