Fare and square

In the face of skyrocketing oil prices over the last five years, airlines have had a tough time trying to convince the average Joe that they're better off flying than taking the train or not traveling at all.

The first and simplest model is that of the base fare, which most low cost carriers have adopted. They believe that if you can attract a prospect with a $10 base fare, that they can then be convinced to purchase a ticket at its actual fare of $200. After all, once you've trimmed away your last olive, why take the blame for the mile-high list of airport, bank, fuel company, insurance and government surcharges.

The surprising thing about this model is that it works - or will at least work until everyone else follows suit. For example, imagine picking up a pack of crisps for 5 cents, only to have the cashier hand out an itemized bill with an additional $1.95 in display, storage, transportation, municipality, cleaning and government surcharges. FMCG arguably isn't the best example, but you get the picture. The restaurant industry reacted in a similar manner when they faced rising taxes a few years ago, only to fall back to all-inclusive prices in due course. Distancing yourself from the reality of an industry to maintain sales targets only breeds commoditization and is at best a short-term solution.

Then there's the value model, which is by far the most demanding. Instead of competing or justifying price, most premium airlines create value by investing in long-term solutions such as service differentiation, improving brand perception and encouraging travel. This option is particularly difficult for small airlines to adopt because it requires substantial short-term investment. The advantage however, is that the airline and its customers won't be held ransom to market fluctuations.

Last on the list is the transparent cost model, which airlines usually adopt after either exhausting or forgoing the value creation model. It doesn't take a rocket scientist to figure this one - the airline's fares fluctuate in proportion to its costs. While it may pinch sales in the short term, you can at least rest in the consolation that the airline isn't compromising its standards. Airlines in this model tend to either shelve all non-essential services or offer it at a significantly higher premium. The key word here is brutal honesty; anything less and it's back to the base fare model.

Although the value and transparent cost models may seem worlds apart, they're actually not that different. The difference lies quite simply in whom the models benefit. While the former benefits the airline industry, the latter benefits passengers. In fact, most airlines choose a balanced mix of the two.