Unbundling: The Sensible Way to Price Airline Fares?

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If you engage a 75-ish or so retired airline pilot in conversation about the glory days of air travel, you'll inevitably hear this: The whole affair used to be much more civilized—people actually wore their Sunday best on the airplanes and food was served on genuine china with real silverware.

According to the accepted wisdom, what turned this idyllic travel nirvana into the hell of modern airline flying is deregulation. That lead to price competition, the rise of discount airlines and Robert Crandall's famously described tyranny of the lowest common denominator. Ultimately, this morphed us all into price-shopping bottom feeders and the airlines complied, cutting their fares (and costs) to the extent that they routinely bleed red quarter after quarter. In other words, we got what we asked and paid for.

Obviously, something had to give and this past summer, it did. The airlines started charging first for checked bags, then for drinks and peanuts and now blankets and pillows. This quaint little trend—which some are calling a la carte pricing—is universally reviled by passengers, even though they pay these fees because there's simply little choice not to. Some airlines are cleverly competing by not charging add-on fees. Southwest, for instance, has some spiffy billboards that say, "Bags fly for free."

The latest iteration of this trend is called "unbundling" and more airlines are certain to start trying it. Using an automotive analogy, unbundling works this way: The new car you'd like to buy has hundreds of components that make up its whole, but you really don't need them all. You can get by without air conditioning, for instance, or a rear defogger, a radio or heated seats. All you really need is the engine, the wheels and a place to sit, plus all the hardware to tie it into a functional piece. For years, the automotive industry has unbundled its products, but they didn't call it that. They called it an options list.

Now come the airlines with their own version of an options list. Cutting right to the chase, unbundling is sold as "customer centric pricing" and "added value," but it's really just a way of squeezing more money out of customers by another name. That sounds like a bad thing, but it's not necessarily, as long as the airlines are transparent and give customers choices that at least seem to represent added value. Still, all this really is is a variant of the class structure that has existed in transporation for centuries. The only difference is that online ticketing gives airlines the opportunity to efficiently offer far more choices within that class structure.

Air Canada is out front with this plan and is supported by a company called Amadeus, which does the sophisticated software to make it work. In this podcast, I interviewed the company's CEO Robert Buckman and he explains the concept. It's quite simple, really. Air Canada, for instance, offers four levels of fares which you can pick right on their website. The lowest, no-frills fare is the equivalent of a discount-type fare on a Jet Blue or a Southwest Airlines.

That base fare gives you a seat and, as I read it, room for one checked bag. Then the options start. If you have no bags, knock $3 off the fare and knock another $5 off if you agree to make no changes and another $3 if you agree not to count the trip to accumulate airline miles. Going up, for, say, another $50, you can add other stuff from the "bundle" such as access to VIP lounges, an inflight meal, special hotel offers, call center support and so on. The choices are extensive within each of the four classes of fares. This is known in sales lingo as "the upsell." At the top of the upsell chain is the full fare, first-class fare in which everything but a foot massage is included.

The price Delta on the cheapest to priciest fare can be breathtaking. For example, one fare I priced from Toronto to Vancouver was $137 for the rock-bottom discount and $1600 for the top-of-the-scale Executive Class seat. Air Canada has been out there with this pricing scheme since 2004 and Buckman says it has generated a lot of revenue for the airline.

U.S. airlines have been eyeing Air Canada's model and I'd be willing to bet you'll see one or two roll out a version fairly soon. Question is, is it a good thing? Is unbundling better than paying piecemeal on the spot for bags, for drinks and for a crappy pillow and blanket? Maybe, but I'm skeptical of the idea having legs. To avoid just charging the right fares, U.S. airlines have tried pricing and marketing schemes before. Remember United's TED and Delta's Song? Both were attempts to build a discount airline inside the hollowed out husk of a business model run by managers who insist on operating their businesses with little or no margin by depressing fares. Song even tried its own version of unbundling, by charging for meals and drinks. Both of those attempts failed.

Unbundling, while being sold as added value for customers, is really just that old all-American practice of flogging a captured market with offers for more stuff it may or may not want or need. And you know what? There's nothing wrong with that, as long as it's done right up front which, on the Air Canada site at least, it appears to be. Air Canada's execution is a little ponderous for my tastes—slogging through the many choices requires more effort than the rewards justify, in my view—but at least the choices are there for the customer to make. The customer can then decide if the upsells represent real value or just all polish and no rock.

Really, all I want is a reasonable price that promises a reserved seat. If I have to pay for bags, just build that cost into the ticket, thanks. I'll bring my own drink and pillow. But if unbundling leads to a healthier airline industry, who am I to complain?

Related Content:
Podcast interview with Robert Buckman

Comments (6)

"all I want is a reasonable price that promises a reserved seat. If I have to pay for bags, just build that cost into the ticket"

Sounds like what we all want. But the explanation I heard was that, in this day of on-line ticket pricing, the lowest fare that 'wins' is the one at the top of the web-site search.

People ask for a flight from Point A to Point B, sorted lowest to highest, then click on the flight at the top of the list. No where in the (current) search engines does the 2nd-place airline have a chance to defend its $5 higher price by saying 'we include sodas and one checked bag.'

So, unfortunately, to compete in a search-engine driven market where the sole criteria is getting one's butt from Pittsburgh to Peoria, airlines are forced to provide that sole service. Any additional services (drinks, snacks, bag stowage) are stripped out.

Posted by: KIRK WENNERSTROM | October 27, 2008 6:12 AM    Report this comment

I have no problem with airlines charging extra for food or pillows, but charging for checked bags (at least for the first one) really irks me. Why? because it leads to almost everyone attempting to carry on all sorts of bags that ought to have been checked.

Anyone that flies on airlines regularly knows that these bags, either oversize or too many (on my last flight I observed a woman with a large roller with two more smaller bags strapped to it, and a large purse) do not get stopped at the door. They just get in and fill up the bins such that those who board last do not have any space.

Checking bags should be free, and encouraged, to speed the boarding process and maybe help flights leave closer to on-time.

As for pricing of the fares, it is rarely a $5 difference that makes a choice. I recently flew to Dallas on NWA with one stop in Memphis for $600 less (round trip) than the hourly flight on AA. Does that make any sense? NWA even ended up putting me on AA going home when the flight out to Memphis was delayed.

Posted by: Jack Burton | October 27, 2008 8:31 AM    Report this comment

Any of us who operate and airplane know that airlines cannot charge 150 bucks round trip to Hawaii. I would prefer airlines charge the same fare for all seats and price them to make some money. Somehow americans seem tho think that it is a constitutional right to take their baby, stroller, and bags of xmas presents for 29.95 across the country. Heck bring back regulation.

Posted by: John Fulton | October 27, 2008 9:11 AM    Report this comment

Until the airlines treat their customers with respect as intelligent human beings, I do not see any hope of the the airline travel experience improving.

I once read an article by the CEO of Delta in the inflight rag about how co-marketing was going to be good for the consumer. If you book a co-marketed flight on Delta that flies on Air France, you get to sit next to the Air France customer, take off from EWR in the same aircraft, eat the same good food (how come they can do this?), and arrive in Paris at the same time, and pay hundreds of dollars more. Huh?

The airlines can't do much about the out-of-control TSA strip searches. Maybe they think that if that part of the trip alone makes air travel a hellish experience, they don't need to do any better.

A couple of years ago I needed to go to Toronto Canada from Newark (EWR). Air Canada wanted $1000 for a return seat in the lavatory. The US airlines followed suit. Jet Blue was more reasonable to Buffalo where I could rent a car for the drive across the border, but they only flew out of the nightmare called JFK. I'd have to leave home 4 hours before the flight. I elected to fly myself. I left home at the same time, and was in my Toronto hotel before Jet Blue pushed back from the gate.

Hooray for GA!

Posted by: David MacRae | October 27, 2008 10:03 AM    Report this comment

The basic service should include a checked bag- this is what Delta currently does. Beyond that, I have no problem with unbundling. Why should everyone pay for services they don't want, in terms of food, extra baggage and special services?

Now if you want to start charging extra for overweight customers, I'm there. Tired of being crammed in next to a rude slob. That is what makes flying miserable, the guy sitting next to you, not the airline dealing with weather or delays.

Posted by: Max Buffet | October 28, 2008 3:28 PM    Report this comment

When all the US carriers line up on one side and Southwest lines up on the other, guess who's likely to be right? Charging for checked bags is stupid. It slows turnaround, makes the cabin even more cramped, and generally raises the pax's already dangerously high blood pressure.

Posted by: Alex Frakt | October 28, 2008 3:46 PM    Report this comment

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