Are Coach Passengers Subsidizing First Class?

Brett Snyder wrote an article for Conde Nast Traveler in which he argued that ancillary fees — the kind you pay for bag check and extra legroom — are being used to pay for other improvements in your travel experience. Great, right? Specifically, he cites the following examples at Delta Air Lines:

  • A partnership with Westin to bring their Heavenly bedding to business class cabins.
  • The installation of those lie-flat beds in business class cabins.
  • Renovation of Delta SkyClubs.
  • Adding WiFi and Economy Comfort seats to the economy class cabins.

My problem with this list is that if you fly in first or business class, you get expedited check-in, priority security, priority boarding, assigned seats, a meal, and a generous free checked baggage allowance. If you’re traveling on an international flight, the lie-flat seats, Westin Heavenly bedding, and access to the SkyClub is free.

If you are an average customer sitting in economy class, you will pay for every perk except, perhaps, a free soda while you’re squeezed in 32B between Tweedle Dee and Tweedle Dum.

Why is Joe Sixpack paying baggage fees so Ritchie Rich can get Heavenly bedding and a lie-flat seat? I understand the need to pay for WiFi access on a plane, but why should that be used to also pay for WiFi access in the SkyClub?

If a business class passenger wants Heavenly bedding instead of standard bedding, maybe he should pay a fee for a “premium bedding” package. Or maybe if the SkyClub is being improved, they could raise the membership fee. That’s what United Airlines is doing.

Brett did tell me over Twitter that one reason these fees have to be tacked on later instead of included in a higher fare is that customers are price sensitive and will gravitate to the cheapest ticket, since that’s the first number they see. Added fees are a shock that comes later. I don’t disagree with this. Most passengers don’t consider the total price.

But does that mean Delta has to charge extra baggage fees to economy class passengers in order to attract first and business class passengers with competitive fares? The usual pricing strategy for airlines is that a disproportionate share of the revenue comes from the front of the plane. Premium cabin passengers pay much higher fares relative to the added space and weight requirements, and historically, first class subsidized economy class.

Now we have a twisted circle where economy class passengers pay ancillary fees to subsidize amenities for first class passengers in order that first class fares remain competitive so that first class passengers will still buy tickets and subsidize the economy class fares. It’s all starting to give me a headache.

United Airlines will refund your fee if your in-flight DirectTV system stops working. Alaska Airlines will refund your fee if your bag arrives late at the carousel. Linking fees to benefits is fair. At the same time, I don’t mind if airlines skim a little off the top to pay for some other services indirectly.

But you can’t pay for all the improvements to premium cabins and elite benefits just by robbing the poor, so to speak. Premium cabin passengers are less price-sensitive than those in the back, so I think there needs to be more responsibility on the airline’s part to pay for some of these improvements using revenue from those customers who directly benefit.

Maybe I have this all wrong. I’d love to hear your thoughts. I don’t actually think this is Delta’s strategy, but it’s my interpretation of Brett’s post.

Update: @kziel on Twitter had a good idea for how this might be working:

Actually, ancillary fees subsidize premium cabin upgrades. And premium pax subsidize everything else (including Y pax)

So we have two systems here. Paid first and business class may subsidize economy class fares, but ancillary fees subsidize other parts of the business, including the loyalty program that gives away a portion of those premium cabin seats for free.

About 

Scott created Hack My Trip while traveling on a budget during graduate school and continues to share his thoughts on better travel. He maintains elite status with American Airlines, Alaska Airlines, Hyatt, and Starwood.
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  • AKold

    Sky Club rates are actually going up $50/year per person for Medallion members starting Friday (staying the same for general members).

    • Scottrick

      So I think that would be enough, right? I’m just saying either the airlines are using the wrong approach to fund their improvements, or the money is going somewhere else.

      • AKold

        It should be enough, but with that said, there are so many ways to access the Sky Club on a continual basis without paying for a membership — you can pay with miles for a year membership, get an American Express Platinum Card, an American Express Delta Reserve, or be a Diamond Medallion.

        • DTWRoss

          Just a quick note & not to be too picky….but….the AmEx Platinum does NOT give you free SkyClub. It gives you $25/day just like Gold Card. Only AmEx Reserve ($450 fee) gives you club for “free”. I thought similar and looked into this and also witnessed argument between pax & club agent about this topic.

          • AKold

            The American Express Platinum is a different card from the American Express Delta Platinum.

            The Amex Platinum ($450/yr) gives you free Sky Club access when you have a same-day Delta flight (and the same policy with AA, as well as US club access when flying anyone). This is also a separate card from the Reserve card.

            The Amex DELTA Platinum ($150/yr) gives you discounted Sky Club access. It’s $25/visit, not per day (so you can’t use it at multiple airports).

            I actually have both cards — the non-branded Platinum for lounge access, and the Business Delta Platinum for MQM threshold spending bonuses.

  • bradR

    I’m going to disagree almost across the board… econ pax are price sensitive, f/j pax are generally not – so the differentiation in f/j product on routes with generally comparable pricing is important to increasing those sales. for the econ pax, all the extra fees are tied to extra costs (you think baggage is free?) so they either charge for it or give it away as a perk for loyalty as the case may be; lounge access isn’t free, it’s paid for one way or another. Where you have a decent argument is that those fees do help support the seats in f/j that are based on complementary upgrade (not upgrade based on some instrument), but that’s still a stretch and only reasonable because of our culture of MR for status :). Additionally, for your argument to be valid the price for all econ seats would have to be uniform vs in different fare classes – other than in highly competitive routes, airlines don’t price things based on charity.

    • Tim

      +1 paid F/J price is proportionately far more in most cases than discount Y, and the competition in that cabin has a lot to do with service for paid pax

    • Scottrick

      I think we agree. What I’m trying to get at is: Where is the money coming from for these improvements to F/J? Is it coming from higher F/J fares? Higher fees for Y passengers? Betteer business overall?

      I don’t really think it’s coming from higher fees, but that was the argument Brett seemed to make. I agree that soft and hard products are improving, and that airports are improving, but is all of that coming from the fees charged to Y passengers? And if so, is that fair? If the answer to the first question is “no,” then the fairness question is moot.

  • Mgd

    my argument is that people expect to use miles for free seats when they’re loyal. When 100% of J is paid and zero seats are available for redemption, it undermines any meaning of loyalty. Then flying becomes transactional instead of long term customer relationship.

    • Scottrick

      But there are other ways to reward loyalty besides upgrades. For example, I’d still be pretty happy in E+ if United gave me a first class meal and free in-flight entertainment.

  • Minos

    “Paid F/J price is proportionately far more in most cases than discount Y,”
    Sure but what about discount F? Like the $450 to Burma?

    We have to compare apple to apples. What is the escalation rate between a regular F and a regular Y? Is it 5 times? Now how much space and weight does a F takes when compared to a Y? Is it 3 times? What about the cattering? The extra staffing? The cost of the limo with chauffeur? The cost of operating a lounge?

    Similarly, what is the ratio for discount F and discount Y? What about the extra space and the extra costs of F with regards to Y? Comparing discount Y and regular F is meaningless.

    And this is assuming that the load factors are the same in both classes. And load factor when computing revenue tickets, not Elite upgrades.

    To be honest, I am not so sure that the conventional wisdom of F subsidizing other classes still hold true. I think there has been a paradigm shift in the last decade and airlines need to evolve and adapt. Some might have F that still make sense, but a growing number of airlines have inappropriate F service. If you take some of the most profitable airlines in the world, the ones that never went into BK, not all of them have F, let alone B. Ryanair in Europe, Southwest in the US springs to mind…

    • Scottrick

      These are all interesting questions I’d love to have answers to! Sadly, most talk about subsidies (including my post) is just speculation without a few hard numbers.

  • vernondemerest

    I havent had the opportunity to read Brett’s article yet, but I look forward to reading it. To put it on the record, I loath airline “user fees” and wish airlines would quit unbundling commonly desired services (baggage, seat selection and the most meagre of inflight snack) for a user fee in favour of an all inclusive price, like it was 8 years ago. I hate having to use a chart and calculator to compare advertised fares. Alas, it seem the airlines find that consumers are price sensitive and for whatever reason nickeling and diming economy passengers is a better way to be profiatble than charging a transparent airfare.
    The analogy that econmoy pax are subsidizing F/J is really just a spin on general revenue and expenditure accounting. Anyone who owns a home knows that they pay property taxes that go to fund things like schools, roads, libraries, community centers, pools, social programs etc that can be accessed by all citizens whether they own property or not. No discount is given if you don’t use one or more services. When municipalities are cash strapped, they start adding user fees. Want to swim – that will cost you $2 each time – does the revenue actually go to keep the pool in operation or is a swimmer in a poorer part of town (who may not even own a car) funding road maintenace in the rich part of town. What difference does it make?

    • Scottrick

      “What difference does it make?” — Very fair point. As long as passengers in both cabin classes are happy, and the business makes money, it may not be an issue. But I thought it made an interesting topic for discussion.

  • Alex

    While Brett can speak to it best, I don’t think his article is making the direct-subsidy point that you are interpreting and the title given to his piece may imply. The legacy carriers are simply healthier because of the ancillary fees, which has given them the capability to invest. Places Delta has chosen to invest include some premium-passenger only efforts (Westin bedding, lie-flat seats, Sky Clubs) but also in areas that impact all passengers (wi-fi, improved terminals in NYC). Companies treat revenue as revenue and chose where to invest it; no one is budgeting specific subsidies from one category to another.

  • Bgiagg

    The airlines are not government. They are businesses and all seats and fare classes are just different products they sell, and they can bundle the services anyway they like. Take AA for example, you can choose any of the ‘choice’ packages that include free checkin baggage etc. So just think F or J as choice packages that bundled free bag and other services and a lot better seat. the customer gets to decide which package works the best for him/her.

    Hotel is the same way, you can get a suite that comes with free breakfast, or you can pay the cheapest rate for a regular room then get dinged when you have to pay breakfast.

    Sure the Airlines and hotels will set different margin on these classes and rooms, just like any other businesses, most likely driven by competition, marketing, etc. Nobody is subsidize anything, and nothing wrong with it as long as the customers have the choice to buy the product they like.

  • UnitedEF

    Why should a once or twice a year kayaker enjoy the benefits of weekly flyers who fly the same airline every time regardless of fare? Volume pricing comes to mind. The loyal customer buys a lot of tickets so you take better care of them just like you would in any other business. Anyways you lost me with “But you can’t pay for all the improvements to premium cabins and elite benefits just by robbing the poor, so to speak.” Class warfare like we don’t get enough from the dems. The airline sites are a nice break from the news well usually anyways.

  • Carl

    This a pretty incoherent posting, Scott. You seem to forget that money is fungible, and that airlines have pretty high fixed costs and pretty low marginal costs. That means it’s pretty hard and largely arbitrary to match revenue (which is mainly variable) to costs (which are largely fixed). Each airline seeks to price its products to maximize revenue on each flight, and seeks the lowest possible costs to generate that revenue. The reason for the explosion in fees is that, on the one hand most ticket purchasers book solely based on price, so the airlines need to have the lowest possible headline price. And some or many don’t use and don’t want to pay for the “optional” services, so by unbundling them and charging fees, the airline can market lower fares and then collect additional revenue from those people who want or need additional amenities and services. Regarding investments in premium cabins, unless you believe airline managements are incompetent, they are only going to make those investments which are profitable for the airline by attracting more premium revenue than the costs of the investment. In no way are economy passengers subsidizing premium travelers, and really not the other way around either, because if an airline is properly using revenue management, then the passengers on the cheapest fares are filling seats that would have otherwise gone empty at higher fares, so they are still generating a contribution vs. the marginal cost of a seat that otherwise would have gone empty.
    Sorry to be harsh, but maybe you should stick to optimizing travel and not attempt analysis of the business case

    • Scottrick

      My argument was more of a reductio ad absurdum taking issue with Brett’s quote: “And now those fee revenues have allowed airlines to start investing in their products again.” The article read to me like a puff piece praising all the cool things Delta has done and making excuses for the fees it charges its passengers. But many fees and benefits he described affect different groups. I think the link between the two is less direct.

  • jfhscott

    I suggest that the airlines will try to extract whatever they can from whomever they can. And they will offer a level of service in any given cabin which they believe optimizes their ability to do so. I fail, however, to find any nexus between charging bag fees in coach and providing souped up offerings in business class. They strike me as independent decisions. Absent some smoking gun internal memo, I cannot credit the theory.

  • AJTrenkle

    Scott,

    I think you capture an important point about the modern economy and where most of the returns on growth in value go to. We just happen to notice it more in air travel. Thanks for an interesting post.

  • Swagato Barman Roy

    So why don’t you start an airline where the business flyers subsidise the coash?