The Airlines Should Hire Behavioral Economists





We all know about the problems that the airlines are having with rising costs and their efforts to raise prices on everything – bags, snacks, good seats, and so on. Their problems are real and I wouldn’t be the one responsible for figuring out a way to cover costs at airlines today.

But I can’t help but wonder if the airlines should hire a couple of behavioral economists as consultants. Here’s why.

One of the major tenets of behavioral economics is that people don’t view gains and losses the same way because they are averse to losses. The classic example is that people are not equally happy about finding a $20 bill on the ground as they are sad about losing a $20 bill, even though both are $20.

This brings me to the airlines. The airlines have framed all of their efforts to raise revenues as losses to the customers. You have to pay an extra fee to check a bag, get a snack or drink on the plane, get a headset, get an exit row seat, and so on.

Behavioral economics would tell you that a better approach would be to charge higher ticket prices and then provide ways for customers to gain money by engaging in the behavior that the airlines want. For example, you pay $350 to fly from Cleveland to New York, but you get $20 if you carry on your bag, $7 if you refuse the peanuts and pop; $2 if you refuse the headset, and $15 for taking the middle seat.

By giving people money for taking the actions that they want (even though the customer is only getting back his or her own money paid in the form of higher ticket prices), the airlines would frame their efforts to raise revenues as gains to customers. Almost all of the research studies show that framing the same efforts as gains instead of as losses make people respond more positively. So the airlines should get the same outcome with less negative customer reaction by taking this approach.

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About the Author: Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of eight books, including Illusions of Entrepreneurship: The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By; Finding Fertile Ground: Identifying Extraordinary Opportunities for New Ventures; Technology Strategy for Managers and Entrepreneurs; and From Ice Cream to the Internet: Using Franchising to Drive the Growth and Profits of Your Company.

12 Comments ▼

Scott Shane


Scott Shane Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of nine books, including Fool's Gold: The Truth Behind Angel Investing in America ; Illusions of Entrepreneurship: and The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By.

12 Reactions

  1. Scott, That is an awesome idea. Making the airline customers feel like they are getting a discounted price would produce a more positive experience.

  2. Anita Campbell

    Scott, I love your insights here! 🙂

    On the one hand, you can’t help but feel concern for the airline industry. Their economics are dismal.

    On the other hand, they are making it such a negative experience to fly that you wonder if they aren’t slowly strangling themselves to death. Here I am, reviewing my upcoming schedule for the next 3 months and trying to figure out how to get out of business trips. I used to look forward to traveling on occasion, but now I am avoiding it like the plague. It just “feels” unpleasant and makes me unhappy thinking about it.

    But, in the alternative, if they gave me some positive reinforcement for acting in a way that helps the airlines’ bottom line, I might “feel” differently about it. And look forward to flying again.

    Anita

    PS, I think it’s going to be boom times for Webex and GoToMeeting.

  3. I aggree that this is in many ways an excellent idea.

    However I’m a bit sceptical since when you are comparing prices between airlines (trying to find the cheapest) the first price you will see from airlines acting in that way will be higher one and may therefor be overlooked.

  4. Amen! An approach from a different perspective is what is needed here. All of those additional charges make the experience a dismal one. It’d be much better to start a tad higher and then let customers feel like they are saving a buck here and there. In the end, it gives the customer the feeling that they’ve been thrifty and also had options – something that’s so very important in these times.

  5. Scott –

    This is an outstanding idea! I can so easily imagine travelers bragging that they saved an additional $50 by declining the headset, luggage and catering services.

    This is the first time I’ve been prompted to comment – your idea is that good!

  6. I would be thrilled to save a few bucks by declining certain options or by sitting in a certain seat. I certainly could do without the peanuts and soda on my flight. However, it would be really hard for them to keep track of who gets what during a flight.

  7. Scott- Wow! The comments themselves reinforce your hypothesis.

    The current approach to passing on costs to passengers hits passengers at multiple times: 1. At the time of picking seats 2. While checking bags 3. When snack trolley rolls out 4. When passengers use restrooms (well not yet..). If the airlines bundle in these charges upfront, then the pain would be felt only once, at the time of buying ticket. There on it would be all positive experience, except while standing in line for security check and undressing for TSA.

  8. Scott Shane

    Amanda,

    I don’t think that it is very hard to keep track of this information. You have to have a boarding pass that is bar coded to get on the plane. The information on bag check is already included as is your seat. So baggage and middle seat info is already known.

    The airlines could print out a bar code for snacks and headsets and you could have them scan the boarding pass if you want one. If not, they can give you the money back to your credit card. This record keeping isn’t that different than keeping the record to give you frequent flyer points.

    Snaebjorn,

    It is true that people shop for the lowest price ticket and the airlines that do this will have problems if their competitors didn’t and they had higher prices. But the airlines would have the same problems if they charge $25 for checking a bag and their competitors don’t charge. So I suspect you’d end up with the same effort to copy what the others do once this is implemented.

    Sanjay,

    You could even get the TSA involved if they wanted. We actually pay a security fee when we buy airline tickets. The TSA could offer some portion of that fee to you if you were willing to stand in the “slow line” through security, freeing up the “fast line” for those who didn’t care. I suspect a bunch of people would be happy to stand in line at TSA check points for $10.

  9. That’s a quite manipulative way of duping people out of their money.

  10. I never understood why the airlines decided to charge for checked luggage as opposed to just raising ticket prices. Customers are not given an itemized ticket price anyway so if they slipped in another $15 on me, I would never know it.

    Overall your suggestions make sense because customers simply don’t want the hassle of having to fork over that much cash upon their arrival at the airport. This is also the reason that charging for curbside check-in is outrageous.

  11. Martin Lindeskog

    I am looking forward to the day when Ryanair and Michael O’Leary’s idea of offering “cheap flights across the pond” will become a reality. I have heard that Mr. O’Leary has a vision that the passengers will be paid to fly sometime in the future. I guess this could work out if the flights get sponsored by advertising. I wouldn’t mind to wear a “jacket” with a message from the sponsor of a specific flight.

    The main problem with the high prices is the taxes, regulations and environmental charges. It is good for the debate that Ryanair is giving out a specified list with all the details of the price. You could then see that only a small portion is the actual flight ticket and the rest is consisting of taxes, surcharges, fees etc from external sources.

  12. Scott,

    You are right on! This is why I love reading blogs / headlines that I normally wouldn’t be drawn to based on the headline… you always end up stumbling upon something interesting you weren’t previously thinking about. This concept it so simple, yet (based on the responses to this post) has the potential to be remarkably effective. And universal – I’m going to think about ways to incorporate this kind of thinking into my own business!

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