How did you book your flights for the summer holidays? If you’re like most people, you bought them online—either directly from the airline’s website or through a service like Expedia, Kayak, or Google Flights. Comparing airline prices, fees and schedules on your own has become standard procedure. But there was a time – for those of you who are my age – when the only way to book a flight was to speak to a travel agent.
When online ticketing took off in the late 1990s, it seemed revolutionary. No more middlemen! You can go through all the options yourself! You can even monitor how prices changed over time! Internet-based booking also forced airlines to step up their efforts to offer more competitive fares. Since prices were now visible, customers could make their decisions based on price instead of what the travel agency thought was the best flight.
While allowing people to make their own choices is in many ways a significant improvement, the ease and transparency of buying tickets online has come with a serious downside. The emphasis that airlines place on low fares has made them less competitive in all other aspects of air travel. Instead of trying to provide a high quality experience, airlines have started skimping on passenger comfort. They have pushed the seats closer together to fit more passengers on a single flight, often resulting in cramped and uncomfortable conditions. They have also de-prioritized on-time performance, resulting in more delays. And they have introduced a complex system of extra fees, often hidden, for services that used to be included in the ticket price. So if you’re frustrated with small sites, frequent delays, and exorbitant extra fees, you may have the internet to blame.
The trade-off of low prices
To win over customers, companies typically compete on a handful of key elements such as price, product quality, and service. In a perfect market, customers and competitors have equal access to information about each of these aspects, allowing people to choose a product based on a mix of the factors they are most concerned about. Perhaps a customer is looking for the cheapest price regardless of quality or, on the other hand, is willing to pay a premium for what is guaranteed to be a high-quality experience. This all sounds good in theory, but in the real world, markets often have incomplete information, which can make it difficult for consumers to truly evaluate the product they are receiving.
For example, when consumers lack full insight into pricing options, companies may focus less on price competition and more on other factors, such as product quality or service speed. But when access to information changes, for example with the rise of online booking, it can change this dynamic.
By cutting operating costs – manning fewer gate agents, cleaning crews or other support staff – flights had less slack, resulting in more delays.
In their 2015 research paper, “The Effect of the Internet on Performance and Quality: Evidence from the Airline Industry,” Tel Aviv University researcher Itai Ater and economist Eugene Orlov argue that online travel agencies such as Travelocity and Expedia caused a disruption in the airline marketplace’s information visibility and dramatically increased competition in the industry. Before the Internet, travel agencies usually viewed the different flight options based on duration – how long it would take to get from point A to point B – and the cost of the ticket was only a secondary factor. As a result, airlines sought to reduce flight time by optimizing flight time, usually at the expense of higher fuel consumption. They also tried to differentiate themselves with perks like better meals, drinks and lounges. But with online ticketing, the measure of competition changed to prices.
When consumers could easily rank search results by price, the overall dollar figure became the primary decision maker. We all know the drill: Rank the options based on price, then start scanning the secondary considerations. Sure, a flight might have an hour layover, but it’s also $150 cheaper, so maybe it’s worth it? Everything is based on the price range.
And as price, rather than flight length or quality, became the dominant consumer concern, airlines also changed their behavior. Instead of scheduling the fastest routes, airlines now prioritize the flight path that is optimal to reduce costs – which is usually not the shortest flight. They also reduced airspeed to save on fuel. In fact, the research by Ater and Orlov showed that the average actual flight time for the same routes increased between 2.6 and 8.2 minutes from 1997 to 2007.
As airlines struggled to cut costs, other parts of the experience suffered as well. Ater and Orlov’s study also found a strong correlation between increased internet penetration among airline passengers (the proportion of internet use reported in consumer surveys) and longer flight delays. They found that just a small increase in internet penetration resulted in a delay of just over two minutes, which is a 24% increase from the average delay time. This trend continued even as airlines planned longer flights – actual flight times still went up. One possible interpretation is that in order to compete for price, the airlines chose to compromise with less obvious factors, such as flight delays. By cutting operating costs – manning fewer gate agents, cleaning crews or other support staff – flights had less slack, resulting in more delays.
Hidden fees and budget airlines
As airlines have cut ticket costs in advance to remain externally competitive, many companies have begun to notice hidden fees. Since there is less readily available information about these types of fees, surcharges became a way to increase revenue while keeping fares down. For example, most airlines added baggage fees starting in 2008 in an attempt to offset the effects of price competition and generate additional revenue.
Several low-cost airlines have taken advantage of this model of ultra-low initial costs combined with hidden fees and cost-cutting measures to compete aggressively in the airline industry. Spirit Airlines, a US-based ultra-low-cost carrier, has implemented this model with great success. Spirit’s primary goal is to offer bare-bones flight experiences at the lowest possible base price. Airlines claim this gives people more options and allows them to save on flights so they can travel more often. But what travelers often don’t realize is that this base price excludes many services that are usually included in traditional airline ticket prices. Spirit charges additional fees for services such as carry-on luggage, pre-selection of seats, in-flight refreshments and even for printing boarding passes at the airport. This à la carte pricing model allows the airline to keep ticket prices low while generating revenue through additional services.
Similarly, Ryanair, the Ireland-based low-cost airline, has perfected the art of the low-cost, high-fee model. Like Spirit, Ryanair offers one-way tickets at very low prices but charges extra for almost everything else – from seat reservations to baby facilities. These extra fees make up a significant portion of Ryanair’s revenue — 45% in 2021 compared to 22% for major US airlines. The model also allows Ryanair to attract price-conscious travelers with its seemingly low fares, while the extra fees ensure profitability.
In their 2016 study “Do Bags Fly Free? An Empirical Analysis of the Operational Consequences of Airline Baggage Charges,” Vinayak Deshpande of the University of North Carolina and Mazhar Arıkan of the University of Kansas argue that, contrary to initial expectations, the introduction of baggage fees has sometimes been associated with improved service quality such as better operations and on-time performance. They argue that the additional fees actually enabled airlines to improve the overall service experience by limiting the amount of checked baggage and by increasing revenue generated beyond the base fare.
But while the extra fees may have helped some performance metrics, they have caused headaches for consumers who are caught off guard when hit with $100 in extra fees. In addition, the rise of ultra-low-cost airlines that sacrifice service and comfort has increased pressure for other airlines to compete on price and cut back on other amenities.
Competing to be on time
This race to lower prices has seemingly come to a logical conclusion. Faced with pandemic profit cuts and few options to lower costs further, airlines have actually raised prices slightly in recent years. But with little room to make prices more competitive, these companies have begun to compete on other aspects of the flight experience, such as on-time performance. On-time data only became available to customers in 2010, and as it has become more ubiquitous, airlines have been forced to try to improve the metric to win over customers. But their solution was not actually aimed at reducing delays.
A 2018 study by Northwestern University researchers Jan A. Van Mieghem and Yuval Salant and Dennis J. Zhang of Washington University in St. Louis showed that instead of reducing delays, airlines strategically increased their scheduled flight times to give themselves more buffer time and increase the appearance of being on time. The authors analyzed approximately 43 million US domestic flights consistently operated by the same airline from 1997 to 2017. They observed an average increase of 8.1% in the scheduled duration of these flights over a 21-year period and found that more than 45% of increased duration time could be attributed to airlines’ strategic scheduling to achieve better on-time performance. In addition, the research suggested a relationship between reduced competition on a route and increased strategic complementarity.
Say a flight is estimated to take two hours and 45 minutes. In order for the flight to appear to be on time, the airline may indicate the flight time as three hours. After all, no one is upset if a flight lands 15 minutes early—and if the flight is 10 minutes late, the airline still gets a gold star on the on-time scoreboard. This practice enables airlines to improve their on-time performance and reduce the risk of delays while ultimately increasing cost efficiency. But this “solution” only shows the increase in flight delays that have appeared over the past two decades.
Since everyone became their own travel agency and airlines began to compete fiercely on price and on-time performance, airlines have shifted their focus. Instead of prioritizing short flights and comfortable amenities, it was all about cost. And as the industry continues to evolve in the digital era, finding the right balance between price competition, flight time optimization and service quality will be critical to airlines’ continued success. And if you want a more comfortable flight experience, the next time you book a flight, don’t buy the cheapest option!
Gad Allon is Faculty Director of the Jerome Fisher Program in Management and Technology and Professor of Operations, Information and Decisions at The Wharton School at the University of Pennsylvania.
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