Meissner Research Group

While we teach in our pricing courses that valuable service components should be unbundled and attract an extra charge, Ryanair has once again been brought to the consumers’ attention for its unfair unbundling practices. The whistle blower this time was John Fingleton, the chief executive of the Office of Fair Trading, who said the following in an interview with The Independent (‘Puerile’ Ryanair under attack by OFT chief, January 4, 2010):

Ryanair has this funny game where they have found some low frequency payment mechanism and say: ‘Well, because you can pay with that [the charge is optional]. It’s almost like taunting consumers and pointing out: ‘Oh well, we know this is completely outside the spirit of the law, but we think it’s within the narrow letter of the law’.

Until last month, the VISA Electron card was the payment option that attracted no surcharge. Now the only payment option without a fee is a prepaid Mastercard, which of course is not widely available and quite inconvenient to use. Advertising rules in the UK (and possibly in the European Union) stipulate that an advertised price includes all non-optional charges. The charge is disclosed only on the very last step of the booking process, making it impossible to compare the total price for the trip upfront.

But even the chief executive of the consumer watchdog acknowledges that it will hard to change by regulatory action, but hopes his public outcry will to customer reaction:

It would be silly to go after something like that every time because they would quickly change it to something else, and it’s trying to establish a general principle that what’s not optional is not in there. Consumer anger and frustration, and an element of transparency, often changes these things much quicker than legal action.

If in case you wonder: usage of lavatories on Ryanair flights is still free at this time, at least on my recent flight back from Germany to England. Ryainair’s CEO Michael O’Leary had toyed with the idea of charges for a visit during the flight, too (Pilots aghast at Ryanair toilet charge, Times Online, February 27, 2009). I read somewhere Boeing had problems building the payment mechanism into the doors on short notice. So maybe I just beat the flight attendant with a credit card reader to the door.

In a recent interview with German business newspaper Handelsblatt, Lufthansa’s Deputy Chairman Christoph Franz mentioned that the airline will implement several strategies so far employed by flow cost competitors (Lufthansa will Billigflieger kopieren, Handelsblatt, November 17, 2009). On certain short routes, the pitch between seats will be reduced. Kitchen and wardrobes will be completely removed to create more space for passengers. Franz mentioned that Lufthansa will have to let go of the old strategy that the profitable long haul business is subsidizing the less profitable short haul routes.

Most importantly, Franz admitted that Lufthansa has underestimated the competition by the low-cost carriers. After some initial panic following the arrival of Ryanair, Easyjet, Air Berlin and others on the scene, most incumbent full-service airlines had settled on the thought that low-cost passengers are a different bread and that their current customers will stay with them not matter what. They now realize that this leniency is dangerous.

For us this is good news, as this might spark some renewed industry interest in choice modeling in network revenue management. Doctoral candidate Arne Strauss and I have been working on improvement in this area for some time now. See for example our articles ‘Pricing Structure Optimization in Mixed Restricted/Unrestricted Fare Environments’ and the upcoming ‘Improved Bid Prices for Choice-Based Network Revenue Management.’