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Medium Strategic Decision Profitability Pricing

BudgetAir: A Weighty Decision

#Transportation
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This case tests breakeven analysis and strategic trade-off thinking. The core insight is that while baggage fees generate $900K daily in incremental revenue, they trigger customer attrition costing $1.35M daily, creating a $450K daily loss at breakeven. Beyond the numbers, the case forces consideration of brand equity and competitive positioning—a niche advantage (free bags) conflicts with industry practice (charging for bags).

Estimated Time 26 minutes
Difficulty Medium
Source Pennsylvania
10 / 100

BudgetAir is a low-cost national airline based in Philadelphia, PA. Being from the “city of brotherly love”, the airline is focused on customer service and satisfaction. In fact, the airline consistently receives top customer satisfaction scores amongst all airlines. As part of their customer focused strategy, they are know for their marketing slogan, “Bags Fly Free”.

As the airline expands its routes and offers additional cross country flights, BudgetAir is considering charging for bags. Is this a good idea?

Clarifying Information

  1. BudgetAir’s primary goal is increasing revenue and profitability. Their secondary goal is maintaining market share.
  2. Yes, all of BudgetAir’s competitors charge a baggage fee. A key differentiator for BudgetAir is the fact that they do not charge a baggage fee.
  3. The baggage fee for a standard, 50 pound checked bag is $50
  4. BudgetAir will charge $25 per bag
  5. Frequent fliers (approximately 10% of BudgetAir passengers) will enjoy free checked baggage.
Mock Interview
Interviewer

BudgetAir is a low-cost national airline based in Philadelphia, PA. Being from the "city of brotherly love", the airline is focused on customer service and satisfaction. In fact, the airline consistently receives top customer satisfaction scores amongst all airlines. As part of their customer focused strategy, they are know for their marketing slogan, "Bags Fly Free". As the airline expands its routes and offers additional cross country flights, BudgetAir is considering charging for bags. Is this a good idea?

You

Thanks. Before analyzing, I'd like to clarify a few key questions...

Interviewer

Good question. Let me provide some background information...

You

Based on this, I suggest analyzing from these dimensions...

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BudgetAir evaluates charging $25 per checked bag to increase profitability as it expands routes. Financial analysis shows the policy would lose $450K daily due to 15% customer attrition outweighing baggage revenue. Qualitative risks include brand damage, operational complexity, and marketing repositioning needs. However, either launching or not launching is defensible with proper support.

Key Insights:

  1. Breakeven analysis reveals customer loss ($1.35M daily) exceeds incremental bag revenue ($900K daily), resulting in net loss of $450K daily
  2. Core tension: Baggage fees are industry standard (competitive disadvantage to not charge) yet represent core brand differentiation (advantage to remain free)
  3. Customer segmentation matters—business travelers vs. families may have different price sensitivity and baggage volume, affecting attrition rates
  4. Strategic options beyond binary choice: bundled pricing (bags + internet), tiered fares with bag fees during high-capacity periods, or targeting less price-sensitive customer segments