Last week, I asked readers what they thought of airlines’ complex pricing schemes. (If you missed the issue, you can still read it here on the website.)
Several of you responded with interesting comments, including the ones below.
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For the most part I don’t have a problem with the myriad and often undecipherable ways in which airlines price their products. However, there are two ways in which I strongly disagree. Those are the prohibition of back-to-back reservations and the prohibition of one family member using a ticket issued to another family member.
With heightened concern about terrorists I can be sympathetic with the latter practice. I feel that airlines really shouldn’t be able to worry about back-to-back reservations/ticket purchasing.
P.A.
Rochester, New York
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How about the newest gimmick of “Seat Premiums.” We bought tickets on AirTran to go to Orlando from Richmond and once we got to our seat selection process each seat carried a $6 to $20 per leg premium. The $128 seats became $208 plus taxes, fees, gas surcharges, snack costs, ad nauseum. At this rate, the airlines may as well advertize free tickets and just clobber the flyer with fees and extras well in excess of original ticket costs. This is why I drive or take the train whenever practical.
R.W.
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There is a clever story that has been floating around the Internet for years called, “If airlines sold paint.” It’s funny in an absurd kind of way. It illustrates just how little respect most airlines have for their customers. This is why I never, never, never under any circumstances invest in airline stocks (with the possible exception of Southwest). You can Google it and/or find one version of the story here.
If I ever win the big lottery, then just for kicks I am going to buy refundable tickets for all the seats on a flight. Then I am going to cancel them all, well, all but one, at the last minute.
Bill
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What you so kindly describe as “legal discriminatory pricing” is in reality a method of hiding the price by obfuscation.
Some simple examples are cross shopping many retailers for a legitimate price comparison on mattresses. Although the mattress may be absolutely identical on the inside where it matters, the pattern on the outside and of course the naming are completely different so you cannot compare apples to apples confidently.
There really are many examples of “price obfuscation.”
Is it really necessary to have 5 or 6 box sizes of breakfast cereals with ridiculously odd numbered ounce sizes? Of course not, unless you’re looking to avoid a comparison of cost per ounce. Let’s compound the situation by having retailers also have cereals or other commodities intended for foreign markets on the shelves and with metric sizes. How many ounces in a Kg or is it vice versa?
What exactly does 20% or 30% off an item you wish to buy mean? Off of what, some inflated manufacturer’s suggested retail that the item is never sold at?
I was even guilty of price discrimination, in a manner of speaking, when I owned a pharmacy. We routinely gave a senior citizen discount on prescriptions, but did not announce it as such. We routinely asked for the patient’s date of birth for our records (just as an MD would do) and if we calculated a certain age we would extend the discount. If we asked outright “do you want the senior citizen discount?” assuming a certain age based on appearance or medication being prescribed, the patient would always answer affirmatively whether they reached our cutoff of age 62 or not. Guilty as charged.
The list goes on and on and has many variations. If you shop for a computer in a warehouse store like BJ’s or Costco you’ll almost never find the identical model anywhere else because it was created especially for that retailer.
Marty K.
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I believe airlines have the right in a capitalistic society, I also believe we the consumers have the right to beat them at their own game, without being punished for getting one up on them.
J.S.
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As to airline pricing, government regulation is odious, however, airlines exist in their present format because all of us spend tax dollars through the FAA and on local airport bonds, not to mention subsidies to the oil industry. In other words, the consumer deserves more respect. Tricky pricing, fees, and arcane rules should not exist. Free market does not mean corporate freedom to abuse consumers should be tolerated. Travelers are treated badly by the airlines. Contrary to the chant and cant of the free market advocates, a little regulation can be a good thing, gently shoving the airlines in the right direction. Government-industry work groups have worked effectively in other industries. Government involvement is not necessarily by regulation only; is not necessarily a bad thing. Letting industry have its way unchecked is the cause of our financial meltdown and is the cause of hundreds of thousands of unnecessary deaths in the medical system (mostly due to the pharmaceutical giants).
As a lifelong frequent business traveler, now retired, I have little positive to say about airlines, other than a fine safety record, which is of course the top priority. As to comfort, convenience, and courtesy, unless you fly first class, forget about it.
J.R.
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The bottom line seems to be that customers are pretty mad about the way airlines are treating them—and I’d be surprised if they can get away with it for much longer. Thanks to all who wrote in!
Speaking of the power of angry customers—and happy ones—I’m reminded of an excellent Businessweek article from back in October. Titled What Amazon Fears Most, it was the cover story; you may have read it. (If you haven’t, it’s an excellent profile of the growth of a successful business, and it’s still available on Businessweek’s website.)
The article told the story of Diapers.com, a five-year-old business that was growing quickly. At the time the article was written, the company had recently bought a 1,250,000 square foot warehouse, with an extra 400,000 square feet “for growth.”
The story emphasized two keys to Diapers.com’s success. One was its embrace of technology that improves efficiency: robots that move pallets around the warehouse, a computer program that fits each order in the smallest possible box, an algorithm that tells them how much stock to order.
Most of the rest of the credit was given the innovative founders, Vinit Bharara and Marc Lore. Specifically, the article focused on their obsession with Amazon.com (AMZN). “We’re obsessed with Amazon. We study it like crazy,” Lore is quoted as saying in the article, adding, “Recently I read every 10-K since 1996.”
The article finished with speculation about a potential diaper price and delivery-time war between Diapers.com and Amazon. Amazon had just launched Amazon Mom, offering diaper-buyers a free three-month trial of Amazon Prime (which, for about $80 a year, gives you free two-day shipping on most Amazon products). The last line was “The diaper wars are on.”
Then one month and one day after the article was published, Amazon.com announced it was buying Diapers.com.
At over $500 million, it was Amazon’s second-largest acquisition ever, after Zappos.com, which it picked up in 2009 for $1.2 billion.
The story was a familiar one to anyone who paid attention to the Zappos acquisition. Zappos achieved success largely by offering free shipping, often overnight, and free return shipping on all of its products. Customers who never would have bought shoes online before were won over by the ability to order multiple pairs and return those that didn’t fit, guilt-free and for free. (I’ve done it myself many times, and it sure beats going to a shoe store.)
As an analyst quoted in the original Businessweek article put it, “An intense focus on a category enables efficiencies that even Amazon would have trouble replicating.”
But that’s not going to stop them from trying.
When Amazon.com first got started, simply selling things online was a massive step forward in convenience and customer service. But Amazon’s not the only horse in that race anymore, and competition means pressure to provide even better service, and a more convenient experience. And doing that—without hemorrhaging money—means increasing efficiency.
Amazon has already made great strides on its own. Its site remembers information like addresses and credit card numbers, and with Amazon Prime on top of that, customers can buy many products by clicking a single button. (I’ve done that too … I like convenience.)
And though I don’t know if they have warehouse robots, they’re doing something right delivery-wise: I’ve gotten books delivered to my doorstep less than 24 hours after ordering them from Amazon.
However, it’s clear Amazon is intent on constantly improving its efficiency. And when it buys innovative young e-commerce companies like Zappos and Diapers, it not only takes out some competition, it also picks up some fine efficiency expertise.
And that translates into better, faster, cheaper service, and happier customers … who keep coming back.
The airlines could learn a thing or two.
Amazon would be the no-brainer recommendation here … and it wouldn’t be a bad choice. The stock has fantastic momentum, and recently moved to an all-time high. The company grows earnings per share every year, always a good sign. And improving efficiency will go straight to the bottom line.
But if you’d prefer something a little—OK, a lot—less popular, I’d suggest you take a look at a little company named Elephant Talk Communications (ETAK).
ETAK trades over-the-counter at less than $5 per share. It has zero institutional ownership. This is not a stock for the faint of heart or the risk averse—in fact it’s pretty much the opposite of Amazon. Except in one way.
Elephant Talk is also in the business of improving efficiency. The company’s original business is telecommunications. However, last year, it bought a company called ValidSoft, which develops anti-credit card fraud technology. The main advantage of ValidSoft’s technology is that is virtually eliminates “false positive” fraud alerts. Those are calls you receive when your credit card company detects “suspicious activity” on your account… but all you’ve done is go overseas or buy something on eBay. Those false positives cost banks up to $250 billion a year, not to mention irritating their customers.
By eliminating false positives, ValidSoft’s system improves banks’ efficiency, and it keeps their customers happy. Visa Europe recently signed an agreement to use the technology.
Of course, there are plenty of small-cap companies with new efficiency-improving technologies. But this one caught my eye because it was chosen as an Investment Digest Top Pick for 2011 by Konrad Kuhn, editor of The KonLin Letter.
And last year, Kuhn chose our top-performing Top Pick for 2010, VirnetX Holding Corp. (VHC). Recommended at 3.46, VHC rose over 300% in 2010.
Of course, there’s no guarantee ETAK will do the same—or do it in the next year. And you might want to wait until it’s listed on a major exchange (it should be on the Amex soon) before investing. But I think it’s worth keeping an eye on.
Wishing you success in your investing and beyond,
Chloe Lutts
