Friday, May 30, 2008

Marginal Cost and Benefit

It's about value received for the cost (not just the price). Airline costs, airline mergers and airline travel in generally have been in the news for the past several months. The industry is being hammered by rising fuel costs, and many companies have recently chosen to place charges on checked baggage or even get rid of in-flight snacks in coach, all in the name of reducing costs and improving profit margins.

But providing less service is not the only answer. Airlines could also find a way to provide more value for the price. Lack of service may be driving down revenue as travelers are beginning to either find alternative ways to travel, or alternatives to travel. This piece at would seem to indicate that flyer frustrations with the hassle and lack of service is a contributing factor to declining revenue. And as I've commented on another blog, simple honesty when dealing with the public at the point of interface could go a long way to reducing frustration. Add to that a pairing of authority with responsibility for front-line employees could reduce the problems that accompany planes stuck on runways for extended periods of time. (It's one thing to have responsibility - it's another thing to have the authority to do something about the problem for which you have responsibility.)

We often forget that competition can be done in a qualitative (value of product) way as well as quantitative (price). If the consumer gets more for the same price; it makes the product more attractive. And if quality improves enough, the consumer may be willing to pay more.

I understand that airlines put a lot of effort into providing high quality for the first-class experience, but the first-class passenger is subject to many of the same frustrations as coach-class when the flight is delayed or cancelled. And frankly, on most of the planes I've been on, the coach seats outnumber the first-class seats by a wide margin. The overall number of flights is falling because of reduced passenger demand across the board.

The alternative to applying marginal cost/benefit analysis and looking for ways to improve product quality is, I'm afraid, a return to the early days of the airline industry, when there were few flights (and few airlines) and only the rich flew. And I doubt you'll find enough rich people to fill a 777 flight from NY to LA on a daily basis.

I look forward to your comments.


Mike Fladlien said...

i would think that airlines would benefit from any price above marginal cost...aren't most of the cost of the flight fixed costs?

Jon Gold said...

The main cause of public distaste towards airlines is not because of the recent price increases. Everyone is going through a transition to higher oil prices and their consuption patterns are adjusting, so they can relate to airlines. The problem is that for years now the quality of service has decreases with the same or higher prices. Many causes for these actions are present, be it union pressures for higher wages, terrorist threats, or oil prices, but now the consumer is just getting fed up with not being fed on flights, extra costs that are unexpected, less convenient travel times, and higher prices. To some extent the airlines are subject to the TSA's mercy as increased security and longer delays have occurred. Providing food on flights had become an expected service, so the change will bring about some ill feelings. This could, however, just be a necessary natural selection process as flights and airlines that were operating for much too low prices at high wages are now being cancelled. Hopefully this painful process will give some positive results. Less flights will decrease airport lines and traffic, making flying less of a hastle. Less planes to maintain means more frequent inspections and less mechanical difficulties causing delays. In the flying might return to the expedient and efficient industry it once was.