"Some may view airlines’ intense hygienic programs and promises as merely a symbolic façade akin to some of the passenger screening procedures introduced after 9/11. Cynics view TSA’s limitation of 3.4 ounce containers for liquids, required laptop scans, shoe and belt removal, and other security rituals, as little more than “security theater.” Measures unlikely to foil a real terrorist plot," writes Kambr Advisory Group's Steve Hendrickson.
In airline Revenue Management (“RM”) circles, the usual quest to understand and influence consumer “Willingness-To-Pay” (WTP) has now been usurped.
A more crucial consumer sentiment, call it Willingness-To-Fly (“WTF”), has taken center stage.
That’s right...WTF. All thanks to COVID-19.
And airlines are quickly realizing that without WTF, there is no WTP.
Many carriers are taking drastic measures to make their operations at least appear less likely to spread contagion. In fact, the growing list of potential precautions has become so extreme that Forbes recently reported that such precautionary programs could push passenger check-in times up to an estimated 4 hours.
While these procedures are motivated by the COVID-19 pandemic, they would, arguably, remain beneficial even during typical flu seasons. But for the moment, the immediate, vital goal for airlines is to restore consumers’ peace of mind and bring back WTF.
Some may view airlines’ intense hygienic programs and promises as merely a symbolic façade akin to some of the passenger screening procedures introduced after 9/11. Cynics view TSA’s limitation of 3.4 ounce containers for liquids, required laptop scans, shoe and belt removal, and other security rituals, as little more than “security theater.” Measures unlikely to foil a real terrorist plot.
Perception is Reality
Yet, it’s reasonable to suggest such responses were more likely helpful in alleviating security concerns of paranoid travelers after 9/11.
So, even if those measures were more security perception than security reality, it's important to remember that invariably, perception is reality when it comes to consumer sentiment. We have accepted security theater and adopted it into our “normal” reality.
Whether airline initiatives around health precautions are truly effective or merely good “health theater,” one thing is for sure: New costs will be incurred.
For an industry that only averages $10-$20 of profit margin per passenger during the best of times, these new costs will be nothing to sneeze at. Consider the spectrum of new programs being implemented by various carriers as health protective measures and ponder the potential costs.
The Price Of Priming The Demand Pump
With each airline defining and re-defining its own precautionary measures, it is too soon to know for certain what the related expenses will be. One analyst estimates that airline health protective programs could increase costs by as much as $35-$45 per passenger – far more than their profit margin in good times.
But those costs hurt financials far less than the lack of passenger volume they’re intended to reverse. So, for now, they become the price of priming the demand pump, a necessary investment.
It’s also clear that airlines won’t be able to bear that cost in the long term.
Therefore, a key question is how health protective programs will be financed if they are indeed to become a long term part of our “new normal?”
And, if history repeats itself, we may well see airlines and governments – or both – seeking to introduce surcharges, possibly in the form of fees or taxes, to absorb these costs.
Historical Management Of Airline Hardships
Past industry hardship has been covered like this in at least a couple cases.
First, fuel surcharges hit the airline scene in the fall of 1990 after the Persian Gulf War triggered severe spikes in fuel costs.
Those additional levies have morphed over the subsequent three decades. They’ve even been renamed in many cases, but they have stayed with us for better or worse. And security surcharges have been collected since 2002, when the TSA implemented what is sometimes referred to as the “September 11 Fee,” as part of each passenger’s ticket purchase.
The original purpose was to bolster airport security in the aftermath of the 2001 terrorist attacks. Now, 18-years-old, the fee currently adds $11.20 to a roundtrip ticket and last year generated nearly $4.3 Billion.
Of course, airlines are free to declare hardship wherever they see it and impose fees or surcharges as they choose. Spirit Airlines charges a mandatory $7 fee for each direction of a passenger’s ticket and presents it as the “Regulatory Compliance Charge”. It was previously known as the “Unintended Consequences of D.O.T. Regulations Fee.”
With a new hardship facing the airline industry in the form of health protective program costs, will we soon see surcharges on our tickets labeled as such? We think it is inevitable because passengers will become conditioned to expect sanitary planes and social distancing protocols, while airlines will be challenged to cover those and other costs in any way possible.
Lingering Questions, or, The Devil Is In The Details
If pandemic driven surcharges are inevitable, it prompts a few key questions around when, who, and how.
Timing for any new charges is touchy these days. A volatile combination of financially stressed consumers, grandstanding government policy makers and hyperattentive media coverage means the first carrier to launch such surcharges may feel backlash on many levels. Until passenger demand shows some consistent and material rebound, it may not be worth rolling out new surcharges. But, eventually, enough travelers will have witnessed all the extra efforts being made for their well-being and this should make the market more tolerant and understanding of such surcharges. Will that awareness come from improved travel volumes this summer? By next Christmas? Right now, it is hard to predict.
This only heightens the importance of who kicks off this new trend. Airlines could wait for government to implement such charges and hope for a flow-through to their coffers. But, since carriers themselves seem to each be defining their own health protective programs, each will have its own costs to bear and thus may be better suited to setting such fees appropriate for their situation.
Still, public perception is critically important. It may take an industry leader with a highly visible, aggressive program and PR finesse to make these charges feel justified and acceptable. Once that first airline runs the gauntlet of public opinion, watch for others to quickly follow in their footsteps.
The “how” of health protective program charges comes down to amounts, disclosures, and applicability. Consumer opinions will vary towards the value of such measures and it will be difficult if not impossible to compare the protective value of one airline’s surcharge versus another’s. But, if the fees start small, are labeled clearly, and are applied to all fare products consistently, passengers will either have to accept them or choose another way to reach their destination.
Let’s hope it all promotes and supports WTF!
About Our Guest Author, Steve Hendrickson
Steve Hendrickson is a Minneapolis based management consultant to the commercial airline industry. He currently serves as Director of Advisory Services for Kambr, Inc., a firm devoted to economic strategies in air transportation. Over the past three decades, Steve has advised numerous carriers during normal times as well as disruptive periods like 9/11, SARS, and others.