OP ED: Airfares Should Reflect Service Level

Anyone who has taken a marketing class has probably learned the definitions of "market segmentation" and "product differentiation." Certainly, airlines have loads of marketing staff who concentrate on these issues. So what is the problem, and why don't they get it?

The main thrust behind product differentiation is simply what the term implies--a product in the same market segment can be differentiated by price, quality, features, benefits, etc. When you go shopping for a pair of shoes at Bloomingdales, you would expect to find a different product and pay more for it than when you shop at Kmart. Granted, you are not getting the same product, yet ultimately it serves the same purpose.

Applying this to the travel industry, a person staying at the Ritz-Carlton and another staying directly across the street at a Holiday Inn expect to have a different experience. Yet both will enjoy the ultimate purpose, which is a night's sleep. The same applies in the car rental industry, cruise business and so on.

What happened to the airline industry? Does ValuJet purport to have the same product as United, Northwest or any of the majors? No. So why are the major airlines compelled to match prices dollar for dollar? While the airline industry might suggest a response like, 'we need to protect market share because we realize we will lose passengers if we don't match,' they may add that the sophistication of yield management controls inventory levels, effectively allowing them to segregate the fares on any given flight.

There is now more separation from a fare standpoint on a given airplane than ever before. Everyone is aware that you could be on a four-hour flight sitting next to someone paying a round-trip fare of $338 while you paid an outrageous fare of $1,600.

I frequently travel between Chicago and Seattle, mostly on United. Flight time is approximately four hours, and the normal coach fare is $1,621 round trip. United flies a mix of aircraft configurations in this market, up to a DC-10. American flies only MD-80s. United Airlines has in-flight audio and video entertainment and offers a choice of hot and cold meals. An MD-80 is a relatively small aircraft and offers no in-flight entertainment, and American offers only a snack handed to you in a little plastic box for a four-hour flight. It is hard to imagine that they charge over $1,600 for that experience. While that would still be too much even if they served caviar, I certainly would not compare the two experiences as similar. Yet customers pay the exact same fare for two very different levels of service.

Is there an opportunity here? Can American build business by charging less? Can United build business by charging more for a better degree of service? Think about it from an international perspective. Airlines spend millions of dollars on product differentiation. Flying British Airways' new Club World configuration is a tremendous experience. Should one pay a premium for that type of service and pay less for a lesser product?

Perhaps the airline industry could learn a valuable lesson on the basic principles of product differentiation involving price differentials. The next time you are looking at a corporate deal, think of the differences in service as an equation in your negotiations.

<I>Mark Walton is president of Workflow Solutions Inc. in Rolling Meadows, Ill.