Gas Prices impact the Airlines industry: American Airlines charging $15 to check one bag

Gas prices is for sure the issue number 1 in the United States right now. High gas prices is driving customers anger and lower their spendings since it impacts deeply their household budget. Airlines are also affected by this problem. In order to keep their margin, they start to "unbundled" their prices, charging customers for all the different service they used to include in their prices. It has  already been a year now passengers need to purchase food and/or drinks during domestic flights.

Now we have reached a new step: companies start charging if you travel with luggages. American Airlines announced they will charge $15 for one bag starting June 15 (source, San Jose Mercury News, May22 2008).

Why don't they simply raise their prices?
Well the problem is that this market is dominated by price competition, with a very few possible ways of differentiation. The arrival of price comparison search engine, such as Expedia, Orbitz or Opodo, helped customers to focus on prices. Raising the prices is not a viable solution as it will probably plummet market shares of the airlines.

I am still deceived about this strategy. Indeed, these items and services offered during a flight became the norm, and if you fly, you expect these kind of services to be included. This move is simply complicating an offer that might have been simple in the past. Also, let's not forget that these services were some of the key advantages of airplanes versus taking the train. Now that the train might come back in the US (I heard that people were thinking about a high speed train connection between San Francisco and Los Angeles), because it is more energy efficient, and use electricity instead of fuel for planes.

What is clear is that US airlines are in deep trouble:

• This year the US airlines industry has lost $2 billion in the first quarter
• 8 airlines filed for bankruptcy protection
• Companies are diminishing their number of lights from 10 to 11%

What do you think about it? What I know, is that I'll probably come back shortly on this issue to explain why I believe the train transportation will probably come back in the US as a viable alternative to the more and more expensive plane transit.

(source: San Jose Mercury News)