07 April 2007

Airline Product Unbundling - A comment

This is a view of the unbundling of airline products and services.

The basic laws of economics work pretty simply. The airline business has traditionally been exempt from them due to - well lets just say unwise management decision. However in this current boom cycle - we are now seeing some interesting trends. One of which is the unbundling of services.

Clearly this is not new. However in the more recent past what has happened has been the imposition of fees for services normally provided. Examples of this are Ryanair charging for bags (now followed by both other LLCs and even a few Network Carriers). The model was add a service - then consider adding a fee.

However we are now seeing a trend towards unbundling on a greater scale. IE you pay for everything. Airlines have ALWAYS been afraid of pricing changes. But its not hard to see if the airline is moving - lets say 10 million passengers and the GDS fees are $5 per segment - then that is going to be more than the traditional net profit for that airline. Ditto in many other areas of cost vs revenue..

Examples of product unbundling come from all areas. Air Canada for example has unbundled services with its line of Tango fares. Resulting in the now famous GDS clause to accommodate it. Interestingly the results of such a GDS clause came to light during the recent Expedia vs AA cat fight. Spirit Airlines, not known for following conventional wisdom now offers its best discounts to people who will pay to join a club. Many European airlines charge for food on short haul runs. A recent example crossed my desk from AA. www.traavelperks.com Not sure I want to sign up for that just yet.

Apart from the economic situation - why are the airlines doing this and why now?

I have 3 basic reasons:

1. The core economic - supply vs demand situation. Tight supply gives pricing power to the airlines, something they have not had for a long while
2. Because they can. Emboldened by recent wins against distributer, the airlines now feel they are pretty powerful and they are flexing this power
3. There is no more savings to be had anywhere in the system. We postulated last year that when the GDS fee issue had been "resolved" the airlines would be hard pressed to find any other sources for net yield growth by cutting further costs. So this is the other shoe, revenue growth - IE more fees

We are going to see more examples of this as the airline accountants scour the system looking for more revenue opportunities. This will continue to boost the bottom line of many airlines. However be prepared for the backlash from the consumer. Remember she/he is getting smarter and will not tolerate gouging. Further expect during a run-up to the next US presidential election that the issue of price gouging by the airlines could become a popular target by at least one of the large field of candidates from either side.

Timothy J O'Neil-Dunne
Managing Partner - T2Impact Ltd
Global Travel eBusiness
Tel (US) +1 425 836 4770
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Meme chose said...

Surely there are other reasons as well:

(a) Probably most important, these fees enable the airlines to lower the base, 'headline' fare. In an era of increasingly transparent pricing this is the fare which attracts consumers' attention.

(b) With these fees, price discrimination goes beyond passengers, to individual trips. On a recent LCA flight in Europe I was happy to pay a supplement for greater legroom because I was continuing from a transatlantic flight. Normally for short trips in Europe I won't pay for that option. By pricing the service upgrade the same airline can keep all my business to that destination.

(c) Service fees can lead to significant cost reductions - Ryanair for example plans to save a large amounts from reducing the amount of baggage it handles. Such cost reductions can have strategic significance. It's possible in Ryanair's case that this is part of a plan to configure themselves to begin operating out of higher cost European airports.

Linda - AA Frequent Flyer said...

Your blog mentioned AA TraavelPerks.
I signed up for this a couple of months ago, lured by the promise of two-for-one discount on a trip.

Normal fare for the AA flight I wanted to book is $472. I thought I could get two tickets for this price.

However when I used the discount code in AA online booking, the listed fare increased to $633!! Then it was discounted to $316 per person, which ended up being $716.

Not exactly a two-for-one. In fact the Expedia price for this flight is about $381 per person.

I wouldn't be in any hurry to sign up for AA TraavelPerks.