Management Decision Case

SHOW ME THE MONEY

To say that the airline industry has changed over the last two decades would be an understatement: The profitability of airlines in North America has decreased sharply due to changes in environmental factors such as record-high fuel prices, global economic recession, significantly increased competition, and even decreased demand due to fears over terrorist attacks.

In the midst of these struggles, the industry found an unexpected, but highly lucrative, source of revenuebaggage. For many years, passengers were allowed to travel with up to three pieces of luggageone item to carry on the plane and two larger items that could be checked into the cargo area. In the United States, American Airlines became the first major airline to charge for checked baggage in 2008. Though this additional fee was widely criticized by passengers, other airlines quickly followed suit, including all Canadian Airlines: In 2012, Air Canada began charging for baggage for those passengers travelling between Canada and the United States$25 for the first and $35 for the second checked bag, followed by Porter Airlines in 2013. WestJet quickly followed suit in 2014, charging $25 per checked bag.

Baggage fees have benefitted the airline industry enormously: In Canada, revenues are estimated to be $110 million in baggage fees alone, while in the United States that number rises to $3.5 billion. There have been other positive effects for airlines as well: baggage fees encourage passengers to check fewer bags, which allows airlines to dedicate more space to cargo, which commands a premium price. Fewer checked bags has led to a reduction in the number of mishandled bags, which also yields additional savings. Checked bag fees have been such a success that Spirit Airlines now charges $45 for carry-on baggage that is stored in overhead bins.

You are a manager of one of the last holdouts, Southwest, which allows passengers to check two bags with no charge. While Southwest has remained profitable as the industry's low-cost leader, it is difficult to ignore such an easy source of additional revenue. You wonder if your company shouldn't also charge for bags so that it can maintain a competitive edge. After all, as you well know, the airline industry is unpredictable, and your company could find itself in deep struggles very quickly.

Sources: IATA report. Retrieved July 20, 2016, available at http://www.iata.org/publications/economics/market-issues/Pages/profitability-old.aspx

V. Lu, "Porter to charge for checked bags on U.S. flights," Toronto Star, July 3, 2013, available at http://www.thestar.com/business/2013/07/03/porter_airlines_to_charge_for_checked_bags_on_us_flights.html; The Globe and Mail, "Air Canada adding baggage fees to U.S.-bound flights," September 13, 2011, available at http://www.theglobeandmail.com/globe-investor/air-canada-adding-baggage-fees-to-us-bound-flights/article594099/; C. Elliot, "Airlines make a bundle by 'unbundling' flight fees," The Seattle Times, April 7, 2010, available at http://seattletimes.nwsource.com/html/travel/2011539200_webtroubleshooter06.html/; H. Martin,

"Spirit Airlines launches $45 carry-on fee," Los Angeles Times. April 7, 2010, available at http://articles.latimes.com/2010/apr/07/business/la-fi-spirit7-2010apr07; C. Negroni, "Less baggage, big savings to airlines," The New York Times. April 6, 2010, available at http://www.nytimes.com/2010/04/07/business/07bags.html?src=me

1. What functions of management would be involved in making this decision?

2. Describe each type of manager's responsibility with respect to this decision.

3. Describe the managerial roles that would likely be required by all levels of management throughout this decision.

4. If you were a middle manager at Southwest, would you vote in favour of or against charging for baggage? Why?