Continental Airlines: No More Free Lunch!

Last fall, in an MSNBC interview about health insurance, Louisiana Senator Mary Landrieu employed a bit of sarcasm to criticize the hotly debated “public option” as “free health care … (that) everybody … doesn’t have to pay for.” She then declared, with an extremely firm sense of moral conviction, “there is no free lunch.”

Although the subsequent inclusion of a $100 million Louisiana Medicaid subsidy appeared to convince Landrieu to support the Democratic health care initiative after all, she never retracted her statement that “there is no free lunch.” And this past week, Continental Airlines helped her prove her point by discontinuing complimentary meals on all economy class trips.

Let Them Eat Pretzels!

Until a few days ago, Continental remained the last major airline in the United States to offer free meals to passengers with coach class tickets. That’s not to say that their meals were extravagant; each breakfast consisted of a muffin or box of cereal, and each lunch contained a single small sandwich.

Nevertheless, Continental had insisted on serving complimentary meals to domestic economy passengers for many years, just as Southwest Airlines had insisted – and continues to stand alone in insisting – that two pieces of checked luggage should be provided on a complimentary basis. Although Continental is now assuring us that pretzels and soft drinks will remain free of charge, they aren’t ruling out the adoption of other nuisance fees, such as the pillow and blanket fees imposed by American Airlines.

But why did the airline industry adopt this pricing strategy? When is it reasonable to charge premium fees for every convenience, real or imagined, that customers request?

May I Take Your Order, Please?

For many years, airline analysts have described the airlines’ fee policies in terms of an a la carte menu, similar to the pricing policies utilized by many restaurants. Defenders of such policies explain that restaurant patrons seldom expect to receive free bottles of wine with every meal, or free slices of apple pie with every cup of coffee.  So why should airline passengers expect free blankets and pillows on every flight?

Critics of a la carte airline pricing, though, retort that restaurants hardly ever impose convenience fees to serve tap water; nor do they apply premium charges for coat check services. And yet they do charge customers for minor services like valet parking, as well as for small dishes like lettuce garden salads.

So how do businesses determine their pricing strategies? How do they choose between an a la carte menu plan and a prix fixe plan? An appropriate decision can obviously enhance revenues, but a poorly implemented one can infuriate a customer base.

You’ve Got a Problem

An effective pricing strategy is not solely the product of computational economic analysis; it is also a function of the qualitative management of customer expectations. And expectations management, in turn, requires a basic understanding of human behavior.

To put it simply, people don’t enjoy feeling fooled, and they don’t enjoy feeling cheated. So businesses should always take the time to inform customers precisely how fees are calculated; any other approach would incur the risk of leaving customers feeling fooled. Furthermore, fees should always be established at levels that are reasonable in comparison to the ostensible costs of providing each service; any other approach would incur the risk of leaving customers feeling cheated.

Thus, restaurants are comfortable charging for side salads because their customers understand that they obviously need to spend resources on salad ingredients; likewise, they charge for valet parking because they clearly need to procure space to park the automobiles. As long as their charges are reasonably disclosed and appropriately priced in relation to the underlying costs of the corresponding services, customers seldom squawk about paying such fees.

But the costs of placing the coats of restaurant patrons on hangers are obviously minimal, and thus customers would inevitably feel cheated if surprised with fees for such services. And airline charges for blankets, pillows, and tiny snacks inevitably leave passengers feeling cheated as well. As the president of the US Airways chapter of the Association of Flight Attendants explained when that airline stopped charging for soft drinks, “(we’re) a customer service industry, and if you’re not pleasing your customers, then you’ve got a problem.” Obviously, customers cannot feel pleased when they feel they’re being cheated!

Step by Step, Slowly I Turned …

So what is an airline to do if it wishes to implement an a la carte pricing policy? To paraphrase the comedy team of Abbott and Costello, an effective strategy might involve moving step by step, slowly but surely, to begin shifting customer expectations, and then to wait for other airlines to follow along.

It takes time for customers of any business to become accustomed to new pricing strategies. A gradual, evolutionary approach is thus best suited to reposition any new pricing policy — or any other customer service policy, for that matter — as an acceptable rule instead of as an unusual departure from established norms.

In reality, airline passengers were conditioned by years of watching their free lunches shrink from multi-course affairs to meager shrink wrapped snacks. Eventually, these meals shrunk to such miniscule proportions that when they disappeared entirely, most passengers hardly noticed at all.