You could afford to make less, so why not make less?
One of my favorite movies of the last decade is The Big Short. The film, which documents the 2008 financial crisis in the most relatable and understandable way possible, touches upon a myriad of issues and questions, almost all of which are far too logical. One question stood out to me, in relation to the legacy airline industry. Steve Carrel’s character asks a ratings agency why they corrupted their rating system, just to make extra money, when they were already profitable, with the question “you could afford to make less, so why not make less”? The question got me wondering, have airlines unwittingly played directly into the hand of Norwegian, through greed?
Whether they like it or not, airlines have been forced to adapt to a “price first” model, where most consumers like their search results sorted by lowest price, and often book the lowest reasonable option. During almost any international flight search, Norwegian Airlines is right there at the top, offering the lowest prices, and therefore forcing other airlines to match. Five years ago, given the same price, there’s no question who you’d choose.
Blurred Lines
Let’s make one very important point crystal clear, before getting into the mumbo jumbo: airlines have never been more profitable or made more money than they do right now – ever. It’s not as if the airline industry is in some sort of survival mode right now, in fact they’re flourishing. Planes are full and so are airline coffers. This leads to the most significant point, and hypothesis: two years ago, Norwegian being offered at the same price as American Airlines, Air France, Lufthansa or any other major airline was a no brainer. Pick the non Norwegian airline, you get bags, meals, miles, drinks and maybe even an upgrade. Pick Norwegian: you’ll likely end up paying a lot more if you need any of the above.
There’s no doubt that Norwegian Airlines is heavily funded, and planned to fight a “long haul” battle against the status quo from the very start. But one can’t help but think that if legacy airlines in this time of flourishing profit “made less” by continuing to offer an incomparably more refined customer experience, while matching on price, that they could’ve killed the Norwegian Airlines “dream” dead in the water. Sure, it may have taken quite a bit of time, but given the choice of a checked bag, meals, miles and reliable service with multiple daily flights, not a whole lot of traction could really have been gained by the upstart. Yet, this weekend, even as a top tier customer for a major airline, I found myself on a ticket where my traditional bag entitlement did not apply, and I found myself in a middle seat, in the middle of the plane. I could’ve payed a lot less, or at least the same for Norwegian, and it made me think – maybe I should’ve.
Into The Hand
There’s the point. If legacy airlines could afford to lower prices, while temporarily pausing the cash grab for bags, seats, drinks and everything else, they could’ve starved the beast before it became one. Now – they’re locked in a price war which will never end. Norwegian started off offering very little, and continues to, while major airlines started off offering a lot, and no longer does. Who do you think is playing into who’s hand?
Great thinking, great post.
Norwegian still owes be a refund from a cancelled flight from 27 days ago. That’s right, they cancelled the flight, I had to buy a new flight, and they still have my money. I hope they fail (as soon as I get my money back).
Marketing is still a if not the king and until people have paid over the odds for a legacy carrier like BA’s halo a couple of times and come to realise they are paying more than they need to for an identical / inferior product (older airframes, less clean cabins, more unpleasant food, even less responsive customer services).
My last 2 transatlantic returns have not been on a legacy for precisely this reason…
Why would I pay for cramped economy on a filthy, ageing airframe with largely non functional IFE, little / no food (“sorry sir we’ve run out”) and knackered seating when you can fly Norwegian “premium” for the same price on a modern plane, which has been cleaned with superior pitch and seating and even free wifi included.
Norwegian are perhaps operating an unsustainable model but I don’t believe in an open market the British Airways high fare, ultra low service model is any more sustainable. Perhaps there’s a happy medium between the most profitable and the least, where airlines treat their customers with dignity and respect and charge appropriately without nickel and diming for every last pound / dollar but charge enough to remain profitable.
Laker Airways. The major airlines colluded to put Laker out of business by matching the low fares in tandem. People chose the legacy airlines for the reasons you listed. When Laker was gone, they jacked the fares up again. My nearby airport has one of the higher price tiers in the US, at least for markets where there’s no low cost competition. Where there’s LCC’s, they suddenly charge a lower price. The airlines are absolutely not interested in making just a reasonable profit, otherwise they would not be cramming even more seats into already packed planes.
PS. Not all legacies are as profit focussed / poor at delivery of basic product as British Airways eg. most clean their cabins effectively regularly and operate with working IFE but the basic points remain.
If the price comparison site sorted by default prices with 20 kg luggage and meal then whats of top is different than Ryan air or Norwegian. The people could take option out and sort sort again if they dont want luggage. Problem is the algorithm
You do as an airline need to make shit loads during good times. The bad times will come (price of oil, terrorism, flu epidemics). In addition to that think about fleet renewal. This goes into 10s of billions for a large airline.