Competition in the Airline Industry - Case Study Example

Why do airlines charge for baggage? As the world is expanding it is seen that new methods of transportation have come into role to help individuals in travelling from one place to other. Previously travelling by air was considered to be a mean of travelling meant only for the elite class but nowadays it is seen that travelling by air is relatively common for all the individuals living in the society. The fares by the different companies have been reduced to such rates that even a common man can afford the tickets to travel. It is seen that the airline industry has expanded ever since its birth and is creating landmarks up till date. The industry has expanded such that many airline companies have entered the arena to form competition. Fares by these airlines are dependent on this competition and every airline these days is trying to minimize the fare rates so that they can get on top of the industry. Previously it was seen that airlines provided their customers with limits to carry baggage and if the customer was willing to carry baggage which was higher than the limit then he had to pay for the additional baggage. The amount of baggage previously allowed by many airline companies was high enough but nowadays it is seen that the limits have been reduced. At an average it is seen that for international flights the airline companies are almost allowing 23 kg of baggage per individual. And anything which has a weight more than 23 kg would be charged by the airline companies. Similarly it is also seen nowadays that the airline companies are charging for hand carry bags which previously was not seen. The question now arises as to why the airline companies are adopting such a policy. Many believe that carrying baggage is a necessity for every individual in the world today and hence the airline companies are taking benefit of this very necessity to charge the customers even higher. However if viewed from an accounting perspective it can be seen that the airlines are trying to balance out different costs which are incurred by them. This assignment would further revolve around the aspect of baggage and as to why airlines are charging excessively for the amount of baggage carried by their customers (IT Review 2009; Business Denver Journal 2008). Nowadays with growing competition in the airline industry it is seen that airlines are trying to minimize their expenses such that they are able to survive in the market. With such a policy every airline is attempting to attract more customers towards it so that it can increase its rate of profitability. In the airline industry today many companies are charging extra for the baggage carried by the customers and they have specific reasons for such a policy. The examples of different airline companies charging excessively would be considered first so as to give a whole scenario about the current situation. AirFrance is a famous international airline company which does not charge for the first bag which is carried by the customers. But if the customers carry two bags which exceed the limit of 23 kg then an amount of $50 or £50 would be charged (AirFrance 2010). All Nippon Airways is another company has a specific limit for the baggage too and it charges an amount of $34-$130 for baggage which exceeds the limits (All Nippon Airways 2010). Local flights within a country are also being targeted by the airline companies. American Airlines is one of the examples which charges $25 for a single checked bag and if the customer carries two checked bags then the cost would be $35. If a customer carries a single bag during the flight then he is not charged by the airlines but if he carried more than one then he would be charged an additional amount for that (American Airlines 2010). China Southern Airlines also fall into this category by specifying a limit for baggage carried by the customers (China Southern Airlines 2010). Continental and Delta Airlines are also an example of the airline companies which charge for checked bags (Continental Airlines 2010; Delta Airlines 2010). It is seen that almost all the famous airline companies in this world are charging for baggage in one way or the other. Many of the customers believe that they are being ripped off by these airline companies but if the members of these airline companies are asked they would simply tell that they are trying to balance out their resources. Because of growing competition it is seen that almost all the airline companies are reducing their fare prices so that they can attract more customers. Customers at the first glance would not know much about the additional charges for baggage and hence they’d go for the best possible price. Here the airlines benefit by charging for the baggage. It is seen that the airline companies are lowering their fares much below their expenses and they need to cover up for these expenses. This additional cost of baggage can be considered as a hidden cost for the benefits of the airline companies. In other words the low fares for travelling are being compensated with the additional charges for baggage. If the airline companies simply increase their fare prices then they might possibly lose potential customers and this might come as a blow to the whole service. But here it is seen that the companies are following a hidden cost strategy which would help them to increase their rates of profitability. The charges for carrying baggage have not been limited only for checked baggage these days but also for carry-on bags these days. As it is seen in a recent move that one of the famous airlines known as Spirit airlines announced that it will charge an additional amount of $20 to$45 for carry-ins. The chief operating officer of Spirit Airlines in the response of such a strategy was quoted as saying "In addition to lowering fares even further, this will reduce the number of carry-on bags, which will improve inflight safety and efficiency by speeding up the boarding and deplaning process”. It can be analyzed here that by such a move the airline companies are not only attempting to balance out their resources but they are also ensuring flight safety for their customers. By keeping an additional cost for baggage the airline companies are ensuring that the customers would not carry stuff which is unnecessary. In other words flight safety would be ensured for these airline companies (Pawlowski 2010). The airline companies are seen to be in an environment which is economically unstable. With rising oil prices the costs incurred by these airlines are unlimited and to balance out the effects of increasing inflation they have to formulate a strategy which can help them. Charging on baggage is one of the strategies adopted by these airline companies. The airline companies cannot increase their fares abruptly to balance out the effects of inflation because this would only reduce their popularity. But they are rather using low cost effective strategy for fares which can attract customers. In simple words they are both attracting the customers from low costs and are also benefitting from the hidden charges that they have imposed on the baggage (Business Denver Journal 2008). Previously it was seen that because of low charges for baggage the customers used to bring a bulk of baggage when travelling. With growing costs it was seen that the airline companies started to face difficulties when managing this baggage. This was either because of lack of staff or because of the increased workload on the staff of the airline companies. It became almost inevitable for these airline companies to manage the excessive amount of baggage carried by the passengers. It was seen that in 2008 baggage which was mishandled amounted to around 42.4 million. The high amount of mishandled baggage was only because of the increased bulk of baggage brought in by the customers. In some cases it was also seen that the airline company was sued because of this mishandled baggage and had to bear costs for the lost baggage. To counter such situations the airline companies had to increase the effectiveness of their staff or had to increase their staff and this became a reason for the increased charges of baggage by the airlines. After the implementation of such a policy it was seen that the number of mishandled baggage reduced by a great amount. In 2009 around 32.8 million bags were mishandled which in comparison to 2008 was quite low. Because of increased charges on the baggage it was noticed that the customers brought in limited amounts of baggage which was easier to handle for the airline companies. In other words the increased charges for baggage helped the airline companies to compensate for their mishandled services. They helped them to increase the effectiveness of their services and at the same time reduce the overload of baggage by the customers. Many airlines have adopted the policy of charging for baggage because of this sole reason and it is seen that their effectiveness has increased ever since (IT Review 2009). The airlines have imposed systems of charges on baggage for the purpose of profit. The rate of profitability which is not otherwise covered by the fares are compensated by these charges. And these profits are used by these airline companies to enhance their systems for the convenience of the customers. Systems for baggage checking are also enhanced through these extra charges which can help the airline companies in such a way that the number of mishandled baggage is reduced. If viewed from a broad perspective it can be noticed that with services improved the airline companies can attract even more customers. Baggage mishandling is common in airlines but if this mishandling is reduced in specific airlines then the customers would be automatically attracted towards it. With increased amounts of charges for baggage the airlines can play an even greater role in reducing the fares for customers. Customers are naturally attracted to airlines which have low fares and generally if the expenses of the airlines can be adjusted through baggage charges then the fares would be reduced so as to attract even more customers. From an accounting perspective it can be seen that airline companies are playing a positive role of advertising through the excess amount of baggage charges. By advertising here it is meant that the profit received by the airline companies through these charges can be invested in that sector so that even more customers are attracted. For example airline companies can use the excess charges of baggage to enhance their baggage system and then inform the customers about their system. This would again attract customers towards a safe flight which can ensure that their baggage is in safe hands (IT Review 2009). In conclusion it can be said that baggage charges are helping the airline companies in an effective way so that they can balance out all their expenses. With increasing oil prices of this world it has become necessary for the airline companies to adopt such a policy which does not discourage the customers from travelling in their airlines and hence they cannot increase their fares randomly. If these airlines increase their fares the customers would be discouraged to travel by air and would rather opt for other options. As the number of airline companies has increased and intense competition in the market is seen it becomes necessary for the airline companies to use an effective way of hidden costs. Baggage charges are one way of hidden costs which cannot de-motivate the customers from travelling by air. Hence it can be said that baggage charges are an excellent way of balancing out the overall expenses of the airline companies. References Airline to charge for carry-on bags. A. Pawlowski 2010. CNN Travel. United Airlines tacks on new charge for baggage. Business Denver Journal 2008 Air Transport IT Review - Issue 3, December 2009 AirFrance 2010 www.airfrance.com All Nippon Airways 2010 American Airlines 2010 China Southern Airlines 2010 Continental Airlines 2010 Delta Airlines Read More