Commentary: Qantas mistakenly sold first-class tickets at bargain prices. Here’s why it made sense not to honour the deal in full

PROTECTING ITS REPUTATION

Viewed in this way, Qantas’ decision seems perfectly reasonable and should leave everyone happier – which can translate into repeat business. Moreover, the reasonableness of the decision protects its reputation – and that matters a lot, because repeat customers are very important for airlines (or any business).

Barring a few select routes, air passengers almost always have options which can often include low-cost carriers. So, a very common way airlines try to retain their customers is to use loyalty programmes. The idea is to make it more attractive for passengers to choose that airline because they are rewarded for it – although there has been a recent decline in interest in such schemes from customers.

In theory, the more rewards accrued, the more likely it is that passengers will choose that airline again, because it becomes more expensive for them to go with an alternative. Airline miles, credit card loyalty points and VIP status with the airline can all be redeemed for preferential treatment, including priority boarding, access to lounges and other “goodies”.

Typically, such rewards have only been available for non-budget airlines – but recently, low-cost carrier Wizz Air took a leaf out of this playbook by offering its own version via a discount club. These discounts are tiered based on frequency of travel – the programme seeks to foster loyalty by making it more costly to fly with a different airline.

An economist might say that airlines are trying to get passengers to make “asset-specific investments” that make it costly for them to transact elsewhere.

Interestingly, airlines are facing the challenge of engendering loyalty and repeat business at a time when overbooking remains common. This practice, whereby airlines mitigate against no-show passengers by selling up to 50 per cent more tickets than they have seats, most certainly has the opposite effect and puts customers off. Data about the worst-offending airlines is freely available.

The public has also been snubbing low-cost airlines that are notorious for poor customer service. Indeed, the future of some of these airlines is in the balance.

Many years ago, legal scholars such as Stewart Macaulay and economists including Paul Rubin highlighted the importance of relationships for businesses. Understandably, airlines have been trying to buy these relationships by providing rewards that make it more “expensive” for consumers to take their business elsewhere. But Qantas’ decision reminds us there is a different “middle” way, using a combination of fair play and commercial logic.

Akhil Bhardwaj is Associate Professor (Strategy and Organisation), School of Management, University of Bath. This commentary first appeared in The Conversation.