How An Airport Shouting Match Can Improve Business Decisions
It seemed like an ordinary business day….
In 1997, I was working on a project that required me to fly from St. Louis (my hometown) to Milwaukee each week for about six months. I loved the work, and the people of Milwaukee were nicer that any city I’ve ever been in- great people.
So I flew each week on TWA, an airline that had a large presence in St. Louis for years- and had since gone out of business. This was pre-9/11, so that was little security at airports.
I show up at the gate about 20 minutes before my flight. There was something that needed to be changed on my ticket (I can’t remember exactly what), and the guy at the gate couldn’t help me. He sent me about 5 gates down to customer service desk.
After I got the ticket fixed, I headed back to my gate. I stopped to get a Wall Street Journal and the gate agent yelled:
“YOU DON’T HAVE TIME TO GET A PAPER, SIR!”
Which made me mad, because they had sent me to the other counter to begin with. So I responded.
“MAYBE YOUR POOR CUSTOMER SERVICE IS WHY YOUR AIRLINE IS GOING BANKRUPT!”
The two of us had a spirited exchange as I got on the plane, and the cabin crew didn’t give me a good vibe for the short flight up to Milwaukee….
The last-minute ticket purchase
So this brings me to my airline analogy for an important business topic: sunk costs. Imagine that a customer rushes up to the ticket counter and buys a plane ticket 5 minutes before boarding starts. What additional costs does the airline incur when the ticket is sold?
Well, not much. Nearly all costs have already been incurred. The fuel, salary and benefits for the crew and baggage handlers, gate fees, food: nearly every cost has already been incurred. All that’s left it the cost to put your luggage on the plane and pay for your delicious soda and peanuts (aren’t those bags always hard to open?).
OK- use this knowledge to think about the price of the airline ticket. As we all know, the less time before a flight, the more we’re likely to pay. That’s because the need to buy a ticket is more urgent, and the buyer is willing to pay more. So we can expect the last minute purchaser to pay a big chunk of change for a seat.
But what about the airline’s profitability on the sale?
Relevant costs are defined as costs that can change, depending on which decision you make. Using the airline ticket sale as an example, there are almost no costs that are relevant. Just about everything has already been paid for. Heck, the airline could probably charge you $50 and still make a profit.
They charge you more because you’re willing to pay more- not because they need to cover a bunch of costs. That doesn’t make the airline mean, bad or wrong- it’s just the nature of business. Prices go up when customer demand increases.
Use this knowledge
So, the next time you need to make a business decision, consider the relevant (variable) costs that will change, depending on the decision you make. Ignore those costs that don’t change, because they’re not relevant to your decision.
Oh, and be nice to airline employees. They’re doing the best they can- and they can’t control the weather. I once was waiting for luggage at O’Hare Airport in Chicago. The gate attendant explained that lighting was in the area and the baggage handlers had to wait until the storm passed.
A guy next to me snapped: “This never happens when I fly Delta!”
Image: Dushan Hanuska, Airplane (CC BY-SA 2.0)